By Patti Murphy
The Takoma Group
An emerging trend in the United States could, if successful, propel a massive shift from cash to electronic payments. It's called microfinance, and it has the potential to drive significant adoption of prepaid and debit cards, as well as emerging technologies like mobile payments.
By some estimates, the value of micropayments that have potential to move to electronic payments could top $1 trillion a year.
Microfinance itself is not new. The first microfinance institution, Grameen Bank, opened for business in Bangladesh in 1976. Since then, the practice of making "micro" loans and providing other financial services to poor people with little or no credit histories has become an international phenomenon.
Last year, Grameen opened its first U.S. bank in the Queens section of New York. And in June 2009, Kiva.org, an international association that facilitates online person-to-person (P2P) lending, became available in the United States.
"Most people think of microfinance as something that helps people in the developing world alone, but the impact of microfinance can be felt in any community that supports creative, industrious entrepreneurs," said Premal Shah, President of Kiva.org. "Kiva's micro-loan model is extremely relevant to low- to moderate-income, U.S.-based entrepreneurs, especially given the current economic conditions, which makes access to credit a very real problem."
Here are some facts about the underbanked population:
Shah expects the Web to become a major resource for low-cost capital for community-focused businesses, as well as for helping to migrate to the financial mainstream these businesses and the individuals who run them. In fact, he's betting on it.
A four-year-old organization, Kiva.org is a nonprofit that facilitates P2P lending of amounts as small as $25. Kiva counts 500,000 people around the globe who, collectively, have lent more than $76 million to 180,000 entrepreneurs in 45 countries. And it enjoys a repayment rate of about 98 percent.
Kiva, headquartered in San Francisco, is partnering with Accion USA, a microfinance institution licensed to do business in 48 states, and Opportunity Fund, a community development bank based in San Jose, Calif. According to Accion, recent economic impact studies indicate that 60 percent of its borrowers have seen household incomes grow as a result of microloans.
"While microfinance has long been associated with the developing world, Accion USA's work has proven that it is also an established tool in the United States," said Gina Harman, President and Chief Executive Officer of Accion USA. "Microloans not only provide access to capital, but fuel business growth and job creation - key factors in driving economic recovery in the U.S."
Ellen Seidman, Executive Vice President at Chicago-based ShoreBank Corp. and a former Director of the U.S. Department of the Treasury's Office of Thrift Supervision, agrees. "We need a small dollar credit system in this country," she told attendees at a recent forum of bankers and regulators. "The traditional banking world has not picked up on this type of product," she added.
Seidman's comments came during a panel discussion at the 4th Annual Underbanked Financial Services Forum presented in June 2009 in Dallas by the Center for Financial Services Innovation, a nonprofit affiliate of ShoreBank Corp. A $2.4 billion asset institution, ShoreBank describes itself as "America's first community development and environmental bank holding company." It operates from offices in six states and the District of Columbia.
CFSI estimates that 106 million Americans (representing 40 million households) have little to no interaction with federally insured financial institutions, a population referred to as the unbanked and underbanked. Roughly half (47 percent) of those individuals have full-time jobs, and 11 percent work part time, according to the 2008 CFSI Underbanked Consumer Study.
For many of these folks, payday loans are the only real credit option, Seidman and others have observed.
"As an industry, banking is in a major state of flux," said Bob Jones, President and CEO of Old National Bank, an $8 billion-asset bank based in Evansville, Ind. "Serving the underbanked market makes sense, from both a convenience and financial standpoint," he told attendees at the forum.
While some lending institutions are quick to turn away potential borrowers with little or no credit histories, one California lender has opted to focus squarely on this market. Progress Financial Corp., headquartered in San Jose, is a state-licensed lending institution; it does not accept deposits. Its primary market: unbanked and underbanked Hispanic immigrants.
"We think this market is great for our company," said James Gutierrez, founder and Chief Executive Officer of Progress, a 1-year-old company with backing from well-known venture capital funds and former bankers.
The company relies on risk scoring models designed specifically for assessing borrowers with "thin" or no credit files and a network of agent supermarkets to collect applications. "We want to be able to serve 1 million people within the next four years," Gutierrez said at a recent industry forum.
As of June 2009, Progress had made about 25,000 personal loans for amounts between $500 and $5,000, at market interest rates. Funds are distributed by check or prepaid debit card. According to Gutierrez, more than 90 percent of borrowers have returned for additional loans.
Jones knows from experience. Following a 25-year career at Cleveland-based KeyCorp., most recently as chief of the bank's brokerage business, Jones was brought in by Old National's board of directors in 2004 to help turn around the institution.
He did this in part by ramping up the bank's community involvement and not issuing subprime loans. When the bank closed its books last year, its stock price was up 21 percent, while most banks in its peer group saw their share values drop 24 percent, according to Jones.
Old National made national news in late March when it became one of the first financial institutions to repay funds distributed through the U.S. Treasury's Troubled Asset Relief Program.
