Article

ATMs and prepaids: plugging the unbanked into traditional financial services

For those outside the banking system, the ATM can be the payments hub for "plugging in" to a modern economy.

July 11, 2013

By Cyndie Martini, CEO, Member Access Pacific

It's been said that payments are the electricity that powers the entire financial system. It is the ability to securely send and receive timely payments that makes our modern financial markets function smoothly.

If payments are the electricity, it's at the ATM where modern payments get "plugged-in." For those using debit and credit cards, ATMs are essential for common account-based functions, including getting cash and making deposits.

Yet, what about those without accounts at banks and credit unions?

The FDIC estimates that 8 percent of American households have no deposit account of any kind — classified as unbanked. There is also a large number — about one-fifth of Americans — who are classified as underbanked, house­holds with an account but who rely on alternative financial service providers, such as non-bank check cashers, payday lenders or pawn shops.

For those without accounts and the traditional services that go with them, it's ATMs and network-branded prepaid cards that help them participate in our modern financial system.

Prepaid cards are primarily used for the purchase of nondurable goods and cash withdrawals — many at ATMs. In fact, cash withdrawals account for about one-third to one-half of the value taken off the card, according to a recent study by the Federal Reserve Bank of Philadelphia.

The study also found that prepaid cards are replacing cash in day-to-day purchases that occur at grocery stores, fast food restaurants, and gas stations. Another major use for prepaid cards is to pay bills, according to the study, helping the unbanked/underbanked avoid expensive money orders or overcome inaccessible checking accounts.

One of the drawbacks for prepaid cardholders is that ATM surcharges can account for a significant share of fees associated with the cards. According to the Fed, surcharges can account for about 15 to 40 percent of the cardholder costs.

But this barrier to prepaid acceptance may be fading as card networks and issuers begin to offer free or lower fees at ATMs. This year MasterCard has partnered with Cardtronics to offer surcharge-free withdrawals through its AllPoint Network, while big banks like Chase and Wells Fargo offer a limited number of free withdrawals through their own respective ATM fleets using the banks' Visa-branded prepaid cards.

As ATM innovations are adopted by financial institutions and independent ATM operators, the unbanked and underbanked are gaining greater access to traditional financial services.

A prevailing innovation for ATMs has been Deposit Automation. There are more than 60,000 image-deposit ATMs in the United States according to CEB TowerGroup. While the majority of deposit automation ATMs are at deposit-taking institutions like banks and credit unions, ISOs have been at the forefront of making ATMs more accessible to the unbanked and underbanked. 

Many ATM operators are seeing the next logical step. Not only can prepaid cardholders withdraw money at the ATM, they also are able to load funds onto the card that accepts cash deposits.

For example, 7-Eleven has more than 2,200 cash-accepting ATMs, and the Visa ReadyLink Network has a growing list of institutions that can load funds directly to the card from a cash-accepting ATM where both the card and the ATM are ReadyLink-enabled.

Last year, Washington-based TwinStar Credit Union converted all of their ATMs to ReadyLink during the institution's ADA compliance upgrade, combining the expense of its ADA upgrade with the software and certification costs required for ReadyLink adoption.

As a result, TwinStar has created an entirely new revenue opportunity to recoup this and other ATM expenses. Today the credit union's ATMs are a vehicle for introducing its products to an otherwise untapped market segment, unbanked and underbanked clientele.

As prepaid card usage continues to grow at phenomenal rates, the need for self-serve functionality at the ATM — such as the ability to load funds onto prepaid cards — will only increase.

Today, the youngest and most enthusiastic prepaid card users, Millennials aged 18 to 34, are opting for a mix of traditional and alternative financial services in numbers much larger than in previous generations. While research shows high satisfaction with the alternative services they are choosing, their expectations for convenience and immediacy are equally high. 

Over the next five years, the number of deposit-automated ATMs is expected to triple, and with that growth will come greater demand for all forms of self-service functionality. The convergence of technological innovation and consumer demand for alternative products like prepaid cards will have a significant impact on manufacturers, owners, and operators.

For the unbanked and underbanked, ATMs will remain as necessary as the payments devices — cards, cash, phones — they use to "plug-in" to our modern economy. ATM product development and deployment will be predicated on these many factors and the need to serve all users, banked and unbanked alike.

Cyndie Martini is CEO of Seattle, Wash.-based Member Access Pacific, a provider of the Visa DPS debit, credit, ATM, prepaid, and mobile processing platform for credit unions.

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