Why Banks Can’t Be Defined By Just Geography Anymore

Jenn Underwood
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Historically, traditional economics assumed that people always act in their best financial interest. However, this theory assumes that financial stability is the only variable used in making spending choices. Thankfully, behavioral economics has shed new light on the complexity of most people’s decision process.

Decisions Aren’t Made In a Vacuum

People live in a community, and their decision process often takes into account far more than their individual needs. Social preferences for altruism and fairness can lead people to choose sacrifice over personal gain. Whether it’s social norms like reciprocity or an inequality aversion, the problems of others often supersede one’s own financial circumstances. 

  • Parents go into debt to send their children to valuable experiences.
  • Neighbors overspend to make meals for the elderly person next door.
  • People avoid building emergency savings to support family members experiencing more immediate challenges. 
  • Individuals reduce their work hours to become caregivers for loved ones.
  • Still others choose to work in lower paying fields in order to serve the community.

While these choices aren’t likely to pad one’s bank account, they are made to invest in other priorities. 

You Don’t Know What You Don’t Know

Part of understanding your members and providing personalized services is becoming familiar with the values at play in the choices your community faces. But one’s cognitive biases often stand in the way of developing awareness of others’ needs. One such bias is the False-consensus effect causing people to overestimate how many people share your thoughts, experiences, and values. As a result, you are more likely to assume others share more similarities to you than they truly do. Of course, there’s little danger in assuming that people enjoy the same food you do when planning a party. But when decision makers at banks believe people have the same resources and priorities that they do, the one size fits all approach can have expensive consequences for their members. 

In fact, most people find it easier to focus on the needs of people like themselves. So it’s not surprising that when the banking industry develops financial solutions, they often struggle to meet the needs of the under-represented.  According to a Morning Consult poll conducted in Q3 2021, 10% of US adults remain unbanked and 24% are underbanked.   

As FIs try to attract new customers, solving the problems of the populations that aren’t served yet is essential. According to a May 2022 Deloitte survey, 66% of respondents believe banks should support diverse and underrepresented communities. And “with more options and lower satisfaction than ever, US consumers are now 2.6x more likely to transact with banks associated with high humanity.” 

Unfortunately, banks often don’t have the diversity necessary to develop solutions that work for marginalized communities. The Committee of Better Banks found that Black and Latino employees at 13 major U.S. banks have a less than 25% chance of holding a senior management or executive position compared to white colleagues. Overall, the study gave the financial industry a "C" grade for diversity, while Black and Latino representation were given a "D." Additionally, these populations have a higher than average likelihood of being trapped in entry-level positions without the opportunity to impact corporate decisions. 

Deloitte found that American consumers are demanding greater representation from their financial institutions.  Not only is greater representation what customers want, but it’s the best way to counteract the false-consensus and build products to serve a wider community. 

What’s the gender, minority, socioeconomic, and geographic breakdown of those developing your financial products?

In The Meantime…

Customers aren’t waiting around. While the diversification of staffing at legacy banks is moving slowly, an increasing number of neobanks have narrowed the definition of who their community is. The last 5 years saw an explosion of new banking platforms targeting specific identity and affinity groups. Neobanks like OfColor, Kinly and Cheese are supporting Latino, Black, & Asian Americans. Purple is uniquely designed for the needs of people with disabilities. And Daylight was designed to support the LGBTQ+ community and reward queer-friendly spending.

This isn’t an entirely new concept, credit unions formed around union and workplace memberships for years. And while credit unions are expanding their membership, it’s noteworthy that many neobanks are refining their approach. People are looking for a hospitable banking environment that makes them feel understood. 1 in 6 Americans reported that they felt “unwelcome purchasing banking products due to their race, gender, socioeconomics and/or sexual orientation.” And they want financial products that address their unique financial concerns. 

The needs of affinity groups are varied and as unique as the members that comprise them. And any list will be reductive, but there are often shared concerns:

  • As a community disproportionately impacted by pandemic job loss, 46% of Latinx respondents report worrying about debt, by far the highest of any affinity group. 
  • Black Americans reported being 1.6x more concerned about having enough saved for retirement.
  • Women’s concerns regarding educational debt for themselves and their children was 80% higher than the national average.
  • While rural community members reported difficulty gaining access to advertising advice leaving nearly $400B on the table.
  • Additionally, the LGBTQ+ community faces credit discrimination, increased costs to start a family and higher medical costs to name a few. 

Value in Customer Values

Deloitte concluded that shared values are becoming the influencing factor when selecting financial services. And if incumbent banks don’t rise to the challenge they risk losing up to 10% market share. Creating a community ethos is not only a high level of customer service, it may just supersede your brand identity.