"We think serving the entire community is our moral responsibility; it also makes great business sense," Jones said, adding that if a community is strong the local bank will do well.
According to the FDIC, most banks make little effort to develop services that attract unbanked and underbanked individuals. In a report released in February 2009, the FDIC wrote that although most banks offer basic checking accounts, few offer deposit, credit or electronic payment products that address the "unique needs" of unbanked and underbanked consumers.
The report detailed findings of the First National Survey of Banks' Efforts to Serve the Unbanked and Underbanked, which included responses from 685 banks, including some of the largest and smallest banks in the country. The FDIC's conclusion: Banks and regulators need to do more to reduce the number of unbanked and underbanked Americans.
Seidman, the former FDIC chief, wants to see the agency do more to encourage banks. "It really falls short," she said of the agency's efforts to get banks to reach out to underserved markets.
Western Union Co., a name commonly associated with consumer remittances and check cashing, has set its sights on these markets. The one-time unit of First Data Corp. has been forging alliances with large banks to offer consumer remittance services through brick-and-mortar as well as online banking channels. U.S. Bank N.A. and Fifth Third Bank were the first banks to sign on with Western Union. In a statement released by Western Union in July 2009, Mark Erhardt, Senior Vice President for Retail Products at Fifth Third, said the arrangement would help the bank serve "our customers and the community."
Outside the United States there has been significant interest in using mobile phones as a means of reaching the unbanked and underbanked.
Arthur D. Little, the international management consultancy, expects mobile payments to grow globally at a per annum rate of 68 percent for the next three years. In its April 2009 report - M-Payments surging ahead: Distinct opportunities in developed and emerging markets - the firm predicted the value of mobile payments worldwide could reach $250 billion by 2012.
Mobile payments will develop differently in emerging and developed markets, with emerging markets posting the lion's share of transactions (65 percent) by 2012, the report noted. The consultancy went on to suggest that mobile payments will coexist with existing payment instruments in developed countries, because massive adoption will be limited to niche segments. "For financial institutions, m-banking and related m-payment services can be a differentiating factor and a chance to tap into the $1 trillion market for micropayments," the report stated.
Meanwhile, CGAP, an international microfinance organization with ties to the World Bank, has been calling for creation of interoperable payment platforms that can support mobile telephone-based banking and payments, worldwide.
Africa is becoming a test bed of sorts for mobile banking and payments. In Kenya, for example, the largest mobile phone network, known as Safaricom Ltd., supports a mobile phone-based service for sending and storing money.
The service relies on more than 10,000 local merchants who act as "agents," collecting deposits and withdrawals from consumers' mobile phones, which serve as electronic wallets.
More than 7 million Kenyan consumers have signed up for the service since its launch in March 2007. Daily transaction totals average the equivalent of about $1.96 million; the average loan is for about $20, according to CGAP.
In March 2009, Grameen received $4.7 million in grants from the Bill & Melinda Gates Foundation to help build a business case for mobile phone-based health care and financial services in Ghana and Uganda.
Shortly thereafter, CGAP revealed it was partnering with Wizzit Bank in South Africa (the mobile banking unit of a large South African bank) to deliver banking services to poor people in small towns and rural areas of that African nation. In addition to mobile payments, Wizzit encourages customers to use MasterCard World-wide's Maestro debit cards.
Prepaid cards also make sense for serving the unbanked and underbanked, especially in the United States, where employers are encouraged to integrate prepaid cards with payroll processes.
Last year, the U.S. Treasury Department took a big step in this direction, introducing a prepaid card option for Social Security recipients.
As of July 2009, more than 500,000 recipients had signed up for Treasury's Direct Express Debit MasterCard.
"In its first year, the Direct Express card has helped to bring hundreds of thousands of Americans into the financial mainstream," said David Lebryk, Commissioner of the Treasury Department's Financial Management Service, which runs the program.
"Reloadable prepaid cards give consumers with little or no access to credit or traditional financial services the ability to budget, spend and save like a mainstream consumer," said Kristen Trusko, President and Executive Director of the Network Branded Prepaid Card Association.
A 2009 survey conducted by the NBPCA, done in cooperation with the CFSI, revealed that 94 percent of underbanked consumers who have reloadable prepaid cards like the cards so much they'd recommend the cards to others.
Trusko, in a presentation at the CFSI forum in June 2009, explained that credit risk models are being developed from consumers' prepaid card usage, thereby making these individuals more likely candidates for bankcards and loans. "Prepaid usage speaks to the ability and willingness of people to repay loans," added Paul Desaulniers, Director of Credit Decisioning at LexisNexis Risk & Information Analytics Group.
Alex Liu, Vice President for Global Prepaid Product Development at MasterCard, said his company is working to create a "bridge" between prepaid cards and mainstream credit products. "Credit building is the second biggest reason why people want to increase their usage of prepaid cards," Liu told the CFSI forum.
For more information about microfinance, go to www.insidemicrofinance.com.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com.
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