As U.S. "Unbanked" Population Grows, Financial Institutions Must Develop New Approaches and Products for Underserved Markets.

NEEDHAM, Mass. -- More than 100 million consumers living in the United States today are considered "unbanked," "underbanked," or credit underserved, and often rely heavily on nonbank providers of financial services to conduct their financial transactions. Despite various regulations enacted to provide banking services to a broader range of consumers, many financial services institutions fail to offer the products needed by this significant portion of the U.S. population and bring them into the mainstream banking system.

New research from TowerGroup finds that traditional financial institutions must focus more attention on creating the right products for financially underserved consumers - given that existing products do not meet the needs of this population nor help institutions win additional market share in this category. Institutions cannot simply strip down products designed for more affluent or mainstream American markets. They must make a full-scale evaluation of various segments of the underserved market and address these customers' unique needs, preferences, and economic circumstances.

While banking institutions may be largely absent in serving these markets, consumers are not without options. In addition to Community Financial Centers and Financial Service Centers, a new wave of providers such as retailers offering financial products (H&R Block, Wal-Mart) and online providers (peer-to-peer lenders) are working to fill the gap. The traditional banks will have to compete with the increasing number of providers who serve these markets and have developed large and profitable networks.

TowerGroup believes the most challenging aspect of serving unbanked, underbanked, and credit underserved consumers is defining and identifying the different segments of the market. The majority of the individuals in the unbanked sector - many of which have a distrust of the banking system - rely heavily on a cash-based economy, generating few to none of the records used in traditional credit reporting. Consumers who are more easily identifiable are those with thin credit files or "subprime" consumers with unfavorable credit profiles. They also tend to fall into the undeserved market due to their inability to secure loans and other banking services stemming from both their lack of credit history or negative history upon which an institution would make a lending decision.

A graphic illustrating the complexities of the underserved market can be downloaded at: http://www.towergroup.com/research/content/page.jsp?pageId=3462

TowerGroup points to a number of ways in which banks can compete for the underserved markets. For lending transactions, a number of risk tools using alternative data elements not previously available for credit evaluation purposes can help institutions ascertain the creditworthiness of credit-underserved consumers. Other aspects they need to consider to attract this population include cultural traditions and inclusivity, office locations and hours, language barriers, marketing, and account documentation requirements.

The TowerGroup report titled "Will Unbanked Outnumber Banked Consumers? Solutions in the Race to Win Share in Underserved Markets," is authored by Bobbie Britting, Research Director in the Consumer Lending practice at TowerGroup. To request a copy of the research or to arrange an interview with Britting, please contact Jorge Lavina at +1.917.595.3047 or [e-mail]. Those interested in subscribing to a TowerGroup research service may call +1.781.292.5200 or email [e-mail].

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About TowerGroup: TowerGroup is the leading research and advisory services firm focused exclusively on the financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world's leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America and Europe, TowerGroup serves a global client base. Visit http://www.towergroup.com for more information.