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Not unbanked, untapped
- Arjan Schutte
Most believe the underserved are large in numbers and small in market potential. Of course, micro lenders around the world, such as Nobel laureate Grameen Bank, who serve the poor with small, market rate "business" loans have demonstrated it's big business - and largely, good for the world.
But, here in the U.S., the unbanked and underbanked have until recently been left to the alternative financial services industry (like check cashers and payday lenders), or the philanthropically funded nonprofit industry (financial literacy programs and credit counseling).
But the underbanked are big business. My fund, with our partners at CFSI, estimate people who don't rely on banks for their financial needs spend $45 billion in fees and interest alone. This is for services such as check cashing, remittances, rent-to-own, title lending, prepaid cards, walk-in bill payments, even bank overdraft.
Based on thorough secondary research from dozens of sources, including our own analysis, this chart shows dollars spent on fees and interest - not the volume of dollars processed (that's $455 billion) - in 2010.
It is fair to say that most of these products are generally more expensive than what most of "us" pay. APRs higher than 30 percent (if not 300 percent); transaction costs of $2+; money transfer costs of $10+; access to payroll check for 2-4 percent. But lest you think most of this comes from the "predatory" and "shark" players, think again. The biggest categories you'll see are originated or funded mostly by banks: overdraft and mortgages. We have taken only the subset of fees generated here by the part of the population that is underbanked. (And this doesn't include a penny from the debit card charges so popular today).
But even the smallest slivers here are big business. "GPR prepaid" ($1 billion) refers to prepaid program managers, including recent IPOs Green Dot and Netspend. Walk-in bill pay ($1.9 billion) is dominated by Western Union, MoneyGram and Fiserv.
These services are thriving during this recession, by and large. The largest growth came from internet-based payday loans (35 percent YOY), followed by prepaid (33 percent) and payroll (25 percent) accounts. Year over year contraction was led by refund anticipation loans (-18 percent, which give customers instant access to tax refunds, in return for a hefty fee) and followed by check cashing (-5 percent) and bank overdraft (-5 percent).
The moral of this story, in my mind, is that the underbanked are big business. And it's growing. AND it's an industry that should contract significantly. Counterintuitively, that contraction should yield greater profits, billions saved by the bottom third of Americans (in terms of income) and a stronger middle class (and therefore a stronger economy, and greater global stability and strength). This will happen through innovators who drive efficiencies through smarter technology and smarter distribution channels.
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