PDF Ebook Getting to Know Underbanked Consumers: A Financial Services Analysis
To help banks and others interested in meeting the financial services needs of low- and moderate-income households learn more about the financial behavior and preferences of low-income consumers, ShoreBank Advisory Services, a business of ShoreBank, with the support of the Fannie Mae Foundation, Ford Foundation, MacArthur Foundation and Annie E. Casey Foundation, conducted a large survey of households in low and moderate income neighborhoods of Washington, D.C., Los Angeles, and Chicago with two central questions in mind. First, what are the most important reasons why so many low- and moderate income households do not hold a checking or savings account? Second, to what extent do households with bank accounts also participate in the alternative financial sector, and in what ways are unbanked households connected to the mainstream financial sector?
The survey utilized a multistage stratified random sampling design in which census tracts were stratified by city, race/ethnicity, and income. Survey households were drawn from 63 low and moderate-income tracts, 21 tracts in each of the three cities. Approximately 500 households were surveyed in each city, for a total of 1,532 interviews About two-thirds of the interviews were conducted by telephone, and one-third in person. All respondents were offered the opportunity to complete the survey in Spanish, and 10% chose to do so. In each household, the survey was administered to the person identified as being responsible for most of the financial decisions. The overall response rate for the survey was 48%, with a higher response rate for in person interviews. The survey was conducted from August 2003 to January 2004.
The survey represented almost 1 million households in the three cities, 20% of them white, 40% black, 33% Latino and 5% other or mixed race. About 27% of the population was born outside the United States, primarily in Mexico. The median income was $18,522, with about half the population working and the remainder retired, disabled or unemployed. The population’s average age was 44.5 years. Almost half the population has had some college education, and 20% are college graduates. About 31% percent of the population owns their own homes; the remainder rent.
Following convention, we label a household with neither a checking nor a savings account unbanked. Households holding either type of account are termed banked. Almost 30% of the survey population is unbanked, a figure in line with previous surveys of urban low and moderate income populations.
To date, most discussions about the financial services practices of low- and moderate-income consumers have proceeded as if these consumers fit neatly into two mutually exclusive categories, the banked and the unbanked. The banked are assumed to be fully integrated into the mainstream financial sector by virtue of having a checking or savings account, whereas the unbanked are on the fringe, completely excluded from traditional financial networks.
The reality is that most low- and moderate income households, as represented by the survey population, rely on a patchwork of financial services provided by both bank and non-bank institutions. For example, two-thirds of the 70% of the population that is banked still use non bank services, ranging from buying money orders and sending remittances from other than a bank to using payday lenders, pawn shops and auto title lenders as primary sources of credit. Clearly, engagement in the mainstream and alternative sectors by low-and moderate income households should be thought of as a continuum rather than a simple dichotomy of banked and unbanked.
The sheer volume of financial activity in low- and moderate income neighborhoods is enough to warrant focused research on these markets. Generalizing from our survey to the total of 957,850 households in low- and moderate-income neighborhoods in Chicago, Los Angeles, and Washington, D.C., we estimate that there are 580,733 households with checking accounts and 478,129 households with savings accounts. Another 281,030 households are unbanked. Together, households in these neighborhoods buy 1.2 million money orders each month and cash 1.9 million checks. Moreover, 172,080 households sent money internationally last year, many doing so on multiple occasions. Given the amount of activity in these three cities alone, the total size of the urban low- and moderate-income market nationally is simply too great for any financial institution to ignore. Not only is there an opportunity to serve the currently unbanked population, but with almost two thirds of banked households conducting at least some of their financial business with non bank institutions, there is plenty of opportunity for banks to expand their business with existing customers.
However, low-income consumers are not a homogeneous group, and a one-size-its-all strategy in marketing and product development for low- and moderate income consumers runs the risk of appealing to no one in particular. In addition to the remarkable demographic diversity in this market, we have also seen that there is substantial diversity in attitudes, preferences, and experience. For example, for the half of unbanked households that have had a bank account in the past, the issue is winning back those whose experience with the system has not been positive—a fundamentally different marketing challenge from attracting those who have never had a bank account. Customers who find managing a checking account difficult may require a different set of products and services than customers who routinely make payments with checks. Financial education curricula also need to be tailored to the needs of individual groups. Curricula developed to bring the unbanked into the banking system need to differ from curricula for segments that were formerly banked, although both need to offer preventive tools designed to address account management issues.
To better understand the rich diversity of the low- and moderate-income population, we have conducted a segmentation analysis on the survey data and defined distinct clusters within this market. The need to size a local market and identify distinct consumer preferences and segments is, of course, not new to the financial services industry. However the conventional approach to defining consumer segments is of limited applicability for lower-income urban markets. Until now, there has been little differentiation among market segments of lower-income, urban consumers.
Few if any have tried to segment the lower-income market with the same analytical rigor applied to the wealthy market. This report begins to fill that gap through specialized analysis guided by specifically tailored questions designed to elicit accurate responses and reveal a clearer picture of the characteristics, preferences and behavior that impact the financial product choices of the low- and moderate-income population.
CONTENTS
Introduction
Cluster Descriptions And Groupings
Conclusion
Appendix
I. Survey Demographics
Ii. Cluster Comparison Chart
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PDF Ebook Getting to Know Underbanked Consumers: A Financial Services Analysis
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