A Banking Play for the Underbanked

  The weekday lunch hour rush is just beginning at PLS Check Cashers, a check-cashing store in a bustling neighborhood on Chicago's Near South Side. A string of customers in business and casual attire enter to convert cash into money orders, buy stamps and get quarters. One slips a money order and a telephone bill into a mail envelope. Another cashes her paycheck for a percentage fee, pays her local phone bill for an additional $1 and receives two fee-free money orders, one for $525 and one for $25.
  One customer tells a visitor he uses check cashers for a variety of services and prefers them to using bank accounts. "A currency exchange is open late at night in my neighborhood," he says. "A bank is not."
  Forrestine Howery, PLS manager, says she serves a "melting pot" of the neighborhood, including residents and business owners, employees of nearby warehouses, students from a nearby university, and immigrants who regularly send remittances to Africa, India and the Philippines. Howery says her location, which provides around-the-clock service, is especially popular with employees of the nearby 24-hour Post Office. "A lot of people getting off the midnight shift stop off to pay bills," she says.
  Check cashers such as Howery, however, are finding increased competition for their customers both from banks that once spurned them and nonbank vendors, such as prepaid card providers. Their motivation is the $1.1 trillion spent annually by the 84 million Americans who do not have bank accounts or who are unable to get bank-issued credit and debit cards.
  This is not a new market for some banks, but they are in the process of changing their methods to reach this market. Some banks, for example, are working with employers to distribute prepaid payroll cards to their unbanked employees or are working closely with states to support the distribution of benefits using prepaid cards. Others use remittance services or low-limit credit cards to attract new customers.
  Both banks and nonbanks continue to tweak their marketing and services as regulatory and technical bumps are smoothed to allow greater functionality and as institutions learn more about what individuals need, want and can handle with little financial risk.
  Prepaid cards, for example, are not always proving to be effective tools for reaching consumers who do not have bank accounts or who have limited access to credit. Bank of America began phasing out its SafeSend remittance service in September after studies showed 75% of remitters preferred to receive funds not from ATMs, but from traditional outlets such as Western Union, MoneyGram International and wire transfers between banks.
  Now U.S. Bancorp is phasing out its card-based Secure Money Transfer remittance service. "We're deactivating it because demand is not there to support it," says Steve SaLoutos, U.S. Bank senior vice president of consumer products and services. "We think of ATMs as fairly secure here, but they're not necessarily secure in other parts of the world."
  U.S. Bancorp now supports MoneyGram funds transfers in its branches. Doing so, SaLoutos says, gives immigrants the worldwide remittance services they need and MoneyGram 2,430 additional branch locations for its distribution network.
  The bank also benefits from the relationship. The remittance service draws immigrants into branches when they see the MoneyGram sign outside. U.S. Bank sources say about 45% of the institution's new Hispanic account holders first visited a branch to use a remittance service.
  U.S. Bank also markets itself to new arrivals from Mexico by sending Spanish-speaking representatives to Mexican consulate offices, street fairs and other community gathering points to provide financial-literacy classes, brochures and application processes that allow consulate matricula cards as legal forms of identification. Visa USA provides additional educational material targeted to unbanked Hispanics, such as its V?as Spanish-language magazine, which covers a range of money-management topics.
  Meanwhile, nonbank vendors have added bank-style services to attract underbanked customers. NetSpend Corp., an Austin, Texas-based prepaid pioneer that markets and processes reloadable MasterCard and Visa-branded cards, began in 1999 with simple payment functions. Since then, NetSpend has added ways to reload and check funds availability.
  Easily tracking funds is important to cardholders, NetSpend officials contend. "If you give us your cell-phone number or e-mail address, you'll get messages that say not only how much a purchase was but, more importantly, how much is left on the card," says Bertrand Sosa, NetSpend cofounder.
  Since May 2005, NetSpend has been helping cardholders save money through a partnership with the Financial Service Centers of America, a check-casher association based in Hackensack, N.J. Netspend's All-Access National Savings Program provides card-based accounts that earn 0.75% interest annually. NetSpend prepaid debit cardholders who open the free accounts at FiSCA-member check cashing locations pay no monthly service fees, and no minimum balances or minimum deposits are required.
  Funds loaded to the cards can be moved between spending and savings accounts via the Web, an automated telephone system or through in-person transactions at check-cashing locations. Cardholders also can set up recurring transfers from their cards to their savings accounts.
  The average savings balance on the 35,000 accounts opened thus far is $131. That modest amount is a big accomplishment for many low-wage cardholders, and it also helps improve financial efficiency, says Joseph Coleman, president of New York check casher RiteCheck. "We used to have people come in, cash checks and buy money orders in order to save," Coleman told attendees of a SourceMedia conference on the underbanked in June. "Now customers are using the card as a money-management tool."
  Customer Retention
  Roy Sosa, NetSpend cofounder and president, told conference attendees that while the savings program is free, it has helped NetSpend retain customers who also use the cards' fee-based payment functions, which include a $1 charge per signature-debit transaction and $2 per PIN-debit purchase (both types of transactions are free if the cardholder opts to pay a $9.95 monthly service fee instead). ATM fees include $2 per domestic and $3 per international transaction.
  Sosa says the savings program has increased by 50% the amount of time customers keep their cards loaded with funds and active. "Savings made us more money and strengthened our relationships with our customers," he said.
