How can financial institutions better serve underbanked individuals?

An advisory panel convened by the Federal Deposit Insurance Corporation (FDIC) met recently to discuss possible answers to this question. Particularly in light of recent regulatory efforts to shut down products like payday loans, the options for the underbanked appear to be decreasing, noted the Advisory Committee on Economic Inclusion.

One possible solution: mobile financial services (MFS).

At the meeting the FDIC released a report concluding that “MFS is best positioned to have an economic inclusion impact through its ability to meet day-to-day financial services needs of underbanked consumers as well as consumers at risk of account closure,” at least on a short-term basis.

MFS can also help “the underserved gain access to the banking system and grow their financial capability,” according to the “Assessing the Economic Inclusion Potential of Mobile Financial Services” report, as 90 percent of underbanked adults own a cell phone and 71 percent of those are smartphones.

To encourage underbanked customers, banks should integrate MFS into their broader economic inclusion strategies, the FDIC recommended, and integrate mobile with other delivery channels. Risk management should be updated to recognize MFS expansion and an increase in underbanked clientele, the agency added. The service itself should be enhanced with regard to speed, convenience, and mobile functionalities.

Banks should identify opportunities to enable more mobile functionalities, the FDIC said. For example, most bank customers must first enroll in the institution’s online banking service before they can enroll in mobile banking. “These requirements could be obstacles to MFS use for those who rely on a mobile phone to access the Internet,” the report noted.

Finally, banks should strive to bridge MFS with traditional payment services such as cash and checks. “Many underbanked consumers must make certain payments (e.g., rent payments) using paper instruments such as checks or money orders and some rely on cash exclusively for most or all of their payment needs,” the report stated. “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.”

But MFS is not a magic bullet as some panel members shared concern about the cost to banks to provide new services and features, especially for smaller financial institutions. “It becomes a point where community banking may not be as competitive with the larger banks,” cautioned panel member Alden McDonald, chief executive of Liberty Bank and Trust Co. in New Orleans.

To watch video from the Advisory Committee meeting, click here.

To read the report, click here.

Why it matters: “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,” senior consumer researcher for the FDIC Susan Burhouse told the panel. “We found through our research that there are many ways to fine tune MFS offerings to make them even more useful tools for the underserved.” While some members of the Advisory Committee expressed concern about the potential cost to banks to improve and expand MFS, the FDIC said the report was released not as official policy but will serve as a foundation for further discussion of the issue.