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The Green Sheet Online Edition

December 28, 2009 • Issue 09:12:02

Reaching the unbanked

By Patti Murphy
The Takoma Group

The Federal Deposit Insurance Corp. released a report in November 2009 that put to rest speculation about just how many U.S. consumers live outside the banking system. Here's the deal: roughly one in four households, or 60 million adults residing in the United States today, have little or no interaction with federally regulated financial institutions.

Think of all the lost opportunities to convert cash to card payments. Think of all the money check cashing houses, payday lenders, even retailers are making on these folks in the form of money orders and check cashing.

The FDIC report - FDIC National Survey of Unbanked and Underbanked Households - draws from responses to questions posed by the U.S. Census Bureau during its January 2009 population survey. Here are the key findings:

  • 7.7 percent of U.S. residents are unbanked, which translates to 9 million households representing about 17 million adults. These are households where no one has a checking or savings account, the FDIC said.

  • An additional 17.9 percent (21 million households/43 million adults, nationally) are "underbanked." Underbanked households may have checking or savings accounts, but they also use alternative financial services providers, such as check cashing houses, rent-to-own shops, payday lenders and pawn shops at least once or twice a year, according to the FDIC's definition.

  • Among households earning less than $30,000 a year, a whopping 71 percent are unbanked.

  • Among households earning between $30,000 and $50,000 a year, the unbanked share drops to 4.2 percent, although these folks are "almost as likely to be underbanked," the FDIC said.

The FDIC survey follows a report it released in February 2009, FDIC Survey on Banks' Efforts to Serve the Unbanked and Underbanked, which revealed most banks don't know how to reach out to the unbanked and underbanked populations.

A detailed breakdown of the latest FDIC survey, including analysis by region, state and metropolitan statistical area, is at www.economicinclusion.gov.

Are banks dissing the poor?

The FDIC said it intends to use data from its latest survey to find ways to bridge the chasm between banks and underserved markets. It's a plan that must be taken seriously, or the banking industry could become marginalized by nonbanks in the payments space.

The money spent by underbanked Americans on nonbank payments products is about $15 billion a year, Mercator Advisory Group estimates. And as the economy teeters and more middle- and working-class consumers find themselves on the economic fringes, the ranks of the unbanked are certain to swell, Mercator warned in a recent report.

"While there are well-documented challenges to profitably selling to/retaining underbanked consumers, a deep recession disintermediates solidly banked customers who may never return," noted Elizabeth Rowe, Director of Mercator's Retail Banking Advisory Group. Rowe's comments were included in a press release announcing a new report titled Retail Bankings' Canary in the Mine: Marketing to the Underbanked Customer.

Many recently unbanked U.S. consumers say they were driven out of the banking system by high overdraft fees and inconvenient branch hours, Rowe noted. The fees charged by nonbanks are more reasonable and there's less of a stigma to being unbanked and doing business with these nonbank financial services providers today than was the case in the past.

"Today's consumers can easily and rationally choose to stay outside banking and to use the safe, reasonably priced financial services products marketed by major retailers," she said.

Wal-Mart Stores Inc., the retailing giant whose efforts to own a bank were sidelined by regulators, has made significant inroads into this market.

Wal-Mart MoneyCenters have become as good as or better than banks to millions of Wal-Mart shoppers (many apparently former bank customers) who regularly drop by to cash paychecks, pay bills and purchase prepaid Visa Inc. and MasterCard Worldwide cards somewhere between the grocery aisles and the automotive department.

In a surefire boost to its status in this market, and the pool of prepaid cardholders, WalMart revealed in September its decision to compel everyone on its payroll (an estimated 2.1 million individuals) to accept electronic direct deposit of pay.

Those without bank accounts receive payroll cards - prepaid MasterCard debit cards (the MasterCard PayCard) - in lieu of checks. The program was developed for Wal-Mart by MasterCard and First Data Corp., and operates through Money Network, First Data's payroll card processing and reload network.

Debit cards are driving growth today in merchant acquiring and transaction processing. An expanding universe of prepaid card users can only help keep transaction volumes growing.

Among prepaid card vendors surveyed earlier this year by the Center for Financial Services Innovation (a banking industry think tank), 80 percent identified unbanked and underserved individuals as either "important" or "very important" to growing their businesses. Yet, nearly a third of these executives identified "building consumer awareness" as the biggest challenge facing the prepaid card industry.

Aite Group LLC, meanwhile, found fewer than one-third (30 percent) of a large group of check cashing store customers it surveyed last year could be categorized as prepaid card "adopters"; about 4 percent were lapsed users of prepaid debit cards; 43 percent were classified as "rejectors."

"Prepaid debit cards are in the initial stages of their product life cycle. As such, there is ample opportunity to grow usage," said Gwenn Bezard, Research Director at the Boston-based consultancy, said in releasing a new report: Prepaid Debit Cards: Barriers to Adoption. That's good news for ISOs, acquirers, processors, banks and the card companies.

MasterCard, for example, has made it clear it has its eyes on this prize. In addition to working with First Data to get payroll cards into the wallets of Wal-Mart workers, the card company has launched a prepaid card campaign with Univision Communications Inc., the nation's leading Spanish-language media company.

According to data compiled earlier this year by the CFSI, more than one-third (35.4 percent) of Hispanic Americans are unbanked.

"We are working closely with Univision, leveraging their unique knowledge and reputation within the Hispanic community, to develop solutions that meet the payment needs of U.S. Hispanic consumers," said Chris McWhilton, President of MasterCard's U.S. Markets division. Univision Debit MasterCard-branded products are slated to debut in early 2010.

For further commentary on this topic, see "Unbanked + underbanked Amer-ican top 60 million," by Patti Murphy, in the SellingPrepaid section of this issue of The Green Sheet (09:12:02). end of article

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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