By Patti Murphy
ProScribes inc.
Mobile technology is changing the way people interact with financial services companies, making anytime, any place banking a reality for millions of Americans who might otherwise have little to no interaction with banks. I'm referring, of course, to the "unbanked" and "underbanked," an increasing number of whom engage in what I call "pocket banking."
Pocket banking refers to the growing use of prepaid cards and mobile payment apps like Apple Pay, Samsung Pay and Starbucks. There is little question of a correlation between these two trends, especially among millennials, big users of both.
In 2013 there were 9.6 million unbanked U.S. households representing 25 million people, the Federal Deposit Insurance Corp. reported. One in five (24 million) households representing 68 million people were considered underbanked.
The underbanked may have credit cards, or even bank accounts, but they also frequent nonbanks, like check cashing and cash advance companies. Underbanked Americans also are more likely than any other demographic to use mobile banking services. In 2013, 29.2 percent of underbanked households were using mobile devices to access their bank accounts, compared with 21.7 percent of fully banked households.
Taken together, these two groups are sometimes referred to as "financially underserved." U.S. consumers give numerous reasons for not using banks. Some feel they don't have enough money to warrant the cost of traditional bank accounts. Others, especially millennials, many of whom came of age during the Great Recession, don't like banks. Still others have had bank accounts but abandoned or were forced to close the accounts due to problems like excessive overdrafts. Many of those in the third category, however, aspire to get new bank accounts, said Susan Weinstock, who heads up research into the underserved at The Pew Charitable Trusts.
A report released in December 2015 by the Center for Financial Services Innovation, revealed just how expensive it is to be financially underserved. Underserved Americans spent $138 billion in fees to manage their financial lives in 2014, a 7.6 percent increase over 2013; the total was expected to reach $147 billion in 2015. Some of the biggest growth has been in short-term credit products, the CFSI reported in 2014 Underserved Market Size: Financial Health Opportunity in Dollars and Cents. Fees paid for subprime credit cards grew 24.5 percent in 2014, spending on installment loans was up 19.1 percent and title loan fees grew 11.0 percent. The biggest gains were in online lending: 310 percent growth, accounting for $600 million in revenues to those firms in 2014.
It's worth noting that payday lenders saw revenues drop by 3.3 percent in 2014, which probably reflects increased government scrutiny of the payday lending market. Numerous municipalities and states have enacted legislation cracking down on payday lenders in recent years. On the federal level both the Consumer Financial Protection Bureau and the Federal Trade Commission are on the case. The CFPB said in 2015 that it is close to proposing a federal regulatory regime for payday lending. In January 2016, the FTC revealed it had secured $4.4 million in fines from two online payday lenders for misrepresenting the cost of loans. The lenders also agreed to waive a combined $68 million in unpaid consumer fees.
Meanwhile, a report just released by the market research firm Packaged Facts revealed that 93 percent of unbanked adults in the United States have mobile phones; almost two-thirds have smartphones. This is especially apparent among younger adults. In fact, millennials, especially those who are Black or Hispanic, are almost twice as likely to be unbanked as banked, and they also are more likely than others to have smartphones, according to its most recent edition of Unbanked and Underbanked Consumers in the U.S.
"Mobile financial services can provide account information from virtually any location at any time," said David Sprinkle, Research Director at Packaged Facts. "Along with this information they can provide tools consumers can use to manage their finances, conduct transactions, and avoid potential problems such as overdrafts, late fees and fraud. As a result, this technology has the potential to make banking relationships more convenient and sustainable for households that otherwise may experience such concerns."
The lack of participation in mainstream financial services by large swaths of the population has not been lost on card companies. MasterCard Worldwide and Visa Inc. each have made strong commitments to expanding electronic payment usage among the financially underserved. Both organizations are part of a coalition committed to universal financial access by the end of 2020. That program, spearheaded by The World Bank Group, aims for all adults, worldwide, to have access to transaction accounts, or electronic instruments (for example, mobile devices) that can be used to store, send and receive money.
As of 2015, there were 2 billion unbanked adults in the world, The World Bank said. The organization said it is optimistic about the 2020 goal, which was announced in 2015. It noted that over 700 million adults, worldwide, achieved financial inclusion between 2011 and 2014. Most of that activity was in developing countries, such as India, which saw a 58 percent drop in its unbanked population between 2011 and 2015, according to PricewaterhouseCoopers.
MasterCard President and Chief Executive Officer Ajay Banga said achieving full financial inclusion in five years will demand engagement and commitment from private and public sector groups working in partnership. "Together, we can be agents of transformative change," he said.
"Providing greater access to Visa's payments network is both core to our business growth and consistent with our vision to be the best way to pay and be paid for everyone, everywhere," is how Visa CEO Charles Scharf described his company's participation in the program. Scharf added that Visa would focus on driving bank account usage among women, farmers, small businesses and young adults in third-world countries.
Ironically, women are more likely to be unbanked than are men, even though research indicates women tend to be better money managers, especially women in developing countries, noted Inez Murray, CEO of the Global Banking Alliance for Women. The Alliance, a global consortium of financial institutions committed to advancing wealth creation by women, has committed its membership to providing financial access to 1.8 million previously unbanked women in Latin America and Africa by year-end 2020.
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 patti@greensheet.com.
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