The Green Sheet Online Edition
August 11, 2008 • Issue 08:08:01
Unbanked, underbanked - untapped
In the prepaid card industry, the term unbanked sometimes gets confused with underbanked. Although prepaid cards offer both constituencies the same general basket of services, it is important to draw distinctions between the two in order to effectively target and market to them. It is also helpful to break these two distinct groups down to get an accurate sense of the largely untapped, multibillion-dollar market they represent.
The unbanked are individuals who have no banking relationships with financial institutions (FIs) - no checking accounts, no savings accounts, no lines of credit. It has been estimated that the unbanked represent 40 million households, or roughly 80 million people.
The underbanked, however, have relationships with FIs, though limited in scope. Teenagers, a significantly large segment of the underbanked, may have savings accounts or certificates of deposit, but in their parents' names. So they do not have access to the full set of services mainstream consumers enjoy. Therefore, the underbanked are considered underserved by FIs.
At first glance, one may label the entire Hispanic prepaid card market as unbanked. But Hispanics are diverse in the size and the depth of relationships they forge with FIs, as well as in the payment products they utilize.
What is not misunderstood, however, is the size of the Hispanic population in the United States and its resultant buying power. The U.S. Hispanic consumer market is larger than the entire economies (gross domestic product measured in U.S. dollars) of all but nine countries in the world, according to the Selig Center for Economic Growth's Multicultural Economy 2006 Report.
And the U.S. Census Bureau said the nation's Hispanic population is growing fast: In 2005, it was more than 36 million. It is expected to total 46.7 million by 2015 and to reach 58.9 million by 2025.
But according to a recent study by the Center for Financial Services Innovation (CFSI), 35 percent of all Latinos in the United States and 53 percent of all Mexican immigrants are unbanked.
The Hispanic market for alternative financial services is just the tip of the iceberg. Immigrants from around the world favor alternative payment products; so do young, low- and middle-income workers with poor credit, as well as people living away from their home countries - overseas-stationed military personnel, students and missionaries, for example.
It's a huge opportunity for ISOs and merchant level salespeople (MLSs) to offer products, such as general purpose reloadable (GPR) prepaid cards or prepaid payroll cards, that serve this market.
Experts differ on just how large this market really is.
CFSI reported that 20 percent of all U.S. households are unbanked. That's about 22.2 million families. Add to that the 19.4 percent of all U.S. families that are underbanked - that's another 22 million families.
BearingPoint, a management and technology consulting firm, projects an even higher figure - 28 million unbanked U.S. households and 44.7 million underbanked U.S. households.
Because the breadwinners for unbanked families are typically considered to be low-income wage earners, they are often overlooked by traditional FIs. But CFSI said such families will spend at least $13 billion on more than 340 million alternative financial service transactions - each year. In the Celent LLC research study, Where the Banks Aren't: Nontraditional/Nonbank Advances in Branded Prepaid Cards, Celent Analyst Red Gillen estimated GPR cards for the unbanked population is a potential $31 billion market.
Data compiled by CFSI and the Federal Reserve Bank of New York showed the average prepaid card user loads or reloads approximately $180 a month, uses a prepaid card 3.5 times at the POS monthly, and spends about $40 each time. The average user spends 92 percent of the initially loaded amount in the first 30 days and the remaining soon after. Also, POS transactions are more common than automated teller machine withdrawals.
"Should average load amounts rise as this population shifts from the early adoption stage to mainstream acceptance, the market size will be even more immense, with the potential for card spending at $192 billion," Gillen stated.
By any measure, this is a huge untapped market.
"In coming years, sheer size and rapid growth will place the prepaid market at the forefront of the competition among card processors," said Gwenn Bézard, Aite Group LLC Research Director. "No other payment product enjoys such tremendous growth opportunity within and outside the United States."
The financial services industry is starting to take notice. In July 2008, MasterCard Worldwide launched a marketing campaign aimed at a Hispanic audience. The effort included TV commercials on Spanish language stations in 11 key markets and a revamped Spanish-language Web site.
"Hispanics comprise the fastest-growing population in the U.S., and as a brand it is important for us to develop a genuine connection with them," said Chris Jogis, Vice President, U.S. Brand Development, MasterCard, in a prepared statement.
"According to MasterCard research, 75 percent of Hispanics say that cash is their preferred method of payment. We would like to provide Hispanics with information on the benefits of credit and debit MasterCard for their everyday purchases, from convenience and earning rewards to building credit scores and record keeping," Jogis said.
FIs have begun targeting these markets. The underbanked are easier for FIs to reach since they already have some connection with banks, although their accounts tend to be marginally profitable.
The unbanked, however, with no relationships with FIs whatsoever, are a little trickier to find and bring into the traditional banking fold.
But many unbanked consumers are already familiar with prepaid cards in the form of phone cards, bus passes or state benefit cards.
The ISO and MLS channel has one advantage over traditional banks: Merchants already serve the unbanked market. Reaching them is just a matter of offering the products the unbanked need at merchant locations they already frequent.
And according to Harry Smith, Vice President of Marketing at Stored Value Cards Inc., the retailers the unbanked favor are often local mom-and-pop shops, not the big box retailers.
"Based upon our field studies and internal sales data, we have learned that the prepaid category is more accustomed to doing business in their local communities, which are more convenient to them than large chain locations," Smith said. "People need to have confidence in the person they're handing over their money to if they're going to get a chip of plastic in exchange.
"The Wal-Marts don't always train their employees to understand how these cards work, so they don't exactly exude confidence," Smith added.
"People prefer a face they know; the relationship with a local merchant helps build consumer confidence to allow the merchants to serve as an alternative banking outlet."
Smith pointed out that, while buying a Slurpee and conducting financial matters at the same time may seem incongruous to people accustomed to traditional banking, that's largely a cultural distinction.
