By Drew Edwards
Banks have always talked about “banking the unbanked,” but the underlying assumption has been that the unbanked need to be educated to become bankable. Banks have never been willing to change their product offerings to meet this massive consumer group’s real needs, including check cashing, money transfers, walk-up bill payments or prepaid debit cards.
That’s changing. Today, in response to lost fee income, banks are offering services that are currently primarily available at the corner check casher or market. Banks’ internal analysis has revealed that as much as 30 percent of their current deposit account holders are going outside the bank to obtain these services, and the consumers that are going outside the bank to cash checks are not the same consumers that pay them for overdrafts or for payday loans.
Chexar has been trying to convince bankers to offer these services for almost 10 years, and we have seen the same two points of resistance consistently – until this year. First, bankers have historically regarded check cashing as predatory. Second, they have indicated that they would limit such offerings to their underperforming branches in demographically-changing areas perceived as no longer populated by “bankable” consumers.
Today, Walmart is the largest check casher in America with thousands of Walmart Money Centers directly targeting these consumers and offering them FDIC insured accounts in the form of prepaid debit cards. This has both legitimized the business in the eyes of banks and given them a wakeup call. Now we are seeing major financial institutions developing new product sets for the underbanked consumers that are packaged as a branded ”relationship” with the bank and offered as a core product in all branches.
This is going to be a huge shift in the marketplace. Banks are going to stand up to Walmart and offer to serve the massive unbanked and underbanked consumer group with a whole package of products, not just a single sideline product.
Cash is king
Contrary to popular opinion, banks are uniquely positioned to serve this consumer, and they have advantages over retailers in several areas. First, retailers entering this space face regulatory licensing and compliance issues. Banks are exempt from this licensing and they are already in the compliance business. Second, retailers don’t like to deal with cash, but the unbanked/underbanked consumer favors cash. Banks have the cash and the infrastructure to deal with it. Finally, transactional costs associated with offering check cashing, for example, are extremely high for a non-bank. For a bank, these costs are by definition “wholesale.”
And while the perception is that the targeted consumers are averse to visiting a bank, the facts disagree. A few years ago, major retail banks started charging non-customer walk-ins seeking to cash a check drawn on that bank. These are called “non-customer, on-us checks,” and the objective was that the fee would drive the consumer to the check casher. But today, each of these major banks still cash staggering numbers of these items. Supporting many consumer studies, this offers further proof that millions of consumers are more comfortable doing their confidential financial transactions in a bank.
We expect that all major banks will offer full product sets in their branches targeting the true needs of consumers who want to live the “pay as you go method” within three years, with offerings available at teller lines, ATMs, self-service kiosks both at banks and retailers, and on mobile phones.
The instant-gratification generation
The millennium generation, which is very much into prepaid and instant gratification, fits into the unbanked/underbanked category. They will likely never adopt the traditional bank account that has transactions in transit, such as deposits and checks, that need to be reconciled and accounted for each month to determine your true balance. Prepaid cards give them instant updates on the available funds and overdrafts don’t exist. As banks begin to repackage their accounts, they are utilizing checking and deposit technology for a fee, which includes instant risk free gratification. If prepaid is the new bank account, then instant check availability without return item exposure is the new deposit. This works in a traditional account just as well as in a prepaid account.
As banks arm their branches with a complete product set for the underbanked consumer (including the millennium consumer), including the ability to cash or deposit risk-free any type and any size check, they stand to hold their own in the contest to win and profitably serve these valuable consumers.
Drew Edwards is CEO and founder of Chexar Networks, Inc.