There is good news, and there is bad news with regards to the path to addressing the unbanked and underbanked in the United States.
The good news is that the size of the U.S. underbanked population appears to be on the decline, with the Federal Deposit Insurance Corp.'s latest numbers on the topic revealing the lowest level of underbanked individuals since the survey began in 2009.
The bad news, however, is that it still means 8.4 million households were underbanked in 2017. At the same time, bank branch closures appear to be accelerating, with small towns across the country losing a combined 14 percent of their banks between 2012 and 2017.
Consumers aren't the only ones struggling to cope with the lack of a bank presence in their communities, forcing them to use expensive non-bank financial products like money transfer and check-cashing services. Many small businesses, too, are struggling to access the bank products they need to survive and thrive, like bank loans and deposit accounts.
In a recent interview with PYMNTS, Michael Coghlan, CEO of banking technology provider Verdigris Holdings, explored the challenge of banking the underbanked small business community. Digitization and modernization are key, yet for the regional banks and credit unions that are left in the wake of larger institutions shuttering their branches, the process is a challenge.
Bank closures are creating so-called "branch deserts," geographic locations without a single bank branch, a phenomenon that can contribute significantly to levels of not just underbanked consumers, but underbanked businesses.
"We see emerging FinTechs struggling to get banks, we see small businesses in bank branch deserts struggling to be able to maintain their bank accounts," said Coghlan. "People are using prepaid cards, check-cashing stores, money transmission for bill payment — they're incredibly expensive ways to operate, and this is absolutely the experience for many businesses as well."
At the same time, ongoing shifts in customer expectations and demands mean that addressing the underbanked does not necessarily mean having to build more physical bank locations. Increasingly, end-users want online and mobile-friendly solutions, with financial institutions looking closely at the broader digital landscape to understand exactly how their customers want to interact with their products.
Coghlan pointed to Amazon, and even digital platforms like Tinder that can influence how a person may want to conduct banking and finance.
Yet the ability for a financial institution to rise to this elevated need for digitization isn't the same for all players.
"I think it would be foolish to expect that small community banks and credit unions can afford to keep up with that market," said Coghlan.
Regional Banks, Credit Unions Compete
While smaller banks and credit unions play an important role in addressing underbanked small businesses, they can struggle with limited resources to assess current customer demands and invest money and time into the technology necessary to meet them.
"We've reached an inflection point where smaller banks, credit unions and community banks really struggle to keep up with the level of investment required to provide the high-quality digital platforms and experiences customers want," said Coghlan.
This presents an opportunity for companies like Verdigris to fill the gap. The company recently announced its Verdigris Commercial offering, which it describes as a "banking in a box" solution designed for community banks and credit unions.
For many of these smaller players, actually finding affordable, well-suited technologies to update their infrastructure and operations is the hardest part of modernization. According to Coghlan, once this hurdle has been overcome, actual adoption of Banking-as-a-Service (BaaS) technology can be quite easy, compared to such a process occurring within a larger institution.
"The level of inertia that exists in major banks prevents many organizations from being open to the same conversations that smaller, more nimble banks have," he said, pointing to the ability for BaaS providers to contact a small financial institution's (FI) CEO directly to have a frank conversation about this process.
Modernization For Customers, Too
Coghlan emphasized the importance of not just throwing technology at a financial institution to support its modernization initiatives, but instead combining that technology with operational support for the greatest chance of success. As more smaller financial institutions turn to third-party providers to support digitization, this coupling will be paramount.
He added that open banking appears to be an "inevitability" as the broader financial services market continues to innovate worldwide.
Yet this transformation isn't only about modernizing the financial institution, it's also about modernizing the experience for the end-user, including under-banked small businesses that have historically relied on expensive and outdated non-bank products. With digital and mobile-friendly platforms key to serving underbanked populations both in the U.S. and abroad, the drive toward open banking will only be successful if it keeps the end-user as the priority.
"We hear regulators saying quite clearly they want to be able to innovate, or work with innovators in the industry, so long as no one thinks they are going to use these innovations to get around appropriate legislation of the financial markets that protect customers," noted Coghlan. "As long as they do it in a way that continues to protect the customer, then I think we're in a space where there's going to be a thousand new ideas that come out and the drive toward 'open banking' is inevitable."