Comment: How to Serve the Unbanked Without Sacrificing Profits

More than 10 million American families have no deposit relationship with a bank. The reason is not simply a matter of costs. For example, millions of low-income families do business with high-cost check cashing outlets.

Banking services can be provided to low-income families in new ways while reaping an adequate return on invested capital. But banks will have to do more than offer low-cost accounts.

They must offer more convenient services and deliver them in ways that are less intimidating than the austere bank buildings to which customers normally must go. Automated teller machines will have to be made less complicated.

A model for banking the unbanked has been operating in-of all places- South Africa, a country with unfavorable political and economic circumstances. This model has been enormously successful, providing mass marketing for the poor, meeting customer needs for friendly and convenient service-and all at a satisfactory profit.

The E Bank model, developed by Standard Bank of South Africa Ltd., was driven both by customer demand and, more particularly, by a squeeze on banking margins and profits.

Market research revealed an urgent need for greater convenience, superior user friendliness, faster transactions, and above all a very high degree of safety and security for customers in a country ridden by crime.

The plan set up E Bank, an independent, electronic card-based operation. The strategy was to open hundreds of electronic branches, conveniently located in supermarkets, shopping centers, and other sites, to suit the needs of the masses.

Kiosks were designed in warm colors, with ethnic music playing. These kiosks were staffed by a personal assistant to help customers feel at home with card-based electronic banking.

The customer is given a card with an ID photo. This image, together with fingerprints and other biometric identification, is stored on its memory chip. When the card is inserted into the ATM, the personal E Bank assistant can make sure that the person identified on the screen is the person engaging in the transaction.

Because PIN numbers are easily lost, stolen, or forgotten and illiteracy rates are high, the images and biometric details are stored in a central computer data base. For those who have trouble reading, all screens are highly graphic, and a staff member is available to help. No paper is used- ever.

The results so far, in terms of traffic and volume, have validated the loftiest expectations of the designers. More than 75,000 new accounts are being opened each month, with customer satisfaction high and the bank earning a satisfactory profit.

By limiting services to a card-based accounting system - without the traditional frills of conventional deposit and checking accounts - bank costs have been enormously curtailed.

U.S. banks might ask: "What's really new about all this?" U.S. banks are installing their ATMs in supermarkets, fast-food outlets like McDonald's, office supply stores like Staples, and service centers like Kinkos.

The answer is clear: What is needed, and what the South African E Bank model supplies, is a way to make mass banking pay off through a carefully developed program offering new technology, new but limited services, and a smart program of mass marketing.

Clearly, E banking would need modification in the United States. For example, personal attendants are probably unneeded in this country, and they would be too expensive.

Other innovative programs for banking the unbanked are beginning to emerge in other places. Some entrepreneurs have scored considerable success in Mexico in banking factory workers with new swipe cards; they are identified by placing a finger over a scanner. Again, there is no paper trail.

The cards are used to check employees in and out of the factory gate, payrolls are automatically credited to electronic accounts, and cash is provided on demand. The facility is being extended to purchases in supermarkets and other retailers.

What we now know is that innovations in technology and marketing make it possible to serve the unbanked profitably, to benefit customers, bank stockholders, and society at large.

This is the time for an innovative bank-better yet, a consortium of banks such as the Integrion Financial Network - to deliver basic services to every American family. It can be done, and at a profit, too. u Mr. Freund is professor of economics and director of the Center for the Study of Equity Markets at Pace University in New York City. Mr. Weil is managing director of Clive Weil & Associates (Pty) Ltd. in Johannesburg. He consulted on development of the E Bank concept.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER