Financial services providers are jockeying and collaborating with each other for the opportunity to serve an increasingly popular underserved market.
The underbanked market is growing and changing, as a result of both the economic climate and tightened consumer credit. There are more niche markets — young people, older Americans, middle-class consumers who are going through foreclosure — that require tailored solutions for different needs.
Putting consumers at the core was a key theme that emerged earlier this month during the sixth annual Underbanked Financial Services Forum, organized by the Center for Financial Services Innovation and the American Banker.
Consumers' needs aren't always consistent. They want to use cash and plastic. They frequent both banks and non-banks. They like high touch and high tech. The most successful providers understand how to sort through these seemingly dichotomous preferences to design products that solve real problems.
One example is PayNearMe, one of the finalists in the Core Underbanked Innovation Challenge, a competition to identify the best new products for the underserved market.
The Silicon Valley start-up understands that cash is still king for many of the same consumers who need to make just-in-time payments. It has built technology and a distribution strategy that combines the ubiquity of cash with the convenience and access afforded by electronic payments.
Who are the right providers to serve this market? As evidenced by PayNearMe and other innovators, the answer is no longer a stark choice between banks and non-banks. It is clear that there is a role for everyone. The challenge is to knit the wide variety of players together into a coherent marketplace that consumers can easily navigate, whether or not the bank remains the relationship hub.
One of the biggest lessons from mobile payments efforts in the developing world is that distribution is key, a point made forcefully by Michael Joseph, the former CEO of Safaricom and the man beyond the M-Pesa success story in Kenya. In order to meet customers where they are, at scale and cost effectively, partnerships between the manufacturers of products and the retailers who can distribute them are a requirement of doing business.
Technology is still a key driver behind all of the industry change. But is it a case of the tail wagging the dog? There are plenty of tech start-ups with whiz-bang products, and lots of excitement about the power of technology to reduce cost, democratize access and customize consumer communication and interaction.
Still, technology is only as important as the consumer need it helps to fill. Mobile payments, for instance, only matter if a consumer has an account in the first place. Prepaid debit cards may ultimately become the go-to accounts that make mobile matter for the underserved.
Technology offers the promise of scale, but the underbanked market has yet to see much of it beyond the big prepaid card companies. Innovation and technology have helped seed the marketplace. Now it's time to focus on execution.
The uncertain regulatory environment is making execution even more challenging. This is true for all providers, especially as the Consumer Financial Protection Bureau ramps up with a focus not on institution type but on the structure of products and services offered by all providers. The question is, will the new agency strike the right balance between innovation and consumer protection?
Uncertainty is putting a damper on innovation, as providers await more clear direction. One thing, however, is clear: Quality is the new watchword of both regulators and providers. Access alone is not enough.
But what does quality mean? Price matters, but it is not the only, or even the most important, measure. In her last speech before her retirement as president of financial services at Wal-mart, Jane Thompson told the story of how, in her early days at the company, she had a staffer draft a report about the competitive landscape titled "Legal, But Unfair." She wanted to make sure that the products and services she offered at Wal-mart met a higher standard.
The renowned business strategist Michael Porter would define quality as shared value, or the intersection between consumer need and corporate success. In an article published in the Harvard Business Review earlier this year, Porter calls on corporate America to trade in recent short-term thinking for a return to long-term value.
The future of the financial services industry, and in particular the underbanked marketplace, hinges on the ability of providers to develop products and strategies that have mutual benefit for both shareholders and customers, today and in the future.
Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation.
