Traditional Banks Tap Into Unbanked Customers
- Image by Nemo’s great uncle via Flickr
Do you have a bank account? In the current world of online banking and high technology it is unheard of not to have an account. How can you function without a bank account? Millions of people conduct their financial business every day by utilizing alternative financial institutions.
The Center For Financial Services Innovation estimated that there are over 40 million U.S. households, about 106 million Americans, that are underbanked. CFSI added that this sector of the market spends over $13 billion on approximately 340 million transactions. These consumers patronize local companies for their financial needs such as check cashing, money orders, bill payment and international remittances.
The mainstream banks have previously overlooked this market. I believe that there is a prejudice at the root of the decision making by senior bank executives. Consumers in this market are seen as poor, immigrant, living in underserved neighborhoods, no social security numbers and no legitimate papers.
Mainstream banks have finally seen the writing on the wall. And that writing says big profits. They are examining several profit centers to replace the overdraft fees.
Prepaid cards.
In 2007 the Federal Reserve Payments Study estimated the over $26.76 billion was loaded onto 45 million prepaid cards in 2006. Since 2006 the prepaid card market has exploded. The Mercator Advisory Group, a leading research company in this area, released the Seventh Annual Open-Loop Prepaid Market Assessment study in August 2010. It showed that in 2009 the total load for all the prepaid card segments was $330.03 billion.
Government agencies have embraced the prepaid card market and see it as a safe channel to get money to American consumer who desperately need help. Social Security benefits are being loaded onto prepaid cards. Unemployment benefits are also loaded onto a prepaid card.
Small dollar credit.
Typically loans under $1,000 that are made to consumers and businesses are considered small dollar credit. To rate the credit risk, a lender would ask for a report from a company such as RentBureau, Pay Rent or Build Credit. The borrower would most likely not have a report with any of the traditional credit bureaus. If by chance there is a credit report it might be incomplete and lacking a history, or simple derogatory. Consumers need this service to fund purchases that require more than one pay check, or to meet emergencies.
Alternative credit.
Pay day lending brings in over $2 billion in fees on loan volume of $12 billion. Add cash checking fees of about $1.5 billion and we can see how attraction this market has become.
Local and international remittances.
Remittances account for about $50 billion annually and the fees generated are about $3 billion.Visa, Mastercard and Discovery see potential in the unbanked market, specifically the prepaid cards, and have lent their brands to the cards. This is a booming endorsement. We can expect more global companies to jump on the bandwagon in the near future.
Europe has shown tremendous growth in prepaid cards alone. The market is currently $22 billion annually. By 2017 this figure will explode to $156 billion according to a study by Boston Consulting Group. I might add that the study was commissioned by MasterCard Worldwide.
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- Banks Look to Prepaid Cards to Replace Lost Revenue (online.wsj.com)
Add comment December 6th, 2010
