STRATEGIC PARTNERS
The Hispanic population in the U.S. represents a huge untapped market for banks, but many in this growing ethnic group prefer cash to cards.
February 26, 2002
"Reprinted with permission from ATM&Debit News, a weekly electronic newsletter based in Chicago. Subscriptions available at 212-631-9780 or go to thisWeb site.
The comfort level of the nation's fastest-growing ethnic group, Hispanics, with ATMs and PIN-based debit cards is well-documented. The results of several surveys conducted over the past few years suggest that banked Hispanics tend to use ATMs and debit cards more often than does the general population.
Yet getting debit cards into the hands of unbanked Hispanic workers is proving to be difficult. Atlanta-based Directo Inc., which was founded in 1999 to provide payroll debit cards to unbanked Hispanics through partnerships with employers and financial institutions. But Directo now has broadened its market to include a more general population after it had difficulties penetrating the Hispanic market.
"What I found was, if Hispanics had a checking account, they were more likely to have a card and more likely to use an ATM," says Robert Howe, Directo CEO. But Directo's attempts to serve unbanked Hispanic workers through companies such as industrial cleaning firms, which marketing studies have shown have high levels of Hispanic workers, did not pan out.
Problem 1, problem 2
Two problems emerged, says Howe. Hispanic immigrants had little trust in financial institutions, and they preferred to use check-cashing stores to conduct most of their business on a strictly cash basis. Moreover, large financial institutions with convenient, surcharge-free ATM access had little interest in signing up new depositors with limited funds.
"The dilemma is that most large banks do not want to target the unbanked person," Howe says.
In Directo's first year only 200 employees signed up for Directocash cards, says Howe. Directo employers have signed up 20,000 employees since the company broadened its market, he says.
How ATMs Fare Ethnic Group Preference Asian-American 42.9% African-American 25.8% Hispanic 11.1% Caucasian 8.6% Source: Analytica Inc. October 2001 survey rsults based on 785 unbanked respondents who did not have an ATM card. They were asked if "they would really prefer" using an ATM to get cash. |
The distrust of financial institutions by unbanked Hispanics showed up in an October 2001 survey by Houston-based Analytica Inc. About 785 unbanked individuals were asked if they "would really prefer" to get cash from an ATM. Only 11.1percent of Hispanics expressed a preference for ATMs compared with 42.9 percent of Asian-Americans and 25.8 percent of African-Americans. The results suggest a preference for using check-cashing stores, despite the higher costs, says Howe.
Banked Hispanics are an entirely different story. A 1999 nationwide survey of 3,000 consumers conducted by Analytica on behalf of the Houston-based Pulse electronic funds transfer network showed that 64 percent of Hispanic respondents used ATMs as the main vehicle to get cash. That compares with about 50 percent of individuals from all ethnic groups combined who stated ATMs were the main way they obtained cash.
Untapped market?
Some observers still believe there is a huge, untapped Hispanic market for debit card and ATM providers. "Hispanics are the highest unbanked population in the U.S. and the highest emerging banking market in the U.S.," says Hugh Barrett, manager of the Houston-based Strategic Alliance Group consultancy, which works with community banks seeking a bigger Hispanic depositor base.
Hispanics, for example, by the end of next year are expected to represent the majority population in Houston, which has of 4.5 million residents, notes Barrett. In some cities an estimated 40 percent of Hispanics do not have a bank account, he says.
The 1999 Analytica study showed that Hispanics were the least likely among all major ethnic groups to have a bank account. Some 76.1 percent of Hispanic respondents had bank accounts compared with 93.7 percent of Asian-Americans.
Financial institutions have the most to gain from converting unbanked Hispanic consumers to bank depositors, considering the popularity of PIN-based debit card use among banked Hispanics, says Richard R. Batsell, Rice University marketing professor and the author of the Analytica studies. "There is a significant Hispanic population that the banks could be converting," he says.
But overcoming Hispanic immigrants' deep distrust of banks will take time and broad marketing efforts, says Barrett. Latin American banks generally are viewed, often for good reason, as being owned by a small and corrupt wealthy class, he notes.
As a result, millions of Hispanic immigrants, as they do in their host countries, use cash for almost all transactions. That is why cash dispensers are used so heavily by Hispanics who have debit cards, says Barrett.
A special card
Another key barrier to getting unbanked Hispanics to open bank accounts is the fact that many have little of the documentation required to qualify. Undocumented workers also are reluctant to provide information about their possibly illegal status in the U.S., Barrett notes.
However, some banks are beginning to accept a so-called "matricula" identity card issued by Mexican consulates in the U.S. to establish that an individual is a Mexican citizen. The matricula cards are used to establish identity in much the same way driver's licenses are used as standard IDs, says Barrett.
The Mexican identity cards will be used to establish accounts and issue PIN-based debit cards by a new, Hispanic-oriented community bank being created in the Houston area called Aquila Bank. The debit card program will be carefully scrutinized to avoid fraud risks and will be operated by a third party, which Barrett declines to identify.
Barrett is skeptical of what he describes as piecemeal approaches, such as issuing payroll-based debit cards or selling prepaid and reloadable debit cards in predominantly Hispanic areas, to crack the unbanked Hispanic market.
Such a reloadable, prepaid debit card, called the Quick Money Card, is being tested at a Carl's Jr. restaurant in the largely Hispanic area of Huntington Park, Calif. The PIN-based card can be purchased for $5.
Barrett believes nonbank debit cards are too narrowly focused for a market that needs more long-term and less-expensive financial services. "PIN-based debit is the entrée into mainstream banking," he says.