If, every week, one wants to cash a paycheck and convert it to something more secure than cash or, every other week, transfer money to family living in another country, the convenience of doing it in the same place one buys phone cards or groceries has obvious appeal.
Banks, on the other hand, are often inconvenient or uncomfortable environments for the unbanked. Nearby convenience stores tend to have better business hours than local banks for the unbanked and, perhaps, a friendlier atmosphere as well.
Selecting the right prepaid company with which to partner is the hardest and most important thing ISOs and MLSs must do - much like choosing an acquirer, said Al Urcuyo, Chairman and Chief Executive Officer of CardMarte LLC.
"You want to know how the payment system works - is it robust enough to give you real-time reports and to pay commissions to everyone along the chain who requires one?" Urcuyo said. "You want to know that the systems are designed from a prepaid perspective, that it's not a retrofitted credit system; the cards may look the same, but the processes are fundamentally different.
"And you want to be sure that they are following all the regulations, and there are lots of them, and that the sponsoring bank is an expert in the field, so that you don't get the rug pulled out from under you."
The last point may be the hardest requirement to fulfill.
"The industry is a like a gold rush right now: People are rushing to get into it without realizing just how sophisticated you need to be to stay abreast of all the regulations," Urcuyo said. "One of the challenges is that this industry is not credit; it is prepaid, but it is regulated like credit.
"It's not just the Patriot Act; it seems like every acronym in the U.S. is watching this space, and every state and country may have different regulations that affect it, as well," Urcuyo added. "Until the laws change to reflect prepaid, rather than credit, it is very complex to operate in this space."
Urcuyo suggested ISOs and MLSs target specific un-banked markets and get to know them well. "There is a broad range of products," he said. "Prepaid cards for missionaries or students may be sold in different channels than those for immigrants or people who use prepaid to reduce the risk of identify theft."
Prepaid payroll cards may end up in the same consumers' hands as merchant-sold GPR cards, but the two card types have different functions and different uses.
Urcuyo explained that, for immigrants in the Hispanic community, "the product that at the end of the day gets them really excited is one that lets them send money home easiest and safest, and with the fewest fees."
Even that's not as easy as it may seem. Legally, many cards can't be sent to other countries. And many U.S.-issued cards are impractical to use abroad. CardMarte has established partnerships with institutions in many Latin American countries to overcome those hurdles.
Although GPR cards sell well in many channels, the best ISO penetration is through smaller merchants in lower income Hispanic neighborhoods, according to Urcuyo.
Implementing GPR card programs may mean upfront training for merchant employees, but GPR cards have an added benefit to merchants: In addition to commissions earned each time the cards are loaded and reloaded, the cards help bring customers back into stores regularly, encouraging loyalty and impulse purchases.
It is reasonable to assume a percentage of unbanked immigrants lack formal education. But that doesn't mean they're unsophisticated about the features they want in their cards. Many developing countries have bypassed land lines altogether, and households rely on communication through wireless mobile phones.
Urcuyo said popular features of CardMarte's products are the ability to check balances and transfer money between cards via mobile phones.
"I'm convinced that the two biggest emerging markets are prepaid financial products and telecommunications," Urcuyo said. "That's why we pay attention to both."
Edo Interactive pays attention to another segment - underbanked teenagers.
"Our first card product is facecard, targeting millennials or Gen Ys," said Ed Braswell, CEO at edo Interactive. "There are about 82 million of these young folks - men and women - with about 200 billion of discretionary spending [per year], that primarily originates from allowances, payroll services, gift card features.
"And so what we wanted to do with facecard is create a nontraditional banking product for our card members."
Facecard was launched in July 2008. It offers advertiser-issued "prewards" (cash deposits retailers load on cards to encourage shopping at those retailers), online balance records and a peer-to-peer payment system, so facecard members can electronically share funds with friends and family. (Parents can upload allowances directly onto cards, friends can repay debts to other friends through the cards and so forth.)
Another segment growing in popularity is prepaid debit cards used by employers. Payroll cards and benefits payout cards are ideal for employers with large unbanked workforces, whether that be foreign workers, or temporary and seasonal workers.
According to the Celent study Payroll Cards: A Direct Deposit Solution for the Unbanked, it costs employers $1.90 on average to cut a paycheck in-house.
But direct deposit of salaries to bank accounts can reduce the cost of issuing checks by approximately 65 percent.
However, companies with high percentages of unbanked employees, such as agricultural and food service businesses or maintenance and construction companies, often find many employees cannot take advantage of direct deposit.
In lieu of checking or savings accounts, prepaid debit card payroll systems can be used for unbanked employees. And once the initial prepaid debit payroll cards are issued, all employer-employee payments are made electronically, saving large-scale employers significant payroll processing expenses.
In Celent's branded prepaid card study, Gillen suggested that, as the retail channel reaches saturation, more GPR cards will be packaged as portable payroll cards.
"Given that payroll direct deposit is one of the 'stickiest' features of GPR cards, working with employers to offer payroll cards is a highly attractive market strategy that encroaches upon retail banks' strengths," Gillen said.
"Players that will succeed will therefore be those nontraditional/nonbanks that have existing relationships with employers."
It's not always an easy market to be in as an issuer, Ur-cuyo said, but he pointed out, "It's sure nice that at least one market is still growing."
As industry players gain more insight into the financial needs of the unbanked and underbanked, prepaid cards will increasingly be desired by these populations as an alternative banking tool, making prepaid cards and services an ideal way to tap into this growing market.
Prepaid cards are already seen as a desirable alternative banking tool by many underbanked and unbanked individuals; their enthusiasm for these products will only increase. And prepaid products may become the ideal instrument for payment professionals to use to tap into this growing market.
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