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America’s Financially Underserved Marketplace: A $141 Billion Opportunity Hiding in Plain Sight

Thursday, November 17, 2016

By Financial Health Network

Underserved Consumers spent $141 billion in 2015 to borrow, spend, save, and plan their financial lives. What products do they use to meet their needs, and where are the opportunities for innovation?

American consumers have never had more choices when it comes to financial products. But having choices doesn’t always mean needs are well met. The challenges are many:

  • A whopping 121 million people are credit-challenged in the United States;
  • 91 million face barriers to using so-called “mainstream” financial products due to low-to-moderate incomes;
  • 54 million face these barriers due to income volatility; and
  • the FDIC estimates that 67 million U.S. adults are un- or underbanked, eschewing bank accounts altogether, or using them in combination with alternative financial services.

Whether they’re impacted by one of these factors or by several of them in tandem, these consumers have one thing in common: They are financially underserved. Financial Health Network’s 2016 Financially Underserved Market Size Study presents an annual snapshot of what underserved consumers spend on financial services, shining a light on the opportunity to better serve those who are more likely to be vulnerable to financial health challenges.

Collectively, the underserved spent $141 billion on fees and interest to manage their financial lives in 2015 — an amount that grew 6% from the previous year. That’s 141 billion reasons to create solutions that better meet their needs. But first, let’s understand what financial products they use, and where the opportunity exists.

Some products utilized by underserved consumers — such as checking accounts or auto loans — are also used by consumers who are not defined as underserved. Yet others — including check cashing and payday loans — exist primarily to meet the needs of underserved consumers. Adding up the dollars spent by the underserved on both mainstream and alternative services alike fully accounts for this market’s true size.

This year, we examined 5 trends across 28 products that underserved consumers use in their financial lives to spend, save, borrow, and plan, plus took a first look at the insurance industry with an examination of underserved spending on auto insurance premiums.

Here are five questions — and a few observations — that hold the key to market opportunity:

  1. Electronic Payments and the Cash Economy: Friends or Foes? Spending on prepaid cards, checking accounts, and mobile payments innovations is growing, but products such as Check Cashing and Remittance aren’t going away anytime soon, driven by the major role that cash continues to play in the financial lives of underserved consumers.
  2. Consumers Seeking Small-Dollar Credit: What’s on the Menu? Changes in provider product offerings mean consumer spending continues to shift away from the single payment model of payday loans, including those offered online, and toward short term credit offered through installment loans and subprime credit cards.
  3. Tapping Alternative Credit Sources: Is it Personal or Just Business? Limited availability of bank microloans for underserved small businesses means that many have unmet credit needs, or seek credit from alternative sources, such as the quickly-growing Marketplace Loan segment or Merchant Cash Advances. Others turn to sources of credit intended for personal use, including installment loans and subprime credit cards, to meet their needs.
  4. Auto Loans in High Gear: New Routes for Growth? Subprime Auto Loan originations and spending continues to increase, while usage of Buy Here Pay Here (BHPH) Auto Loans, which carry higher interest rates, is declining. However, an increasing share of remaining BHPH customers do not have subprime scores, suggesting a significant opportunity to address unmet demand for lower-rate auto loans to these lower-risk consumers.
  5. Pricing Auto Insurance for the Underserved: Premiums or Penalties? Underserved consumers pay higher rates for auto insurance than the mass market due to characteristics tied to lower economic status. They spend nearly as much on premiums to drive their vehicles as consumers spend on fees and interest for subprime auto loans and leases.

There’s plenty of opportunity for innovation right in front of us. Products and solutions that can improve financial health — and address consumers’ specific and very real needs for financial systems that work with the lives they lead and the income challenges they face now — are long overdue. Let’s dive into this $141 billion opportunity to help more Americans become financially healthy.

By Financial Health Network on November 17, 2016.

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