Banking the Unbanked: Prepaid Cards, Mobile Payments & Global Opportunities in Retail Banking

lock-key.jpgDeloitte, a professional services firm specializing in audit, tax, consulting, enterprise risk, and financial advisory services, recently released a report on the unbanked, with excerpts printed here: 

A Large Untapped Banking Market?

Financial institutions around the world compete against one another trying to attract and retain the same middle- to upper-income retail customers year after year. Yet there is an enormous market that most banks are ignoring—and that nonbank competitors have begun to cultivate effectively: the world’s 2.5 billion adults who are either unbanked or underbanked.

By definition, unbanked customers have no checking, savings, credit, or insurance account with a traditional, regulated depository institution. Meanwhile, underbanked customers have one or more of these accounts, but conduct many of their financial transactions with alternative service providers, such as check-cashing services, payday lenders, and even pawn shops—and still use cash for many transactions.

Prepaid Cards and Mobile Payments: Recent Innovations Gaining Rapid Acceptance

The developing world is serving as a crucible of innovation for a new payments infrastructure for financial services — one that relies less on the physical presence of branch offices and more on wireless telecommunications and the Internet.

Prepaid cards. Like the holiday gift cards that have become so popular in the United States, general purpose reloadable (GPR) prepaid cards are a medium of stored value. However, gift cards are typically “closed loop” products accepted by a single merchant, while GPR prepaid cards are “open loop” and accepted almost everywhere.

Prepaid cards can offer unbanked and underbanked consumers access to online shopping and bill payment, as well as a host of other traditional banking functionalities. Moreover, many governments around the world are increasingly adopting prepaid cards as a preferred mechanism for making benefits payments to consumers because it can be cheaper, faster, and more secure to transfer funds to cards than it is to mail checks or provide cash to all recipients.

Mobile payments. At the same time that prepaid cards are taking off, payments made through mobile phones are also becoming more common. According to the International Telecommunication Union, the United Nations agency for information and communication technologies, there were 5.9 billion mobile-cellular subscriptions in the world at the end of 2011.  With a global reach of 87 percent—and a developing-world adoption rate of 79 percent—mobile phones are in use almost everywhere and by virtually
every consumer segment.  With such widespread access to mobile technology, consumers in Africa, Asia, and other emerging markets can pay bills, get cash from local merchants, and send money back home to their families—without having to step into a banking office.

The United States: An Emerging Market for Prepaid Cards

In the United States, a number of prepaid program managers are increasingly positioning their GPR prepaid products as a checking/debit alternative and targeting them to both the unbanked and underbanked population as well as presently banked consumers.

Prepaid cards can appeal not only to younger consumers looking for a cheaper, more convenient alternative to traditional banks, but also parents eager to control, compartmentalize, and track their children’s spend or their own.

Emerging online banking players are offering a broader product array, including savings and credit accounts to complement their prepaid offerings. Adding to the pressure, several established nonbank players and several large retailers have introduced everyday payment prepaid cards with fewer fees aimed at younger consumers and the cost-conscious segment of the market.

Responding to New Competitors

Stay the course and reduce operating costs. Some banks may elect to continue to grow their share of wallet among existing profitable customers while further reducing operating costs in-line with the new reality of regulatory constrained fee income.

This option is a traditional response of large incumbents when faced with disruptors. It also is a well-established playbook and might make the most sense for many banks. This option will likely require forcing out unprofitable consumers and will shrink the total consumer franchise. Typically, large national banks seem to have chosen this option, either due to a profitability imperative or to a strategic choice to focus on the affluent. Some regional banks have made a similar choice as well. The shallow profit pool of existing prepaid customers is also a common reason cited for this choice.

Protect the franchise. Other banks may decide to offer prepaid products to unprofitable checking/debit consumers, migrate them to the cheaper prepaid platform, and offer prepaid options to less creditworthy customers.

This approach will likely preserve the size and scale of the franchise and preserve the future option of migrating prepaid customers to traditional banking products as their financial situation improves. Banks that are more comfortable with middle-income and subprime customers as well as regionals looking to grow aggressively are considering this option. The risks associated with this option are a dilution of efforts and the traditional risks associated with middle-of-the-road options.

Embrace the disruption. Still other banks may choose to create an enterprise-level focus on the unbanked and underbanked markets initially around prepaid offerings and actively prepare for the upward march of this new banking solution. Of course, this option can be especially attractive for banks in fast-developing markets where the non-consuming segment is 70 percent or more of the population.

Traditional banks could acquire one of the prepaid specialists or create their own program-management capability. The upward march would involve migrating the product functionalities and positioning to help meet the needs of selected banked segments, whether lower-middle class or younger affluent segments that do not want or need traditional banking relationships.

For access to the full report, click here.

Deloitte LLP