Income volatility leaving underbanked stuck in neutral

Americans have been doing much better in the personal finances department in recent months, which is good news to both consumers and lenders providing financial services. The national unemployment rate has hovered at around 4.3 percent, according to the Labor Department, a low last witnessed more than a decade ago, and median household earnings are improving. Indeed, last year, the typical household was pulling in $59,039, the Census Bureau reported, a 3.2 percent increase from the previous year, the highest median salary on record.

While this is a net positive for consumers looking to improve their quality of living - as well as lenders, eager to provide the credit leniency borrowers enjoy - there's a sizeable pool of potential customers that's waiting to be tapped: the underbanked.

Approximately 9 million families - the equivalent of 15 million U.S. adults - are underbanked, according to the Federal Deposit Insurance Corporation. Not having access to or ownership of a checking or savings account, the underbanked represent approximately 7 percent of the population.

Given the ubiquity of banking services, it may come as a surprise that the rate is so high. One of the main reasons why it's elevated stems from income volatility among the underbanked, meaning those not earning a consistent salary from month to month. In 2015 - the latest month for which data is available - nearly 31 percent of the underbanked said their earnings varied significantly between pay periods, according to the FDIC's findings, and 26 percent said the variation was moderate.

Majority believe they don't earn enough to open bank account
Typically, in order to open a banking account, individuals have to keep a consistent amount of money available. Because the earnings of the underbanked tend to vary, this is part of the reason why many don't seek out traditional banking services. Nearly 58 percent of respondents in the FDIC poll cited not having enough discretionary income as a contributing factor for their lack of a bank account, with 38 percent pointing to this as the overriding reason.

This may explain why consumers perceive, often wrongly, that banking institutions don't want to render services to them. This is particularly evident among the unbanked, as nearly 56 percent of participants in the FDIC poll said banks probably "weren't at all" interested in taking them on as customers.

However, perception is hardly reality in this context. The unbanked and underbanked are no different than the fully banked, because like them, they have regular bills to meet and payments to address. The only difference is the means by which they pay for these services, typically in the form of cash.

The alternative credit difference
Alternative credit reporting is the means by which businesses can evaluate risk in order to determine just how consistent so-called "credit invisibles" are about making their payments, such as utilities, cable or their mortgage. Alternative credit is a reliable indicator, which is why several lawmakers in Congress are looking to move on a bill that would require mortgage services providers, such as Fannie Mae and Freddie Mac, to use alternative credit scoring when making lending decisions, MarketWatch reported. The bi-partisan bill is co-sponsored by Senators Tim Scott of South Carolina and Mark Warner of Virginia.

Here's more information on Microbilt's Alternative Credit Reporting model, helping business owners get a more accurate depiction of potential borrowers' spending power and their creditworthiness.