By Patti Murphy
For more than two years, I've been pointing out to whoever would listen that the unbanked and financially underserved represent a huge, underappreciated market that spends well over $1 trillion a year at nonbank financial service providers, such as check cashers, payday lenders and even Wal-Mart Stores Inc. Now, following a spate of industry reports echoing much the same message, I'm even more convinced.
The title of a recent report from Mercator Advisory Group regarding general purpose reloadable (GPR) cards and demand deposit accounts (DDAs) speaks volumes: GPR Cards and DDAs: The Same Only Different.
The consultancy KPMG LLP puts America's unbanked and underbanked population at 88 million and estimates these two groups combined earn about $1.3 trillion a year. The firm predicts 6 million more U.S. consumers could join their ranks within the next two years.
"As banks transform their business models to address a new marketplace, they need to examine the potential of the underserved market, as new revenue streams are necessary due to increasing compliance costs and various fees coming under pressure as a result of regulatory reform," said Carl Carande, National Account Leader of KPMG LLP's Banking and Finance practice. "In the current environment, we see heavy competition among banks chasing customers with high credit scores, with decreasing margins, leaving the underserved market for those willing to invest in it."
The value to the ISO community of banking the unbanked is significant. It demonstrates plenty of payments can still be moved to cards, especially prepaid debit cards. Plus, it's an opportunity to tap into new market niches, such as stores that cater to recent immigrants or the education sector.
Reloadable prepaid debit cards have risen from a place of relative obscurity just 10 years ago to now being in the wallets of at least one in three Americans. In 2007, the Fed identified 17.2 percent of consumers as prepaid debit card users (people who have used such a card at least once in the past year). Two years later that number had nearly doubled, to 32.3 percent.
Experts point to several reasons for this growth: the ongoing recession, consumer desire to better manage finances, regulatory changes and broad customer satisfaction with prepaid cards.
Aite Group LLC reported in Alternative Financial Services Customers' Views on Prepaid Cards that nine out of 10 prepaid debit cardholders are "extremely" or "very" satisfied with prepaid debit cards. The report also revealed that 50 percent of users prefer prepaid debit cards to checking accounts; 71 percent prefer those cards to traditional credit cards.
Aite projects the U.S. market for prepaid debit cards will grow to $104 billion in 2014. That's good news, said Ron Shevlin, Senior Analyst at Aite and author of the report, because it suggests banks can leverage prepaid debit cards to recoup some fee revenue lost to debit interchange caps.
"Prepaid debit card issuers' marketing efforts should attempt to influence prospective cardholders' expectations about the product, especially regarding access to credit and credit-building," Shevlin said. "Long-term use should be incentivized, and alternative offerings associated with the product should be explored."
Patti Hewitt, Director of Debit Advisory Services at Mercator, agrees opportunities exist for banks offering GPR prepaid cards. But she warned that new Federal Reserve regulations regarding debit interchange (implementing the Durbin Amendment) have added a "wrinkle" to this strategy.
For a GPR card to be exempt from the Fed's debit interchange rules (known as Regulation II) it must be an all-electronic product - no check writing privileges. Automated clearing house (ACH) payments are also singled out under the rules. Payroll cards are subject to Reg II interchange caps unless the issuing bank has $10 billion or less in assets. (These banks are statutorily exempt from the law's strictures.)
It also affects the use of prepaid cards for electronic bill pay services, which typically process through the ACH. "I think this is going to give some people pause," Hewitt said, adding that the smaller financial institutions "might have a chance" because of the exemption.
Study results released in June 2011 by the Darden School of Business at the University of Virginia suggest financial institutions are losing out big time on revenue opportunities presented by the underserved. Although the research focused on Latino households, many of the findings apply to most any unbanked household, said Greg Fairchild, a Darden professor and author of the report, Perdido En La Traducci¢n: The Opportunity in Financial Services for Latinos.
Fairchild identified 39,000 unbanked Latino households in Virginia that have an average yearly income of $23,500. That's about $917 million in annual bankable income left on the table just in Virginia. Fairchild determined these households tend to use neighborhood markets (known as tiendas) for basic financial services, such as check cashing, money transfers and bill payments.
Some banks are getting the message and actively reaching out to underserved populations.
Seated at a Bank of America branch in suburban Washington, D.C., recently, I watched as a Spanish-speaking greeter worked with each Latino who entered the busy branch; about eight out of 10 customers appeared to be Latino. Moving down the street to a Capital One Bank branch, however, was like entering an entirely different reality: the lobby was practically empty, there were no Latinos and the only language spoken was English.
According to data collected by the Federal Deposit Insurance Corp., five states account for the largest amount of consumer earnings that are not banked. These are California, Texas, New York, Florida, and Georgia. Banks need to find creative ways to attract these deposits, or risk ceding the market to Wal-Mart and others.
In closing, I'd like to announce that I've applied to take the Certified Payments Professional exam - the first ever - in the fall. As the self-proclaimed "Payments Maven of the Fourth Estate," I thought it fitting that I take part in and provide a firsthand account of the certification process.
Recent conversations with ISOs and merchant level salespeople have led me to believe there are many questions and potential misunderstandings about the CPP program and exam. Hopefully, reporting about my experience will help answer some of those questions. So stay tuned.
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