  Some consumers with bank accounts also use NetSpend cards. At PLS Check Cashers, one banked customer used his NetSpend All-Access Visa Prepaid Card to pay his cell-phone bill and walked out with a statement showing his payment and balance. He says he uses the card only "for emergencies every now and then." That includes last-minute payments for his wireless phone bill or car loan. He says he never uses NetSpend to pay bills online or by phone, preferring to transact in person at the check casher.
  The man says his wife has a couple of Visa and MasterCard credit and debit cards they occasionally use for purchases. Though NetSpend allows direct deposit of payroll checks to the card's account, the man has his pay from a local shoe store chain directly deposited to his checking account at a local bank.
  NetSpend also gains cardholder loyalty by occasionally giving bill payers a little float, Sosa said. NetSpend's internal records show regular patterns of reloads, so a cardholder can pay a $70 electric bill with only $50 loaded on the card because the system can anticipate a regular, weekly reload to occur a few days later.
  Sosa said if the system declines a cardholder's attempt to pay a utility bill because anticipated reload funds have not yet arrived, she may have her utility shut off and have to pay reconnection fees that put her further behind financially. But allowing a utility payment a bit early is worth a small risk that NetSpend may get stuck with the bill, Sosa said. "Do I risk $10 or $20? We say it's OK. Banks don't do that for them."
  Banks and credit unions want to offer such customers a bit more financial slack, too, but without harming themselves or their customers. "Banks are just now beginning to think about how they might be able to use prepaid products as a lobby product, just like you would be able to offer a checking account to anyone else," says Jennifer Tescher, director of the Chicago-based Center for Financial Services Innovation. "Some are thinking about offering it to someone who they will deny an account to. Others are thinking about offering it to people whose accounts they're about to close."
  Credit card issuers also are reaching out to underbanked individuals. GE Consumer Finance's "road to credit" private-label credit card program, for example, now has 50,000 cardholders. The issuer hopes to expand the number of cardholders to 70,000 soon but still calls it a pilot. "We're trying to monitor this very carefully before we open the floodgates," says Margaret Keane, the GE unit's chief executive. "It's not just about putting a piece of plastic in their hands. It's about teaching them to manage it."
  In many cases, issuers may not give a card to consumers lacking a good credit history. But the GE program gives card applicants credit limits as low as $75 and a lot of hand holding, and it does so subtly so most do not even know they are in the program. GE has expanded the pilot it began in 2004 to include the cards of more major retailers, including Wal-Mart and JCPenney.
  Customer-service employees call cardholders to remind them when their first bills are due and to see if they have any questions. Accounts that show signs of trouble are handled by collection experts who work to educate debtors as much as to recoup any debts.
  Payroll cards give issuers another option to reach out to the underbanked. A Mercator Advisory Group study released in July 2005 projected that payroll cards would multiply to 14.2 million in 2008 from 812,500 in 2004.
  Many employers now pay their unbanked employees with payroll cards that allow free paycheck direct deposits into the card accounts, plus a certain number of free ATM withdrawals and point-of-sale transactions. Visa says employers distributing its payroll cards include McDonald's and U-Haul, while Greyhound and the Gap distribute MasterCard-branded cards.
  Bank of America will not say how many payroll cards it has issued but claims to be the largest issuer through payroll partners. "We've found that to be the most efficient distribution channel for us," says John Gruce, senior vice president of BofA's prepaid card group.
  BofA uses a train-the-trainer approach with human-resources personnel who interact with cardholders, and BofA provides descriptive welcome packets for cardholders. But the best teachers often are coworkers, Gruce says. "A lot of times, it's word of mouth from cardholder to cardholder or employee to employee. We've had great success with that," he says.
  BofA also is one of several issuers, including U.S. Bank, Wells Fargo & Co. and JPMorgan Chase & Co., providing reloadable benefits cards to state governments.
  Many states now give unbanked recipients network-branded cards that allow direct loading of one-time or recurring benefits.
  Experience Builders
  While states may not allow issuers to cross-sell other products to benefit recipients, the cards help users gain experience with branded payment cards.
  At least 13 states are distributing such benefits as child support and unemployment insurance on MasterCard-branded cards, including Florida, Illinois and New York. More than 30 states are using
  Visa-branded prepaid cards to disburse benefits, including Texas and California.
  Michigan expects per-payment savings of 50 cents per participant from the U.S. Bank-issued Visa cards in its child-support program. While each check costs Michigan 86 cents to distribute, it is much cheaper for the state to electronically transfer funds into card accounts, about 36 cents per card, according to Visa.
  Georgia has saved money and headaches distributing child-support funds via MasterCard-branded cards, issued by Detroit-based Comerica Bank, instead of checks, which can get lost in the mail. Ted Dargan, MasterCard vice president of emerging markets, says many low-income benefits recipients often move, which led to Georgia sending many checks to addresses that were no longer valid. "The person may not have a permanent address," he says. "They may live in a shelter."
  Nizam Antoo, Visa vice president of prepaid products, says that even many banked recipients of child-support benefits prefer their state disbursements on cards. "A lot of custodial parents like having the child support separate from their other types of funds so if they're ever asked how the funds are being spent, they have a record," he says.
  Just as unbanked customers become comfortable, and then savvy, in the uses of such financial products, bank and nonbank issuers will continue to tweak their services to compete for their business.
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