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April 25, 2014

How FDIC Is Nudging Banks to Reach Underserved

“WASHINGTON — The issue of serving so-called “underbanked” borrowers has taken on a new urgency since regulators began cracking down on payday and certain other low-dollar, high-interest loans, prompting fears of a credit crunch for low-income consumers.”

“Even as the Consumer Financial Protection Bureau writes new rules for payday loans and the Justice Department continues “Operation Choke Point,” which is designed to force institutions to sever relationships with online lenders, regulators are trying to create and promote safer, viable alternatives that can expand access to the banking system.”

“The Federal Deposit Insurance Corp. convened an advisory panel for the 20th time on Thursday focused on exploring ways to reduce the number of unbanked and underbanked borrowers. Following the committee’s earlier studies on bank-offered small-dollar loans and safe transaction accounts, officials presented a new paper exploring how the use of mobile phones could broaden banking access. They also announced a joint financial literacy initiative with the CFPB to expand the FDIC’s well-established Money Smart education program.”

“Mobile financial services is becoming more and more widespread but for a variety of reasons … it’s not always designed for or used in ways that are increasing economic inclusion,” Susan Burhouse, senior consumer researcher in the FDIC’s division of depositor and consumer protection, said in a presentation to the advisory committee. “We found through our research that there are many ways to fine tune MFS [mobile financial services] offerings to make them even more useful tools for the underserved.”

“The committee’s white paper on mobile financial services, which the agency said was released “for discussion purposes” and not as “official policy,” noted that 90% of underbanked adults own a cell phone — of which 71% are smartphones. Meanwhile, 68% of unbanked adults have access to a cell phone, of which 49% are smartphones.”

“Among the study’s recommendations were steps to bridge the delivery of mobile financial services with the traditional payment methods underbanked consumers use, such as checks, money orders and cash.”

“MFS is likely to be a more useful financial tool for the underserved if ways can be found to reconcile and meet the underserved’s needs for electronic transactions with their need for paper payments or cash,” the report said.

Other obstacles to leveraging mobile technology to serve the underbanked, the study noted, include the fact that customers typically need access to a bank’s online service — which some consumers lack — to enroll in mobile banking or manage their mobile banking settings.

“These requirements could be obstacles to MFS use for those who rely on a mobile phone to access the Internet,” the study said.

“The paper also called for further efforts to study examples where banks have successfully created mobile services platforms that can be used by the underserved and for regulators to “evaluate incentives that could encourage banks to offer and demonstrate the benefits of offering specific MFS features that are relevant to underserved consumers.”

“But committee members raised other issues about expanding access through mobile technology.”

“Alden McDonald, chief executive of the $550 million-asset Liberty Bank and Trust Co. in New Orleans, urged policymakers to be sensitive to the cost burden on smaller institutions — including the compliance costs — of making changes to their mobile banking offerings.”

“It becomes a point where … community banking may not be as competitive with the larger banks,” said McDonald, a member of the advisory panel.

“FDIC Chairman Martin Gruenberg, who has maintained the agency’s focus on unbanked issues following the creation of the advisory committee under his predecessor, Sheila Bair, said the report would serve as a “foundation” for further exploration. He also acknowledged that future discussions on how mobile technology can benefit the underbanked should address advances by nonbank startups, not just banks.”

Read full American banker article here.

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