Expanding Membership & Increasing Revenue While Solving One of the Biggest Social Challenges

The persistent existence of underbanked and unbanked households remains a significant social issue – one that credit unions are in a unique position to help resolve. Through mission-aligned partnerships and technology adoption, credit unions can turn this social challenge into a growth opportunity for expanding membership and increasing revenue. Those credit unions that make the effort to tackle this challenge will improve not only their community’s financial health but also their own.

Who Are the Financially Underserved?

According to the Federal Reserve, 63 million, or 22%, of American adults are either unbanked or underbanked. The general view of the mainstream financial services industry is that this population is too risky and costly to serve. However, the rapid growth of alternative financial services providers like payday lenders and check cashers, which exclusively serve this population, is clear evidence to the contrary. In 2021, the revenue of the payday lending industry was $18.2 billion while the revenue for credit unions totaled $85.3 billion. Considering that unsecured consumer loans account for less than 10% of credit unions’ overall loan portfolio according to the NCUA (the majority of which is comprised of mortgages, car loans and commercial real estate loans) but 100% of payday lenders’ loan portfolio, one could argue that payday lenders are already making more money serving the underbanked than credit unions serving the banked in the same product category.

Credit unions can take this market back from the payday lenders. Having created an online platform for delivering affordable financial products to the underserved, I see success stories every day, where credit unions and their formerly underbanked members both come out ahead. Individuals with no credit score can successfully get approved for a short-term installment loan at no more than 18% APR (compared to 400-500% for payday loans); credit unions making such loans can successfully attract new members and keep their loan default at a low single digit. By sharing the best practices from such success stories, credit unions follow can follow suit and help more underbanked consumers become productive members.

Partner With Non-profits

Unbanked and underbanked consumers are concentrated in low-income communities. These individuals are frequently people of color or new immigrants. Many, scarred by years of overdraft and nonsufficient funds fees, do not trust financial institutions to have their best interests at heart. Many do not understand the model of a credit union and are unaware that they are not-for-profit organizations, owned and operated by their members.

Non-profit organizations that are already serving these communities can bridge the gap of trust and spread the knowledge about the unique benefits of credit union membership. Service organizations in the following categories are a few examples:

• Financial counseling;
• Affordable housing;
• Work force development;
• Minority- and women-owned business associations;
• Disability assistance; and
• Refugee and new immigrant settlement.

Such organizations share the same interest as credit unions of strengthening the financial health of the communities they serve. For individuals already engaged with these organizations, getting a low interest loan or opening a low minimum balance depository account offers an attractive incentive for completing a program such as job training or financial education. For the non-profit organizations, a partnership with a credit union provides a secure pathway for their community to reach financial prosperity. For credit unions, a partnership with such mission-aligned organizations provides both an extensive referral network and an efficient vetting process for recruiting responsible new members.

Adopt the Right Technology

Technology can break down the barriers to reaching potential members and help build enduring relationships. For those unbanked and underbanked individuals living in a “banking desert,” smartphones are often the most convenient and reliable way to get immediate access to banking services. Technology benefits credit unions by making it possible to reduce processing time and cost, and by providing resources that can be used to reach even more members or make in-person service even better.

Technology is not a one-size-fits-all solution, especially when it comes to serving the underserved population. Rosa Franco, director of lending at Neighborhood Trust Federal Credit Union ($18.7 million, New York, N.Y.), understands this from serving her vibrant and diverse community in the Washington Heights neighborhood of New York City, where 71% of the population speak a language other than English and 20% live below the poverty line. Franco said that because a large portion of the financially underserved still have a lot of gaps in their banking knowledge, they “struggle when using technologies to perform transactions. For these reasons, we need technologies that are flexible, user-friendly, adaptable, and of course, affordable.”

To choose the right technology to reach and serve the unbanked and underbanked, a credit union executive should ask the following:

• Does it support multi-channel communication and allow seamless transition between in-person and online services?
• Will it support and facilitate staff interaction with members or impede and restrict it?
• Is it easy to customize and update based on changing member demand?
• Does the contract hold the credit union to a long-term commitment that can be potentially costly?

Unlike banks, which are measured primarily by the size of their assets, credit unions are defined by the strength of their membership. While unbanked and underbanked individuals may not bring large swaths of assets, these individuals do have meaningful cash flows and need help to manage them. Alternative financial service providers have been fulfilling this need but have been charging exorbitant fees and keeping the consumers in a perpetual debt cycle. Credit unions can serve this population in a way that is much more societally beneficial and by doing so can grow themselves as well.

Kate Hao is the Founder and CEO of Happy Mango, a New York, N.Y.-based data technology company that focuses on consumer credit risk assessment and serves community banks and credit unions.