Aug 25, 2017 Philip Burgess
Unbanked and underbanked consumers make up a significant portion of American adults. The latest Federal Deposit Insurance Corporation survey, which collected and analyzed data from 2015, put the number of unbanked persons at approximately 9 million. The organization estimated the number of underbanked consumers - those who rely on atypical financial services in addition to a checking or savings account - to be around 24.5 million.
Many assume unbanked and underbanked consumers simply don't have enough income for traditional financial services. According to the University of Minnesota, many of these households earn less than $25,000 per year. However, limiting one's reliance on banks and similar institutions is becoming an increasingly popular choice. In fact, many millennials - frustrated by banks' role in the Great Recession, wary of institutions in general and eager to try innovative solutions - choose to forgo checking accounts, savings accounts, debit cards or credit cards.
Because of the rapidly shifting payments and personal finance landscape, un- and underbanked consumers have their choice of financial products. Many industry insiders thought tools like prepaid cards would be the favored solution, but the relatively new bitcoin seems to have stolen the thunder. Unfortunately, it appears bitcoin is running into the same issues that ultimately made prepaid cards such a poor option.
Increasing fees call bitcoin into question
Because bitcoin had such a miniscule barrier to entry, experts assumed it would be the most inclusive option for the un- and underbanked. However, according to American Banker, increasing fees make it difficult for bitcoin to work as an alternative financial product. Transaction fees hit their highest in June, reaching an average of $5.50. They've now settled to about $2, but they still pose an issue since they're incorporated into every external payment and transaction.
That's the same issue that called prepaid cards into question. Consumers were often charged to load money onto their cards or to use them for purchases, siphoning away their funds.
One bitcoin vending machine company charged 14 percent per transaction. Andrew Barnard, its cofounder, told American Banker the currency's convenience allows his company to charge so much.
"As competition, infrastructure and economies of scale grow, customers will begin to become more aware of their options and prices will naturally come down over time," he added. Barnard expects fees to fall in the range of 5 to 7 percent.
Credit for the un- and underbanked
Unfortunately, being un- or underbanked has another major disadvantage. Not having access - or enough access - to traditional financial services prevents consumers from partaking in high-value transactions. Many of these consumers, being unable to secure a loan, are excluded from traditional elements of American life such as home ownership and entrepreneurship.
The prevalence of un- and underbanked takes a toll on businesses as well. People who fit in this category, especially those who elect to do so, are usually credit invisible. This means they have little to no credit history with the three major reporting agencies. Although un- and underbanked individuals might be financially responsible, lenders see their lack of credit and are unable or unwilling to extend a loan. In other words, lenders often reject perfectly viable customers, unaware of their creditworthiness.
Thankfully, alternative credit data solves that specific issue. It pulls information from other sources like rental and utility payments to provide an alternative score businesses can use to evaluate the financial health and responsibility of a potential lendee.