Serving the underbanked has emerged as a profitable and strategic opportunity to expand membership and reach underserved communities. Some credit union boards are taking a leadership role in creating new strategies to serve underbanked members and the broader community with successful results. Here is a case study you may find useful as you do this at your own credit union.

The Opportunity

The directors of a large, federally chartered southeastern CU with which my firm has worked recognized a growing underserved population in their market. Their observations were supported by the Federal Deposit Insurance Corp.’s December 2009 survey of unbanked and underbanked households. This study found that 23 percent of existing deposit members use non-bank providers for basic financial transactions. According to the study, customers that would have been considered mainstream “banked” deposit members have proved to be users of such alternative financial services as check cashing, bill-payment, and money transfers. These services can represent up to $70 in monthly fees incurred by existing members at check cashers and non-bank retailers such as Wal-Mart. Bringing these transactions back to the CU could represent both new fee income, and an opportunity to save members money with lower-cost services.

Armed with this information, the board challenged management to develop options for a new strategy to serve the underbanked, with a business case to back it up. The board authorized an “emerging markets” management position, reporting to a steering committee of executives, to lead the effort.

Business Case

Like many CUs, this board believes in the potential long-term value of serving the underbanked as a strategy to fulfill the CU’s core mission. Still, the directors posed key strategic questions: What is the size of the underbanked population in our field of membership? Who are the key competitors and what products are required to serve underbanked members? Is this profitable? What will it take for the CU to be successful? How does this program compare with other investment opportunities?

Additional considerations for the board included the potential impact on existing members, the CU’s reputation in the community, regulatory compliance, and a lack of existing expertise and experience with alternative financial services.

Generate Results

The emerging markets team created a thorough business case supported by data from the local market and best practices from other CUs. The team identified an opportunity to more fully serve the African American and Hispanic communities, fulfill commitments to the National Credit Union Administration in designated “underserved” areas, expand membership, and increase member loyalty and retention. By piloting the program in two specialized storefront branch locations, the program is expected to reach profitability in two years, and to provide a full return on investment in five years.

This director-initiated project enabled the board to evaluate the options and make a decision regarding the best strategy to serve the underbanked. The board voted to implement a comprehensive strategy for the underbanked segment built around a reloadable prepaid card and transactional services including check cashing. The incremental fee income per branch is expected to reach $110,000 annually.

George Hodges is founder and managing director of New Market Partners, a new CUES partner, College Park, Ga.