Inside Financial Services

Serving the Underbanked: My Takeaways From Emerge 2015

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Last week I attended what’s become one of my favorite financial services conferences: Source Media’s annual Emerge Conference, held this year in Austin Texas. The very first Emerge event was held ten years ago, when it was called the Underbanked Conference.  That first edition drew a surprisingly large (to me, anyway) crowd of 200 attendees, of which I was one.  But success begets success: this year’s attendance in Austin was around 700! If my experience is any indication, those 700 got their money’s worth. Here are my takeaways from this year’s event:

Celebrate diversity! One of the most notable—and best—things about Emerge is the wide spectrum of participants it draws. Which is to say, not just bankers, but also “shadow” bankers, entrepreneurs, regulators, people from nonprofits, activists, vendors, trade groups, and private equity investors. At the very least, it makes for some interesting panel discussions. The program is put together by the Center for Financial Services Innovation, a Chicago-based group dedicated to working with the nation’s 68 million or so un- and underbanked consumers. The conference is the vision of CFSI’s impressive CEO, Jennifer Tescher.

Every year at the conference you can feel the tension between those attendees and speakers who are looking to make money serving the financially underserved, and those who want to protect those same people from being ripped off by greedy vulture capitalists. It’s entertaining for all of us to play in the same sandbox for a few days.

It’s still a big market! The un- and underbanked actually use all sorts of financial services, most notably check cashing services, money orders, wire transfers, prepaid cards, and payday loans. Those sorts of activities generate aggregate revenues, in fees and interest, of around $50 billion annually, according to CFSI.  Of course, a number like that upsets the activists at the conference, who take it as a sign that these consumers are being preyed upon by greedy capitalists.

Mobile is huge. The penetration rate of smart phones among the un- and underbanked is somewhat higher than it is for conventional banking consumers. Not surprisingly, many companies looking to serve the market are trying to build businesses centered around mobile applications. Private equity is playing a large and expanding role here.

Regulatory pressure increases each year. It’s a typical regulatory irony. Politicians and regulators want institutions to serve the un- and underbanked, but each year seem to put forth more rules and regulations that make serving the market more difficult.  Check cashing is a good example of where regulators are doing more to hurt than help. As long as fees are clearly disclosed the, consumer should be allowed to decide for himself whether he’ll pay for immediate availability of his funds.

Fluctuations in consumers’ income and expenses are a big challenge. Income and expenses can vary widely for this group of consumers, because of factors ranging from seasonality to unexpected emergencies. This makes it difficult to serve the un- and underbanked through traditional banking models.

Profitable small-dollar lending in this segment is still a work in progress. We’re talking in this case about loans of $500 to $2,000. After hearing this topic discussed rather intensely at this conference for the past ten years, I don’t believe much progress has been made toward coming up with a solution that would be acceptable to all parties. Lenders know how to profitably make the loans–but only at a rate the activists would call usurious. It is possible to write the loans at a rate activists would deem socially responsible, but few have figured out how to make money at it.

New underwriting models are all the rage. I was overwhelmed this year by the number of startups that claim they’ve developed new credit underwriting models that rely on nontraditional data, that they say make better credit decisions than the old-fashioned credit scores. I understand that may be possible, but I doubt that traditional lenders aren’t working to develop models that use non-traditional data sources, as well.  I am sure some of the startups will succeed, but suspect they won’t succeed on the scale their backers imagine. Others have simply come up with innovative new ways to write loans that won’t be paid back.

We have a huge savings problem in this country.  It’s a demographic fact of life that without meaningfully changing the programs, government-sponsored retirement and health care systems will run out of money in the next 20 years.  It’s also a fact that Americans are not doing very much to save for their longer lives and more expensive health care.  CFSI quoted a study that revealed 45% of Americans don’t save anything!  I saw some great solutions that would help increase individual savings, but we as individuals have to adopt them.

Let a thousand flowers bloom! Over the decade this conference has been in business, CFSI has essentially taken over all the content and management of the program. I’m a huge fan of CFSI, but the organization has a strong point of view, which by now comes through in just about every presentation and panel discussion. The organizers might consider allowing other perspectives into the mix. Perhaps Source Media rather than CSFI (which, again, I think is great) should have more control over the conference’s programming.

That gripe aside, Emerge 2015 was a great conference, as it has been for a decade. I’m already looking forward to Emerge 2016.

What do you think? Let me know!

3 Responses to “Serving the Underbanked: My Takeaways From Emerge 2015”

  1. Jonathan Donahue

    Tom –

    It sounds like a great conference – sorry I missed it. I would love your thoughts on where experienced talent should be looking to make a difference in the un/under/and emerging financial services market. It is disappointing how many banks are treading water and playing defense – it would be great to find a firm that is playing offense and taking advantage of all the change in the market. The only bank I can find that is coming close is Customers Bank – it would be great if there were others like them.


  2. G. Mark Alarik

    Banks have got to stop operating in Silos.

    This reveals the opportunity for banks to offer bundled accounts that could include savings, lending & small dollar loans, core, etc. This way, the lower margin/small dollar loans could be priced very competitively while the bank enjoys normal profit from the other products.

    Multi-Account holders are the most profitable and least likely to leave the institution. Not all un-/underbanked will be profitable, but perhaps a significant number will respond because it makes sense and helps serve their overall needs. This program will work if management commits to serving the customer wholistically.

  3. John Thompson

    Really enjoyed your summary Tom, including the ‘gripe’ at the end. Very useful feedback as we try to make this the best event it can be. Thanks – John @ CFSI.

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