In the 2011 Underbanked Market Sizing Study sponsored by investment firm Morgan Stanley, the researchers found that one out of every four U.S. consumers are underbanked, a significantly higher ratio than reported in their 2010 report. The total underbanked market in the United States stands at approximately $682 billion (in volume), with about $78 billion paid out in fees and interest revenue.
By far the largest financial service product category for the underbanked was short-term credit ($41 billion), with providers of subprime auto loans, especially, raking in over $25 billion in fees and interest revenue in 2011. In comparison, payments accounted for only $8.9 billion, and was made up of such services as money orders, walk-in bill payments, remittances and payroll.
Notably, in year-over-year growth rates between 2010 and 2011, prepaid scored highly. Both payroll and general-purpose reloadable (GPR) cards grew at over 20 percent, while total growth over all the product categories was 7.3 percent.
In a webinar that discussed the report's findings, CFSI Lead Analyst Eva Wolkowitz said prepaid's growth (along with Internet payday loan products) resulted from a mixture of increased uptake of online and mobile technologies by consumers in addition to greater access to the products and lower costs associated with them.
"The advantage of these products is pretty clear from at least a cost perspective," noted Rob Levy, Manager, Insights & Analytics at CFSI and report coauthor. "Using [the] Internet and mobile infrastructure, and not relying on traditional storefront and brick-and-mortar locations, gives them a huge advantage in terms of cost and also reaching the underserved consumers who might not be near traditional bank branches."
Levy expects that trend to continue. "We think the products that capitalize on this infrastructure and usage by underbanked consumers will see more growth in the years ahead," he said. "And the products that rely on older technologies and business models will likely continue to bleed market share."
Among the trends that have had the greatest affect on financial services is regulation. "Passage of Dodd-Frank [and] the establishment of the CFPB will continue to impact the way different segments grow or retract," Levy said. He highlighted the Durbin Amendment to the Dodd-Frank Act of 2010 as being particularly consequential for prepaid. "Clearly prepaid is hugely impacted by the contentious Durbin Amendment and other products, as well as at the state-by-state level, particularly for payday loans," he said.
But the consensus opinion reached in the report and by the webinar presenters is that the future looks bright for prepaid. Mike Harris, Managing Partner at Core Innovation Capital, said the top driver of prepaid's success will be the integration of its products with mobile devices.
Harris gave Plastyc Inc. as an example of a cloud-based checking account replacement service that leverages the mobile infrastructure. "A very high percentage of their current customer base are underbanked consumers," he said, adding that financial institutions are recognizing better ways to offer services without issuing paper checks and charging consumers overdraft fees.
Levy noted the trend of banks entering prepaid will continue to accelerate. Because the movement began in late 2011, the report does not reflect banks' full impact on the industry; next year's study, showing 2012 numbers, will better reflect what affect banks' entrance into prepaid had on overall consumer spending patterns.
Looking in from the outside, investors and entrepreneurs might want to dive in to take advantage of the growing underbanked market or, conversely, they may get cold feet at the tightening regulatory environment. Bryan Wagner, Executive Director of Morgan Stanley Global Sustainable Finance, cautioned against both approaches. He said firms must understand "how consumer preferences are changing, the role that technology is playing, the role that regulatory change will play going forward."
Levy added that the opportunity is present for "high-class, high-quality innovation" in the market. And regulation could be a catalyst for that innovation. "The market could grow in quality but decrease in size," he said.
As for prepaid, CORE instituted CFSI's Compass Principles in how it evaluates what prepaid products and services to invest in. "We're very bullish on the space because consumers are showing with their decision making that it's a product that they want, and they don't want to pay some of the fees that are associated with other alternatives," Harris said.
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