An emerging industry of financial services technology startups, known as FinTech, are creating a new wave of products for financially underserved customers. The underbanked market in the United States is currently estimated at $78 billion in annual revenue, serving 68 million consumers across 22 different financial product types. The Center for Financial Services Innovation and Core Innovation Capital co-released Financial Technology Trends in the Underbanked Market on May 7, 2013.
This report examines four key trends in emerging financial technologies impacting the underbanked marketplace today and highlights a selection of noteworthy companies capitalizing on these trends to improve consumer financial health and their own bottom line. The trends include:
This paper has been sponsored by Morgan Stanley and has benefited greatly from the company’s strategic input.
Download Financial Technology Trends in the Underbanked Market below.
Products for Unhappily Banked Can Win Over Underbanked, Too
Next-generation banking products are here, but knowing exactly what to call them is a challenge. They bundle transactions, payments, savings, and money management tools in ways that fundamentally reimagine the banking relationship.
By JENNIFER TESCHER and RACHEL SCHNEIDER
The trend last summer began with the private launch of Simple, a tech start-up that promises to replace the hassles of a bank account with an elegant white card and a mobile app. Then Chase made a splash with Liquid, the bank's card-based checking account designed to imitate prepaid.
Next, American Express grabbed the headlines with its Bluebird card, sold in Walmart stores and online. This month, GreenDot entered the fray with a beta launch of GoBank, its attempt to leverage its new bank charter to mimic traditional banking services in a more 21st-century package.
While each of these products is structured differently, they all combine elements of checking and savings accounts and prepaid debit cards. The common denominator is a focus on building customer relationships.
Consumers must apply for these products. The bar is set far lower than it is for opening a traditional checking account at a brick-and-mortar bank, but a bit higher than for traditional prepaid products, which are nearly universally available.
Getting the risk screening right is important because consumers can deposit checks into these accounts, primarily by snapping a picture with their mobile phones. These new products are not built around the good-funds model of traditional prepaid, in which the only ways to load the card are with cash or direct deposit. In this way they act more like a checking account, without the ability to overdraft.
What truly sets these new products apart is the overall customer experience. They have intuitive designs and improved user interfaces that are meant to help consumers make sense of their finances while having some fun. Marketing materials are clear and simple, with little bank-like gobbledygook to be found. Mobile access is a major part of the equation.
Simple, for instance, categorizes every transaction, and users can search recent transactions by category to understand spending patterns. They can set savings goals and have funds automatically swept into savings daily. The company has also created a "safe to spend" measure to help customers understand exactly how much money they have available, a dramatic improvement over the inscrutable "available balance" that banks typically provide.
GoBank is going for a lighthearted touch in money management. Through a feature it calls Fortune Teller, GoBank will warn customers when a desired purchase is about to blow their budget: "Remember that time you won the lottery? I don't either."
The price for all of this functionality and fun? In most cases, free.
Bluebird and Simple have no monthly fees. Chase charges $4.95 per month for Liquid, compared with $12 per month for its Total Checking product. GoBank lets customers choose their own monthly fee using a sliding scale from zero to $9, regardless of the services provided. (Think of the "pay what you want" model Radiohead used to sell an album online a few years ago.) By comparison, monthly fees for most traditional prepaid cards range from $3 to $10 per month, plus additional costs for loading funds via channels other than direct deposit.
The storyline is that these products are meant to appeal to unhappy bank customers and to the younger, tech-savvy set, a more "upmarket" segment. But why stop there? Marketed effectively, these products should hold great appeal for underserved households.
Young hipsters aren't the only ones who want to conduct business with their mobile phones. The underserved are also heavy smartphone adopters, and they are more likely than others to use them for banking and payments. Moreover, the business models of these products are focused less on balances than on the interchange revenue from transactions.
More than most, underserved consumers are likely to appreciate the money management bells and whistles that these newfangled products offer. And while consumers may not rate savings as high on the priority list when asked about it in a market research survey, Simple and GoBank each offers intuitive and fun savings features that small savers would appreciate.
To cast a wider net, the new entrants will have to calibrate their underwriting models to make sure they are weeding out fraudsters without inadvertently cutting off access to consumers with nontraditional credit histories.
They also will need to contemplate consumer cash flow issues. Some cash-strapped consumers need immediate access to their funds. A growing number of prepaid providers are offering check cashing via mobile phone. The customer takes a picture of the check, the check is immediately cashed for a fee, and the proceeds are deposited on a prepaid card. Why not offer customers the choice, after they have snapped a picture of their check, to either deposit the check or cash it?
Some will argue that underserved consumers don't want a financial relationship. While that may be true for some, we shouldn't confuse consumer behavior with consumer preference. Both banks and prepaid companies lament their high churn rates, but their products are often designed and priced in ways that encourage that churn.
While we may yet lack the language to neatly categorize the new products coming to market, it is clear that they represent the future of finance. Let's ensure they are marketed and structured in ways that make them a part of all consumers' futures.
See the original article here on American Banker.
"Consumer's Use of Prepaid Cards: A Transaction-Based Analysis" was released on August 7 by the Payment Cards Center of the Federal Reserve Bank of Philadelphia. The paper was co-authored with CFSI's Rachel Schneider, Vice President for Innovation, Research, and Policy.
The Payment Cards Center and CFSI conducted this research project in an effort to develop a better understanding of how consumers use prepaid cards by examining their transaction behavior and the issuer revenue and cardholder costs generated by those transactions. Using data provided by Meta Payment Systems, this study focuses on open-loop reloadable prepaid cards and presents an analysis of more than 280 million transactions made on more than 3 million prepaid cards issued by Meta Payment Systems over a six-year period in over a dozen programs.
While the data are not necessarily representative of the entire market, they can be used to establish a number of important stylized facts about the life cycle of prepaid cards. The authors report important statistics on the longevity of prepaid cards in the data set and the intensity of their use, identify cards that are likely enrolled in direct deposit and contrast usage of those cards with other cards in the data, and calculate statistics on the composition of issuer revenue and cardholder costs.
Click here to see the full paper on the Federal Reserve Bank of Philadelphia's website.
BY ROMY PARZICK
Imagine meetings packed with prepaid card industry experts — from program managers, bank issuers, distributors, processors, and networks to civil rights organizations, nonprofits, and consumer advocates.
You might think these would be cacophonous gatherings. Now, imagine they are working toward a common goal: to set a high bar for quality in the prepaid industry, with consumers at the core of that mission.
Over the course of the 12 months, I had the privilege of organizing such a group – the Center for Financial Services Innovation's Advisory Council on Prepaid. Last month we published our culminating work, the Compass Guide to Prepaid. As I reflect on my experience participating in this series of successful conversations about high-quality products, I learned five important lessons that I believe can be applied beyond the prepaid industry to engage in genuine and productive cross-sector dialogue during product development.
Engaging interdisciplinary experts in the development of new products can lead to higher-quality products and better outcomes for consumers and companies. Our new reality mandates that we work cooperatively across professions. Customers deserve it, and bottom lines demand it.
Romy Parzick is the manager for innovation and research at the Center for Financial Services Innovation in Chicago.
See the article here on American Banker.
