An estimated 45 million U.S. consumers are credit invisible, have thin credit files or lack a recent credit history. These underserved consumers aren’t necessarily just the unbanked, but can also be younger or immigrant populations ready to engage with institutions for their growing financial needs.
The hallmarks of legacy Know Your Customer (KYC) systems include poor identity coverage, high rejection rates, high manual reviews and socioeconomic bias, all of which contribute to underserving this diverse group, which includes the Generation Z cohort of 18- to 25-year-olds. Unmet are the expectations of hyper-personalized digital experiences that this generation desires, and for new-to-country applicants, the account origination experience can vary widely across the industry. Compare this approach to that of Canadian banks, which extend a much warmer welcome to “newcomers” via dedicated webpages that compete for the business of new residents, foreign workers and international students.
There are two avenues for breaking down the barriers that make it difficult for U.S. banking institutions to connect with this diverse and potentially profitable group of underserved customers.
The first is to refresh the approach to customer identification programs (CIP) to instantaneously confirm that customers are who they say they are when they’re opening accounts. Doing this requires incorporating more sources of acceptable identification and employing more automated experiences to reduce friction in getting consumers approved for both deposit and credit products. In the current environment of money mules and synthetic identity fraud, it’s clear that banks need to be smarter with their approach to KYC.
While the range of identity and verification (ID&V) vendors abound, neobanks such as Chime and SoFi employ solutions such as Socure KYC, which uses AI and machine learning to access hundreds of trusted alternative data sources to verify new customers. The same vendor enabled a challenger bank with a younger applicant base to improve its auto-acceptance from 62% to 85% in digital account opening.
Verification using digital ID capture, biometric capture and liveness testing can also smooth the way to providing an entirely digitized experience without off-ramping customers to another channel, which can cause application drop-offs. Curinos Shopper data show that Gen Z and millennials overwhelmingly prefer mobile account opening (See Figure 1).
Figure 1: Preferred Way To Open A New Checking Account By Generation
Gen Z, Millennials and Gen X prefer to open new accounts digitally with less
human interaction, while Boomers overwhelmingly prefer to visit a branch
Vendor solutions such as those from Jumio and Onfido use native mobile-device features to make ID&V more seamless: A user captures a photo of their ID, a selfie and the ID are compared for similarity, and then video movement and speech is used to ensure that the applicant is a live person. This process is done entirely within a single mobile account-opening session. Some solutions have access to libraries of thousands of ID documents across most of the world’s countries, facilitating verification of more difficult-to-verify segments, such as new-to-country applicants.
The second avenue for tapping into new areas of profitability pertains to developing products and propositions to truly meet the needs of these underbanked segments. According to BAI, fewer than half of Gen Z and millennials used the same financial institution as their parents in 2021, compared to more than half of them a year earlier. This should be a wake-up call for incumbents that they need to take action to address this downward trend in usage
Younger and new-to-country segments need to build credit histories in order to access the full range of financial products offered by institutions. Fintechs such as Kikoff, Brigit, StellarFi and MoneyLion work to educate customers on building credit scores, taking them step-by-step through account linking, adding bills and building payment histories to augment thin credit profiles. Importantly, these providers make it truly easy for digital natives by enabling API-based connections to external bank accounts to pull in the transactional data necessary for bolstering credit profiles. Chime takes it one step further with its Credit Builder card, which functions much like a secured card but with a twist: There’s no minimum security deposit to open an account, and on-time payments are reported to the three credit bureaus without passing on credit-utilization data.
Digitally delivered propositions afford institutions new ways to tap into pools of new customers by personalizing more effectively and to build longer-term relationships for loyalty and primacy. For example, Viva First provides a simple mobile account-opening journey entirely translated in Spanish. The provider also offers help and support explanations specific to newcomers.
Dealing with longer-term profitability challenges means reinforcing behaviors and establishing trust early on through interaction, familiarity and utility. Some banks are revisiting how they can bring even younger generations into the fold earlier to establish relationships beyond generic child and youth savings accounts. To take on fintechs friendly to Generation Alpha, including Go Henry, British incumbent NatWest acquired Rooster Money to provide an entirely digital proposition to its customers with a family pocket-money app and prepaid debit card for kids. Revolut (UK)’s <18 and Chase First Banking cards also enable parents to stay on top of spending by their children while enabling goal setting and spending limits.
Whether it’s leveraging available technology or developing more personalized and digitized products, more financial institutions can tap into the opportunity to develop deeper and more profitable relationships with customers previously overlooked. With Gen Z alone projected to be more than 30% of the U.S. workforce by 2031, banks need to sharpen their approach to connect with this diverse cohort and the generations coming up behind them.