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T-Mobile Answers Call of Underbanked as Banks Fail to Pick Up

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T-Mobile's bid to provide basic checking services to its mobile phone customers is the latest signal that banks are losing the low end of the consumer market.

By offering a reloadable prepaid Visa card, a mobile banking app, and other rudimentary features of a checking account, the carrier has joined a growing list of companies that are enabling consumers to bank without going to a bank. Walmart, Green Dot, American Express, Simple, Plastyc and others are also vying for the business of the nation's 68 million underbanked and unbanked consumers. Many of these customers don't want or need full-service accounts but do need inexpensive ways to deposit checks and pay for things - which a lot of them, particularly the younger set, prefer to do through mobile devices. The nontraditional providers aim to win them over with low fees and mobile apps.

"You've got whole swaths of customers who are choosing as their primary day-to-day bank account now a prepaid card," says Brett King, president of Moven, a startup targeting this demographic. "The core differentiation the banks offer is branches," but retailers like T-Mobile and Walmart have stores, too.

To be clear: T-Mobile insists that it has no ambitions to become a financial institution.

"We're not a bank," says Taylor Collyer, senior director of marketing at T-Mobile. "We don't want to be a bank. Mobile Money is an alternative to a checking account." The carrier is touting the Mobile Money service package, free for subscribers, as a way to avoid the fees charged by check cashers and other financial providers.

The telecom provider is using The Bancorp Bank to provide the package of basic banking services: a prepaid Visa card; a mobile app customers can use to deposit checks, pay bills, transfer funds and reload cards; and access to the AllPoint network of 42,000 ATMs to withdraw cash without surcharges.

T-Mobile is the second telecom carrier in the U.S. to enter this field - Sprint was first with Boost Mobile, which offers bank-like services through mobile devices, though it lacks ATM access.

From 2008 to 2011, banks lost one million checking accounts, according to Aite research.

"The door is open for this market to be served," says Mary Monahan, executive vice president and research director at Javelin Strategy & Research. "This market needs this product, with its low minimum balance, no overdraft fees, and low fees."

The low fees, especially, should be a draw, some say.

"Consumers are looking for an unbundled experience that offers more value," says Bradley Leimer, who leads digital channel strategy for Mechanics Bank in California. "We're likely to see more consumers flock to this type of simplified banking account because it's simply a better experience at a lower price point - certainly better than what the 'underbanked' (a term I despise) get today from check cashers and money center banks."

King sees the market bifurcating. "It's almost as if we're going to create two classes of banking: a basic prepaid or thin [demand deposit] account and a full-service checking account from a bank," he says. "The only real benefit to the full-service account, apart from the overdraft (which comes with a fee), is the concept that when you have a real checking account, then when you need a mortgage, you'll already have the account you need to establish at a bank. But increasingly as financial services become commoditized, that's not a driver of business."

T-Mobile is well positioned in the underbanked segment - a large chunk of the company's customers use prepaid contracts. (In the U.S. in general, there were more than 100 million prepaid phone subscriptions in the second quarter of 2012, about a third of the total number of subscribers.) Prepaid phone customers tend to be younger.

The carrier's entry into financial services "shows how these technologies are dissolving industry boundaries," says Wayne Busch, managing director of Accenture's North America banking practice.

"Digital is becoming a battleground for customer relationships as banks throw their weight behind technology like mobile," he says, citing a survey his firm did last that showed a 50% increase in mobile banking activity in a single year.

Busch predicts more such incursions into banking turf, noting Google's introduction of a prepaid card in November. Another Accenture survey of executives in various industries around the globe found 60% "expect to be making moves of this sort over the next five years."

T-Mobile already provides interest-free loans for smartphones; the company says it has originated billions of dollars in such loans.

Collyer says Mobile Money follows in the spirit of his company's broader campaign of so-called "uncarrier" initiatives, which has included doing away with carrier contracts in recent months.

Such moves are aggressive attempts on T-Mobile's part to compete with Verizon and AT&T, observers say. "They're definitely the underdog," says Monahan. "They're fighting back by offering no-contract services, buying out contracts and now this, to serve customers better."

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Comments (4)
Beware the Trojan Horse.

While many traditional bankers may see services like this as a 'gift' that will take their lower profitability customers, how do we stop the much sought after digital natives from leaving as well? According to T-Mobile, as many as 40% of the customers who opened this service during a pilot were credit worthy customers who were drawn to the mobile-first platform offered by T-Mobile.

If the traditional banks lose the roughly 30% of their customer base that are 'underbanked' (today) and lose customers who are willing to split their relationship between institutions, how do we get these customers back? Given that these customers will be accustomed to a much more simplified design and contextual engagement that is not being offered by most banks today, the answer may be never.
Posted by jmarous | Thursday, January 23 2014 at 3:08PM ET
T-Mobile beta tested this prior to the AT&T takeover attempt. They called it FlexCash and it was only available in Florida.
Posted by Jim Jackson | Thursday, January 23 2014 at 6:53PM ET
jmarous is correct. But the top 100 banks do not care. They have most of the deposit market and this is a good way to disguise their lack of concern about communities. They can simply pretend the other guys are real "competition" as they try to reverse Dodd-Frank. Yes, there could be a long range migration to digital excellence but the top 100 banks are living for the next 90 days reports to security analysts who do not care at all about the American public and community development. The big banks are becoming more concerned about the half of median incomes which also have non-deposit assets. Look at the majority of their advertising dollars target markets for their real objectives.
Posted by FrankRauscher | Friday, January 24 2014 at 10:03AM ET
I remember a Card Forum conference a few years back when bankers were furious that cell phone companies planned to "steal" their customers and charge fees to place an app on their phone. Now, with open smart phones consumers can run any app they chose. Banks are protected from the monopoly power of the cellular networks, but not from market forces. I agree with jmarous that we will continue to see digital natives leaving traditional checking accounts in favor of a simpler prepaid account and leaving traditional banks in favor of other existing relationships (retailers, cell companies, etc.). If they can pay the rent and bills, why should they care if they are banking at a bank?



I do challenge Frank's position on big banks. They have the best mobile interfaces among banks by a long margin and are less likely to lose customers to mobile companies than community banks. Even so, their apps may not offer the user experience that the digital-savvy and/or underbanked desire. The real threat to them is staying competitive. Banks do have an important asset to leverage - trust. Most US consumers don't feel comfortable storing the majority of their money digitally or on prepaid cards, and would prefer to stay with their current financial institution (FI). In order to meet new customer expectations, FIs need to build and market alternative banking services in-house. Attracting new customers--millennial, digital native, and underbanked--is critical to their long term survivability. Otherwise, their customer base will slowly age and disappear along with them.
Posted by Eric Lindeen | Monday, January 27 2014 at 4:34PM ET
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