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The Unbanked, The Underbanked and The Underserved

Jul 08, 2010 Matt Vitko

With the new financial reforms pending in Washington and the potential effects of that legislation on short term lending and other alternative financial services, there is a lot of discussion about the "underserved", "underbanked" and the "unbanked". I thought it might be worth looking at these different groups - how they are alike and how they differ.

For today's blog, let's take a look at the definitions:

Unbanked:   The unbanked are those individuals without an account at a bank or credit union and are considered to be outside the mainstream financial system for one reason or another. The majority of the unbanked are American born while a growing number of the unbanked are immigrants with a low income and insufficient savings for the minimum balance to open checking and savings accounts.

Underbanked:   Although they may have an account with a bank or credit union, the underbanked are people that have poor access to mainstream financial services from banks and credit unions and rely upon alternative financial services from non-banks such as check cashers, money orders, remittances, payday loans, pawn shops, and auto title lenders.

Credit Underserved:  The credit underserved are those individuals currently outside the credit mainstream because they have a thin credit file or no credit file at all.  These individuals are disproportionately young adults who have yet to establish a credit history, immigrants, the elderly, divorcees and widows who have had access to credit through their spouse, but have not established their individual credit history, ethnic minorities, low income earners and those that distrust the credit system. Without sufficient data on the credit underserved individual, lenders typically view the person with no FICO® score as a high risk.

Underserved:   The term underserved is a catchall word typically used for those individuals that are unbanked, underbanked and/or credit underserved.  It is also used to refer to "subprime" consumers - consumers that have full credit files with low FICO® scores to whom traditional lenders are unwilling to offer traditional credit products.

All these categories represent a huge potential market for lenders and business, together representing between 50-100 million US consumers.  Many of these individuals are low-risk, active consumers that regularly pay rent, utility and mobile phone bills. The key to tapping this huge market of creditworthy individuals is good data.