Trying to keep up with developments in mobile financial services can be a dizzying prospect. Banks are fearful of being left in the dust, yet they are hesitant to make a big bet on mobile that could possibly distinguish them from the rest of the field but could just as easily fail.
So, instead, banks are taking the smorgasbord approach, offering customers a bit of this and a little of that and hoping they will find something they like. Instead of a mass market approach to mobile, why not concentrate on the early adopters?
Turns out, the first movers in mobile are actually the underbanked. They have the most to gain from mobile financial services — and so do the banks that focus on them.
Research released in March by the Federal Reserve Board shows that the underbanked have access to mobile phones and smartphones in greater numbers than the population overall: 91% of those identified as underbanked have mobile phones and 57% have smartphones, whereas 87% of U.S. consumers have mobile phones and 44% have smartphones.
The digital divide has shrunk dramatically, but low- and moderate-income consumers are still less likely to have home internet access. They view their phones as a necessity, and they use them in greater numbers than Americans as a whole to manage their money.
Of underbanked consumers 29% percent have used mobile banking in the past 12 months, compared to 21% all consumers. The underbanked are also heavier users of mobile payments (17% vs. 12%).
Convenience is a key driver. Underbanked consumers often cash checks, pay bills or transfer money using products and providers that may require several manual steps or trips to multiple locations. This can be time consuming, inconvenient and costly. Being able to conduct these transactions via phone can reduce time and cost for consumers, driving a shift from cash to electronic payments that also benefits billers, retailers and bankers in the form of increased efficiencies and new sources of transaction revenue.
The Fed's research found that underbanked consumers generally use mobile banking services in similar ways to all consumers, with the top activities being checking an account balance, transferring money between two accounts, downloading a bank's mobile application, and receiving a text alert. But they are more likely to pay bills using their mobile phones relative to all mobile phone users (62% vs. 47 percent).
Innovators have begun to deploy mobile remote deposit capture technology for check cashing customers, another service that provides a great deal of convenience. A number of hurdles remain before this service becomes broadly available, the most significant concerns being fraud risks and the time it takes to clear funds.
But imagine what a boon this service could be for prepaid debit card users, who today can only load their cards with direct deposit or cash. While some consumers would continue to pay a fee to cash their checks because of constrained liquidity, others would be just as happy to use RDC to load their cards and wait a day or two until the check clears before the funds are available, reducing one of the most significant costs of prepaid.
Prepaid represents one of the most potent ingredients for mobile financial services to increase access to financial accounts. Mobile wallets only work if consumers can access the products inside. For the underbanked, a virtual prepaid account that could be initiated and fully accessed through the mobile phone would enable consumers to begin and maintain a relationship with a financial provider through a channel to which they have access and with which they are already comfortable.
Despite the clear opportunity that exists for financial providers to grow relationships with underbanked consumers through the mobile channel, much of the development in mobile financial services in the U.S. — particularly among the large banks — has focused on expanding and enhancing services for more affluent populations.
Creating yet another channel for customers with significant channel choice creates more legacy expense for banks without much new revenue. Consumers generally haven't met a channel they don't like. Rather than shift most of their activities to the newest channel, they continue to use them all. Plus, banks have tried to charge customers for channel use – for tellers, for online banking, and most recently, for debit cards — and they have largely failed.
The underbanked, on the other hand, have fewer good channel options for the financial chores they need to accomplish. History suggests they will be more willing to pay for the convenience that mobile affords, and the reduced financial friction they experience as a result should ultimately save them money.
As counterintuitive as it may sound, the underbanked are the smartest near-term play for mobile financial services.
Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation. Kate Marshall Dole is an innovation and research analyst at CFSI.