News

Relearning old tricks to reach unbanked consumers

Private investors and company executives are trying out products that reach the unbanked. Last month, the two met in San Francisco to talk about those products and services, as well as how they can meet the needs of this niche market.

October 11, 2005

Forget what you thought you knew about tapping unbanked consumers in the United States and Latin America. Speakers at last month's Unbanked Financial Services Innovation conference in San Francisco blew most of the industry's preconceived notions out of the water.

"There's got to be a lot of care to go into these solutions to help them be successful," said Hamed Shahbazi, president and chief executive of Info Touch Technologies Corp., a Burnaby, British Columbia-based software company.

Shahbazi couldn't have said it better.

In fact, most of the presenters at this first - expected to be annual - conference hosted by Financial DNA LLC, a California-based e-payments and financial technology consultancy, shared that message.

How the industry is going to introduce some of its well-thought-out solutions is where opinions and perspectives branch, however. For as many arguments as were made for card-based solutions, an equal number were made against using stored-value products to reach the unbanked. Dan Schatt, an analyst with Boston-based Celent Communications LLC, pointedly said, "A lot of banks have come out with card-based products and none of them have been successful."

Glen Fossella, marketing vice president of privately held Source Technologies, outlined the role automated self-service kiosks play in reaching unbanked consumers through services such as bill payment.

Larry Schulz, vice president of international retail payments for the Federal Reserve Bank of Atlanta, argued that certain industry extremities would be well-served to establish alliances.

Preempting his statement with "In a perfect world," Schulz dared the audience to step outside the box. "A partnership between an MTO and a bank would be a good idea for the future," Schulz said. "Perhaps they could come up some fee-sharing relationship."

The conference's 150 or so attendees, primarily investors, may have left the halls of the Merchants Exchange Club with more questions than answers, depending on which side their allegiances lay. The conference was broken into two tracts - one for public, the other for private companies.

One attendee, Arjan Schütte, associate director of Chicago-based The Center for Financial Services Innovation, said: "I thought it was interesting, the way he (Financial DNA director Gary Craft) set this up from an investor perspective. … From our perspective, we see an opportunity to provide capital to this space. This bodes well for what we're trying to do."

Whether investors in the audience walked away with the same enthusiasm remains to be seen. But there's no doubt that products marketed to the unbanked are catching investors' attention, and for good reason.

"There are 250 to 270 million people* in the United States, and of that number 50 million are unbanked," said Safwan Shah, CEO of San Jose, Calif.-based Infonox Inc. "In the last 100 years, we have not had that many (new) people available to us, and we don't even know who those people are."

Marketing to an unknown

Identifying and understanding the unbanked and/or underbanked consumer has been difficult. Much of the industry's recent attention has honed in on recent Hispanic immigrants to the U.S., but some of that focus could be misguided.

Only 30 percent of the U.S.'s unbanked consumers are Hispanic, said Ray Sosa, founder and president of Netspend Corp., an Austin, Texas-based processor and marketer of prepaid debit and stored-value products. The majority, or 46 percent, of unbanked consumers in the U.S. are African American, Sosa added.

And the way the industry has historically viewed the unbanked also is off the mark.

According to Sosa's research, 56 percent of the U.S. consumers who have been labeled "unbanked" or "underbanked" hold bank accounts and credit cards, and earn between $35,000 and $37,000 annually. As well, the notion that remittance products should target recent immigrants to the U.S. also is based on false assumptions, said Manuel Orozco of The Dialogue Group.

"The longer they (immigrants) are in the country, which is usually at least seven years, the more money they are sending home," Orozco said.

Money remittance throughout the world accounts for the exchange of about $200 billion annually across national borders, Orozco added. The average immigrant sends between $200 and $300 to his home country 8 to12 times a year. "They stay in contact with their family back home, so you want to integrate that family (into banking) as well," he said.

"Cost, reliability and speed," that's what immigrants say are the top three deciding factors for money-transfer products.

Safwan Shah is the CEO of Infonox, a software-development company. Shah discussed some of the backend solutions Infonox has developed for the gaming and financial services industries, and how those solutions are enabling servies that reach unbanked consumers.

Card-based products, Orozco said, would meet those criteria well, if they could gain market acceptance.

Celent's Schatt said card-based products have not been successful for a number of reasons. "We think the bank is missing the boat where remittance is concerned," Schatt said. "They're not doing good, targeted ethnic marketing. … Bank of America is offering it (a card-based product) for free and they still can't get people to walk in the door."

There are fundamental problems, he added, including a general misunderstanding of ATM/debit cards in unbanked markets. "Mexico may look appealing on the surface (since the country has 26,000 ATMs), but Columbia and Brazil are more appealing where cultural acceptance (of card-based products) is concerned," he said.

"We see an opportunity to grow at the merchant level, where (unbanked) consumers may already be going to buy prepaid phone cards," for instance, Schatt added.

Partnerships will pave way for FIs

One exception is Wells Fargo, which successfully deployed a card-based remittance program in Latin America by partnering with banks in other countries, Schatt said.

Partnerships, said the Fed's Schulz, will be the key. Cross-border, financial institution-to-financial institution relationships are a necessity, Schulz said, and the foundation of Directo a Mexico, a remittance program that utilizes the Automated Clearing House network. "$9 million a year goes through ACH," Schulz said. "It's the second-largest way to make payments in the U.S."

Through ACH, he argued, cross-border transfers could be made for $3, much less than what typical money-transfer operators charge. "In Mexico," Schulz added, "the (MTO) agents are well placed, while many ATMs are not readily accessible to people who live in rural areas. This is why the agents have been successful. .. But the banks have the advantage of a customer relationship."

"I ultimately think that using bank-based products is where this business will go," he said. "We just have to figure out how to build an account base on both sides of the border."

*According to The World Fact Book, the U.S.'s estimated population in July 2005 was 296 million.