When more regulation is good.
21 January 2012
Bart Narter
The Consumer Financial Protection Bureau (CFPB) is going to examine payday lenders and I think this is a good thing for banks. Approximately 60 million adults reside in these households. The FDIC estimates that 9 million household are unbanked. Another 21 million are underbanked, adding to 30 million households or about a quarter of the population. Source: FDIC: http://economicinclusion.gov/key_findings.html Banks compete against less regulated pay day lenders, check cashing stores, and non-bank financial services companies. Increased regulation will level the playing field and create market opportunities for banks. Most bankers aren't finding many areas for profitable growth and would be well advised to consider this market as a real opportunity. Mobile banking enables the unbanked to access financial services in a low cost channel so that thinner margins can be effectively supported. I would suggest those that are interested to read the Celent report, Reaching Underbanked Consumers Through Mobile Services which was co-authored by the Center For Financial Services Innovation, http://cfsinnovation.com/ Regulation isn't always a bad thing and the CFPB may create new opportunities for banks that can create appropriate products for the un- and under-banked.
This is an interesting question. It’s true that regulation isn’t always a good thing, but in this case that is only because it is a competitor being regulated. I did a brief review of bank products that compete with payday loans and found that options to be lacking. In fact, most comparable bank products were more expensive, harder to get, and less convenient. This certainly supports the idea that banks could do better at reaching the underbanked consumer.
Before adding any new products, I think it is important to consider that unbanked consumers are quite the same. Not that they are better or worse, but different. Bank need to be prepared for the idea that traditional bank processes may not be equally effective with different consumers. Without changing internal processes to reflect the unique needs of this market, banks could run much higher risk exposure than they expect. There is great opportunity, but it must be pursued with care.