The Green Sheet Online Edition
September 13, 2010 • Issue 10:09:01
The United States of microfinance
Microfinance, an industry more than 30 years in the making, is finding a home in the U.S. economy. The implications of this for the acquiring sector will be significant, as this movement compels millions of Americans to transition from cash to card payments.
Microfinance was conceived in Bangladesh in 1976 as a strategy for alleviating poverty. Today, that first Bangladeshi microfinance institution (MFI), known as Grameen Bank, has gained footholds in dozens of countries, both underdeveloped and developed countries like the United States.
Here's how the news magazine Newsweek described Grameen in a recent headline: "It's Payback Time: How a Bangladeshi bank is growing in the U.S. making tiny loans to groups of poor women with entrepreneurial dreams." In Bangladesh, a $50 loan from Grameen was sufficient to help lift a family from poverty. In the United States, loans of several thousand dollars are more common. In addition to Grameen, dozens of other MFIs are doing business in the United States.
The object of microfinance is to empower the poor through access to basic financial services, such as low-cost checking and savings accounts, small-dollar loans and insurance policies. Individuals and households targeted by microfinance programs have little or no interaction with regulated financial institutions. Instead, in the United States, these people spend $320 billion a year on nonbank financial services, according to the Federal Deposit Insurance Corp.
Half that money ($160 billion) is spent loading value onto prepaid debit cards in addition to remittances, money orders and check cashing services. The other half is spent on loan products, such as payday and refund anticipation loans, according to the FDIC.
The FDIC estimates that 7.7 percent of U.S. households are unbanked; they have no bank accounts or credit or debit cards. At least 17 million adults reside in these unbanked households, according to the 2009 FDIC National Survey of Unbanked and Underbanked Households.
Another 17.9 percent of U.S. households (or about 43 million adults) are underserved or underbanked. They may have checking or savings accounts with federally regulated financial institutions, but they also use nonbank financial services providers with some regularity.
An additional 4.5 percent of households (more than 11 million adults) that have bank accounts may also be underbanked, but the FDIC was unable to be precise on this count because of lapses in data collected from users of alternative financial services.
Perhaps one of the most telling facts revealed by the FDIC survey, however, is that 41 percent of unbanked U.S. households have no plans for opening bank accounts. In response to this data, as well as the dictates under recent financial reform legislation, the FDIC and the U.S. Department of the Treasury (Treasury) are redoubling efforts to get more federally insured financial institutions to work with unbanked and underbanked individuals.
In August 2010, the FDIC began a pilot program to evaluate the feasibility of banks offering low-cost checking and savings accounts that leverage electronic banking technologies. Interested financial institutions were given until Sept. 15, 2010, to apply for the program, which will run for a year.
As part of the program, the FDIC developed an account template to guide financial institutions in creating these accounts without breaking the bank, so to speak. Designated features include free debit cards, direct deposit, online bill pay, electronic statements, check cashing and financial education, as well as free or low-cost money transfer and kiosk bill payment services.
The accounts also qualify for same- or next-day availability of deposits; feature low minimum balances ($10 or less) and low monthly maintenance fees (no more than $3 for checking accounts, nothing for savings accounts); and provide accountholders with affordable microloans (amounts under $2,500).
In a statement about the pilot, FDIC Chairman Sheila C. Bair, said, "We've seen banks that have already been successful in providing safe, low-cost accounts, particularly designed for consumers new to the financial system. The FDIC Model Safe Accounts Pilot is intended to increase these account offerings by providing a voluntary roadmap for others."
Low-cost, limited transactions accounts for the unbanked have been around for years.
Treasury, for example, initiated an Electronic Transfer Account (ETA) program for unbanked recipients of federal payments about 10 years ago. ETA features include direct deposit of federal payments, no minimum balance requirements, debit cards for ATM cash withdrawals and POS purchases, monthly statements, and a $3 monthly service fee. In return, Treasury pays financial institutions a one-time set-up fee of $12.60 for each ETA opened.
As of June 2010, 118,137 ETAs existed at 392 participating financial institutions comprising more than 52,000 branches, a spokeswoman for Treasury said.
Banking on it
In addition, Treasury recently launched a new initiative to reach the unbanked and underserved: Bank On USA. The program, prescribed under the Dodd-Frank Wall Street Reform and Consumer Protection Act, builds on a recent surge in local Bank On programs that connect low-income consumers with local banks offering no-frills, low-cost accounts that build on debit cards and similar innovations.
The National League of Cities estimates more than 25 cities have Bank On initiatives today. The oldest and best known of these programs, Bank On San Francisco, is credited with helping San Franciscans open 25,000 new accounts through 170 participating bank and credit union branches since it was launched in 2006.
Financial literacy resources are also a key to these programs. Treasury asked Congress for $50 million in its upcoming budget allocation to promote Bank On USA during fiscal 2011, which begins Oct. 1, according to Michelle Greene, Treasury's Deputy Assistant Secretary for Financial Education and Access. "We have a unique opportunity here, and it's one we want to be sure we don't miss," Greene said. "We have an opportunity to change the system and make it work for everyone."
More than 12 million benefits recipients have signed up for the Direct Express card since it was introduced in 2008, according to a Treasury spokeswoman. As of March 2011, all federal benefits recipients will be required to receive their benefits via direct deposit either into bank accounts of their own or into the Direct Express card. However, Cynthia Vega, Communications Manager for the Financial Service Centers of America Inc., stated that consumer groups are lobbying against this restrictive law because, for some people, a paper check is the best instrument for them to use in managing their finances.
