Underbanked, But Not for Long
Financial institutions and tech firms are working to use mobility and analytics tied to prepaid cards to reach underbanked consumers, or customers who would otherwise have a difficult time establishing payment and account relationships because of thin or poor credit histories. The financial institutions can spot healthy customers among prepaid users to grow deposits and, eventually, credit and loan accounts. At the same time, consumers escape the high fees of payday lending and check cashing businesses, a chronic problem that can prevent consumers from establishing a track record that makes them more attractive to banks.
"I'm absolutely amazed at the unbelievably high rates people are paying to have their checks cashed. And they are doing it repeatedly, month after month," says Marc DeCastro, a research director at IDC Financial Insights.
Financial services companies are using transaction tracking and analysis of payment tendencies to identify consumers who are a good bet for additional credit and deeper financial relationships. For example, Movenbank, a mobile finance startup that will rely on deposit relationships with chartered banks to grow its business, is using an internal system called CRED to gauge creditworthiness and incrementally move people into deeper banking relationships. CRED combines traditional scoring and a person's standing on Facebook, Twitter and other social networks to determine a track record in paying bills and other financial activities.
Analysts say this model can allow institutions to reach underbanked consumers at less risk because the analytics engine allows a view into how people prioritize recurring debts. "You can look at the stored value card and see how people keep a balance on it, and when money comes in and out," DeCastro says. "You can see if they are spending it at the dog track or if they are buying gas."
In American Express's new "Make Your Move" program, the transactions executed by prepaid card users are tracked and run through an analytics engine operated by the card firm. After a minimum of six months, some card members will be invited to apply for credit cards based on solid spending activity, which can be later used to build credit relationships with banks.
In most cases, the people targeted by the card firm for the program don't have a substantial track record that could be used by a bank to issue credit. The program also includes tips about how to use the prepaid card for groceries, gas, mobile phone bills or other recurring payments to build a solid credit record.
"This will help someone build a financial track record...which will help them down the road if they are looking to buy a home or get another loan," says Leah Gerstner, vice president at American Express. "There are so many times when having a credit history is important. This product to some degree can bridge that gap for those who don't have a credit file or who have a very thin credit file."
The mobile revolution in banking also extends to the underbanked segments, as mobility is used to deliver payment services to consumers that heavily use prepaid cards. In May, Plastyc, a New York-based prepaid card marketer, rolled out an app for the Kindle Fire, a less expensive WiFi-only tablet that's in the price range of prepaid card users. Plastyc's mobile users can also use a phone's GPS to spot merchants that sell Green Dot's MoneyPaks, which can be used to reload prepaid card accounts.
Mobile and online channels are also part of Chexar's range of services, in which the check and card tech firm enables cash transfers, bill pay, mobile top-up and prepaid cards delivered via mobile deposit capture and other self-service channels. Chexar CEO Drew Edwards says mobile apps allow faster loading of prepaid accounts, which can deliver cash to underbanked customers faster - an option that's also spreading to banking customers. "There's a whole industry that used to be the domain of the check cashers that banks are now looking at," says Edwards, whose clients include 15 of the largest 20 banks in the U.S. "There's a shift away from professional check deposits and toward a prepaid relationship. It started with the underbanked segment but is moving toward people who also have accounts."
Among Chexar's clients is Regions Financial, which has developed a range of alternative check cashing and prepaid card services. Called "Now Banking," Regions is targeting what it calls "pay as you go" consumers, which include underbanked customers and people with bank accounts and higher incomes than traditionally unbanked consumers, who are increasingly choosing other options besides credit cards to access funds for fast purchases or payments.
"We can use this as a tool to attract new customers that may be described as underbanked, people who are using alternative providers for [check cashing] services, and to find customers to develop broader relationships as they grow in their financial maturity," says Bill Simpson, head of Now Banking for Regions. Simpson says Now Card reloadable Visa prepaid cards, another part of the bank's prepaid/underbanked product suite, can be accessed by users via a mobile app that allows them to track their balances. Simpson says the ability to view balances in real time on mobile devices or online is a large part of managing the prepaid card as a way of building a financial record that can improve a consumer's fiscal health. "You can manage your budget more closely and stick to the budget, and keep up in real time."
New mobile and data analysis are making it easier to reach underbanked consumers.