Spurned by tight credit restrictions and discouraged by high fees, a rising number of Americans have turned away from the traditional banking system in favor of alternative financial service providers, such as payday lenders and rent-to-own services, according to a new study from the Federal Deposit Insurance Commission.
This month, the FDIC released its 2012 National Survey of Unbanked and Underbanked Households, reporting that 8.2 percent of the U.S. population has no interaction with traditional banks. These adults – there are roughly 17 million in all – do not have a checking or savings account. An additional 20.1 percent of Americans are underbanked, said the report, meaning they have a traditional bank account but conduct most of their financial transactions at alternative banks.
Experts say there are numerous reasons why fewer Americans may be banking with traditional sources. Unemployment and financial difficulty may be primary reasons, while some banks must turn away lower-income households due to the high cost of running their accounts, according to The Washington Post. Some individuals are simply distrusting of traditional banks, choosing instead to opt for alternative servicers.
"The most common reasons why households report they do not have bank accounts are that they feel they do not have enough money for an account, or they do not need or want one," said the report.
The study's findings could present an opportunity to alternative lenders, as these financial institutions may be able to increase their customer population significantly. However, there is risk in lending to a wider group of consumers, which is why it is important to support any expansion effort with sophisticated risk management software that can mitigate unneeded risk.
With a firm and stable risk management framework backed by comprehensive credit application assessment processes and automated decisioning, alternative lenders can build a portfolio of clients that is both high-performing and profitable.