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Delivering for the unbanked

By Dave Birch posted Sep 15 2008 at 10:35 PM

[Dave Birch] Professor Steve Worthington has a piece in the current Journal of Financial Transformation looking at financial services for the unbanked in the U.S. It contains some very useful figures and statistics -- noting, for example, that half of the unbanked have college educations and that a quarter of them have prime credit ratings, which implies that they have opted out of the banking system rather than been excluded -- that reinforce the point that the unbanked are an underserved segment. If the financial sector could develop appropriate products, they could make money from a socially beneficial enterprise (ie, reducing transaction costs).

The headline conclusion, for me, was that a fifth of U.S. households are either unbanked or underbanked and that some of them have already begun to turn to non-banks to deliver financial services to them. An example used in the article is the Wal-Mart Money card, exemplifying the point that simple, transaction-oriented financial services are well-suited to the core skills and competitive approach of mass-market retailers. With the growth of, in particular, government use of prepaid card products to provide better and more cost-effective services to the unbanked, it seems plausible that non-banks might do rather well in this space. Leave the "lending money" part of banking to banks (who seem hopeless at it, but there you go) and treat the "moving money" part of it as a business up for competition just like any other business.

Many of Steve's points, I think, are valid beyond the U.S. and deliver useful input to organisations hoping to create new payment products. Obviously it is the pre-paid card market that is at the forefront at the moment, but it is not exclusively a prepaid sector: there may be a variety of innovative products coming to the unbanked. Given my interest in payments, I naturally look at mobile phone-based possibilities for simplified, low-overhead transactional accounts.

I notice that this issue of financial services for the unbanked has moved up the ladder of priorities in the U.K. to become a Conservative Party policy, which is a measure of the attention that it has been getting in political circles. People who do not have bank accounts, for one thing, do not benefit from the discounts available for utility payments by direct debit so

The Tories say they will reform post office accounts so that for the first time they can be used to pay utility bills using the equivalent of a direct debit.

[From Tories attempt to tackle fuel poverty - Times Online]

The story here is that the Post Office Card Account (POCA) is used by many less well off people, so making it more of a quasi-bank account and allowing direct debits from it helps them to avoid the effective surcharges for cash that they face when they go to pay bills over the counter. This could be a significant issue. My guess is that many more organisations would like to surcharge for cash but they cannot because of political pressures. At a conference in Singapore recently, I heard a speaker from RATP (the Paris rail network) say that they want to surcharge people who pay cash something in the region of 5-10% but are not able to because of the politicians. We've discussed before how plans to charge for cash have been stamped on by politicians who don't understand business or economics, and it's hard to see how they would react any differently in the future.

Yet the spread of prepaid cards could make a strategic difference to the "cash equation", by providing a viable, attractive alternative to cash. OK, so you can't use a prepaid card in all of the places that you can use cash, but it's getting close and A2A services using prepaid accounts will get us even closer (especially when integrated into mobile platforms). This is all an opportunity for financial institutions to open up a new line of business. A good example -- one of many -- is this recent launch:

Alliance & Leicester Commercial Bank is rolling out a prepaid card payments solution for local authorities in the wake of the government's scheme to transfer payment of housing benefit to claimants, as opposed to their landlords. A prepaid card scheme will allow local authorities to save up to 75 per cent of their processing costs for the payment of housing benefits, as well as remove the - on average - 10 per cent charge to the recipients when converting cheques to cash.

[From Finextra: Alliance & Leicester launches pre-paid card scheme for housing benefit claimants]

TEN PER CENT! So already poor people receiving welfare benefit in the form of cheques lose a tenth before they get the cash at all! The growth of prepaid has implications way beyond the growth of the card market: it may eventually lead to a breakthrough in the pricing of cash that will result in a more efficient payments industry all round.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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The unbanked are a massive group in the US. Many are immigrants and use money transfers such as WU and MG. Lately, in the past few years, as your post points out, many unbanked are just regular people tired of getting hit with bank fees. The problem as I see it with the Walmart card, is that this card is just another Green Dot product. If Walmart had created their own card, instead of using this existing network, they could be giving the cards away. Green Dot fees are high. Most of the card products in the US are Green Dot.

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