The Green Sheet Online Edition
December 26, 2011 • Issue 11:12:02
Insider's report on payments
Thinking outside the bank
It seems almost unfathomable that today - when electronic payments are burgeoning with the help of new form factors like mobile telephones - dependence on cash is on the upswing in certain pockets of the economy. I'm not referring to the underground economy, but rather to the poor.
The Pew Charitable Trusts, a nonprofit group that tracks social issues, reported that in Los Angeles, more low-income consumers closed out bank accounts than opened accounts between 2009 and 2010.
The Pew Health Trust began following a group of 2,000 low-income households in Los Angeles in 2009, when half the group had bank accounts and half were unbanked. A year later, when researchers returned to query the group, 13 percent of households that reported having bank accounts in 2009 had closed those accounts; just 8 percent of those who were unbanked had since opened bank accounts.
According to the Pew report, Slipping Behind: Low-Income Los Angeles Households Drift Further from the Financial Mainstream, nearly a third (32 percent) of Los Angeles households that left banks between 2009 and 2010 said unexpected/unexplained fees were the reason for closing accounts.
Among all unbanked households, 50 percent reported being unable to meet minimum deposit requirements; in 2009, only 30 percent said they couldn't meet minimum deposit requirements.
But here's the real kicker: more than half (59 percent) of the newly unbanked in Los Angeles now conduct business entirely by cash; an additional 26 percent use a combination of cash and nonbank financial services providers like check cashing houses.
This is not a trend limited to Los Angeles, or to California. In November 2011, the Center for Financial Services Innovation released data suggesting the number of unbanked and underbanked Americans is significantly larger than the Federal Deposit Insurance Corp. reported in 2009.
CFSI staff identified 60 million underbanked U.S. consumers who together generated $45 billion in fee and interest revenue for financial services providers in 2010, and most of those providers were not banks. Altogether, underbanked Americans are responsible for $455 billion a year in principal borrowed, dollars transacted and deposits, the CFSI reported.
To put this all into perspective, the consultancy Aite Group LLC estimated the first year of debit card interchange rate caps under the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 would result in revenue shortfalls of about $12 billion among all debit card issuing banks in the United States.
Looking forward, 2012 would be a good year for banks and credit unions to start offering products that tap into that revenue stream. I'm not alone in espousing this belief. Arjan Shutte, Managing Partner of Core Innovation Capital, a New York-based venture capital fund that invests in technology companies targeting America's underbanked consumer segment, hopes the CFSI data will prompt banks to do more to serve low-income communities.
"This new data confirms that there is a large opportunity for the financial services industry to create products and services that are both profitable for them and provide much needed solutions for this consumer segment," he said.
You can bet an army of nonbanks, including retailing giant Wal-Mart Stores Inc., has plans for tapping into that $45 billion revenue stream. Wal-Mart is fast becoming a banker to U.S. consumers who have been left behind by mainstream financial institutions; most recently it obtained ownership interest in Green Dot Corp., which specializes in general purpose prepaid cards and just got the federal government's OK to purchase a small bank in Utah and rename it Green Dot Bank.
Green Dot distributes prepaid debit cards via the Internet and retailers (like Wal-Mart, its biggest client), and contracts with third-party banks for card issuance and settlement. Now that it owns a bank, Green Dot no longer needs to contract out card issuance and related tasks.
In a November 2011 statement about the approval of Green Dot's application, the Federal Reserve Board said, "Green Dot Bank's operations would be substantially focused on the prepaid card business." The underlying question that should be on the minds of bankers: what does it mean to be substantially focused?
Many nonbanks, Wal-Mart in particular, are attracting under/unbanked consumers with transparent pricing, convenient locations and services that banks aren't inclined to offer, including check cashing, small-dollar remittances and micro-loans.
And new technology makes it possible for nonbanks to help just about anyone to accept credit and debit cards.
In fact, Intuit Inc., the accounting software giant, is planning a prepaid card account that unbanked micro-merchants can use to deposit payments accepted using Intuit's GoPayment, a mini-card swiper that plugs into smart phones, according to published reports.
Spending by unbanked Americans on payment services grew by 6 percent between 2009 and 2010, CFSI's data indicates; spending on credit services grew by 2 percent. Nonbank products that CFSI said experienced substantial growth include:
- Internet-based payday loans (35 percent growth)
- Reloadable general purpose prepaid debit cards (33 percent)
- Payroll cards (25 percent)
None of these are products that banks can't support. In fact, several large banks have begun offering short-term (payday) loans, including KeyBank, Wells Fargo & Co., U.S. Bank and Fifth Third Bank. And most of the largest banks, along with hundreds of smaller financial institutions, participate in Bank On programs that offer free or low-cost starter accounts in scores of communities throughout the country.
More to the point, banking is "the cornerstone of financial security," as the Pew report stated. Consumers without bank accounts cannot fully participate in the economy. Instead, they struggle on the fringes, paying cash for overpriced alternatives to banks, without any hope of saving or accumulating assets (like cars and homes).
According to JoinBankOn.org, a resource of the Corporation for Enterprise Development, a Washington think tank, an unbanked worker spends about $1,000 a year cashing checks, paying bills, obtaining short-term credit and accomplishing other financial tasks that banked workers take for granted.
Assuming one-fourth of the 60 million underbanked identified by CFSI are unbanked and employed, that's $15 billion a year nonbanks are earning at the expense of banks.
It's time for banks and other regulated financial institutions to rethink customer acquisition strategies and take a few cues from nonbank financial services providers. Mainstreaming the underserved makes good business sense, and it's good for the economy.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org.
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