Targeting the unbanked
People can be unbanked for any number of reasons. But the two most common reasons seem to be credit and pricing issues. "Consumers that are unbanked or underbanked often choose to be so for practical reasons rather than attitudinal ones," noted Gwenn Bezard, Research Director at the Boston-based consultancy Aite Group LLC, and co-author of a 2009 report on the unbanked and underbanked. Yet check cashers and other nonbanks are not inexpensive. Bank of San Francisco, for example, estimates that, on average, unbanked people earning $22,000 a year spend about 5 percent of their annual income at check cashing houses.
Aside from government agencies, several large retailers and a few boutique shops are pushing low-cost alternatives for the unbanked. Wal-Mart Stores Inc., for example, houses MoneyCenters in more than 1,000 stores and expects that number to reach 1,500 by the end of 2010.
Wal-Mart MoneyCenters offer just about every type of service a consumer could get from a traditional bank - except savings accounts. Check cashing, bill payment and prepaid card services are priced significantly lower than other nonbanks' fees, and check cashing customers can have paychecks applied directly to prepaid debit cards, according to Wal-Mart.
The retailing giant claims that consumers using its MoneyCenters saved $450 million over what they would have paid in 2009 to other nonbank providers of financial services.
Wal-Mart also owns a minority stake in the prepaid card company Green Dot Corp., which is also the exclusive provider of prepaid cards to Wal-Mart. Considered the largest U.S. provider of network branded prepaid debit cards, Green Dot raised $164 million through an initial public offering in July. The company also applied to purchase a federally insured financial institution, presumably so that it can further expand its product suite.
For its stores without MoneyCenters, Wal-Mart has agreements with more than 300 financial institutions that rent space and operate in-store branches during normal store hours. Urban Trust Bank, a bank with branches in Florida and Washington, D.C., is a Wal-Mart tenant.
Robert L. Johnson, Chairman of Urban Trust Holdings Inc., the bank's parent company, believes prepaid cards are key to banking the underserved. And he describes his bank as being committed to banking the unbanked by offering affordable and transparent financial services products.
In addition to prepaid cards, Urban Trust Bank offers microloans and a "second chance" checking account called Opportunity Checking.
Competing through innovation
Not to be overshadowed by its largest competitor, Kmart Corp. has set its sights on the unbanked and underbanked markets as well. Kmart customers in eight Chicago-area stores can now cash checks, purchase money orders and pay bills while shopping for groceries and toys. This is in addition to layaway plans and store-branded credit card offerings now available at most Kmart stores.
"As the underserved market grows, it has created opportunities for retailers," said Susan Ehrlich, President of Sears Financial Holdings. (Kmart is owned by Sears, which launched the original Discover Card in 1985.)
The latest nonbank company to enter this market is Mango Financial Inc., which opened its first financial services store in April 2010 in Austin, Texas. It also serves customers through its website MangoMoney.com. Mango is a cross between a prepaid card company and a bank.
Mango is the brainchild of two brothers, Roy and Bertrand Sosa, who previously founded NetSpend Corp., an independent prepaid debit card company that is reportedly awaiting its initial public offering. The Sosa brothers also founded MPower Ventures, the venture capital firm backing Mango and Rev Worldwide, an international version of Mango, as well as an upstart mobile telephone service named YAP.
Bertrand Sosa said he and his brother launched Mango because of what they saw as a continued lack of interest in creating innovative products for the unbanked.
"While prepaid cards have made tremendous strides, we can't stop there," he said. "We're showing it's possible not only to compete on innovation rather than price, but also to build a business by serving customers' financial needs over time rather than one fee at a time."
The brothers, who immigrated here as children, see huge opportunities in Hispanic markets. According to the FDIC's data, nearly one in four Hispanic households (24 percent) in the United States today are unbanked or underbanked.
Each Mango customer gets a reloadable MasterCard prepaid debit card with all kinds of freebies, including card activation, online account-to-account transfers, bill payments and money transfers. Bertrand Sosa said the Mango card is intended to be more than just another prepaid card product; it's a "platform" for bringing financial services to the unbanked.
Mango customers also can access accounts using YAP, Mango's trademarked mobile money service. And in June, Mango unveiled a high-yield savings account (5.1 percent per annum) that customers can open with deposits as small as $1.
"Given the importance of savings to reducing Americans' reliance on debt and achieving long-term financial stability, we need better savings products and rates to make it worth their while," said Bertrand Sosa in announcing Mango's new savings product.
Creating wealth opportunities
"The ability to accumulate and preserve wealth is dependent on the types of accounts, financial education, money management skills and access to other asset-building opportunities," stated Community Financial Access Pilot: Elements of an Effective "Banking the Unbanked" Strategy, a document published in January 2009 by Treasury's Office of Financial Education.
It's a sentiment shared by many bankers. At the Fifth Annual Underbanked Financial Services Forum in June 2010, Andrew Plepler, Global Corporate Social Responsibility and Consumer Policy Executive at Bank of America, remarked, "A banking relationship is still essential for wealth creation. I don't think there really is any substitute to creating a solid banking relationship."
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. She is also the founder of InsideMicrofinance.com. Email her at email@example.com.
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