A few weeks ago, I wrote a column describing the financial preferences and behaviors of underserved consumers by painting a picture of an archetypal consumer named Sue. Taking stock of the true needs of the underserved helps explain why traditional bank products and practices often miss the mark.
A small but growing number of innovators are recognizing the market opportunity that Sue and those like her represent. Their new products demonstrate how to develop promising business models by addressing Sue’s financial pain points.
Sue has a full-time job as a store manager of a locally-owned small business. Her husband was recently laid off, and they don't have much savings. Sue has a bank account, but she doesn't use it much. For her family, cash flow is paramount.
One of her biggest challenges is the "money in, money out" problem. Like 28% of American workers, Sue doesn't have direct deposit. Her employer doesn’t offer it. With no financial cushion, she has to spend time and money every two weeks converting her paycheck to cash, only to have to turn around and purchase other financial instruments or services to pay bills, buy household items and safely store the remaining cash.
Direct deposit is a critical onramp to the payments system. Half of the American workers who don't use direct deposit don't have access to it. Solving this problem requires both more and better do-it-yourself cash management tools for small employers, and incentives for workers to participate.
Enter PayPerks. The New York-based startup has created a rewards program that helps employers shift from paper checks to direct deposit via payroll cards for employees who don't have or don't want a traditional checking account. The company provides workers with information and cash incentives as rewards for avoiding fees through proper use of the card.
If Sue's employer signed up, she could be eligible to win weekly cash prizes by taking an educational quiz about payroll cards, using her card in ways that keep fees to a minimum, and paying her bills with the card.
But what if Sue's employer doesn't shift to direct deposit? Is there an easier way for Sue to cash her check?
One alternative is a new mobile deposit capture service offered by Chexar, a check cashing technology company. Sue can use the service to snap a picture of her paycheck with her phone, have the check immediately cashed, for a fee, and loaded on a prepaid card.
Sue's bank offers a service like this, but when she deposits the check remotely, the funds aren't available right away. Her employer's check is drawn on a different bank, and Sue doesn't have any spare cash in her account.
Regions Bank signed up with Chexar earlier this year to offer fee-based check cashing in most of its branches, after a survey of their customers showed that a third used non-bank providers despite having a checking account. In addition to check cashing, the bank has rolled out a suite of services, including a prepaid card, money transfers and walk-in bill payment.
Regions took a page from KeyBank, which has been offering fee-based check cashing in its branches for several years and which also recently added a similar set of add-on services.
Sue has a growing set of options for cashing her check and paying some bills, but she still has to pay rent, and her landlord will only accept a money order. Sue may be connected to electronic payment networks, but her landlord isn't. Like the direct deposit problem, this one requires services aimed not just at consumers, but at the people they do business with.
Person-to-person payments innovations abound, and there are a growing number of mobile payments solutions aimed at small businesses that could work with small landlords. There is a business opportunity here that has yet to be seized.
Sue's money order problem highlights another challenge: the fragmentation of financial services. Sue can easily find a cheap money order, but it requires a separate trip to yet another provider. Innovators have created products and services that solve one or two of Sue's needs at any given time, but few if any solve all of them in a unified way. For instance, few of the innovations described here offer tailored opportunities to save or borrow.
Banks are designed to meet the payments, savings and credit needs of customers. The technologies at the core of banking create this interconnectedness.
Whether or not banks decide to take advantage of the business opportunity Sue represents, the technologies of tomorrow will need to knit together products and services that are manufactured and delivered by a range of both bank and non-bank providers, in ways that enable consumers to manage their finances seamlessly.
Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation. A KeyBank executive serves on the CFSI board.