Once upon a time, at some point well after Western civilization moved beyond the barter system, you needed a bank account to manage your finances, pay your bills and keep your mattress non-crunchy.
But the advent of newer, smaller, cheaper technologies – most notably, the smartphone – may mean that’s no longer the case. As smartphones and mobile devices become increasingly accessible to lower socioeconomic populations, some financial services companies are seeking to capitalize on the desire of un- and under-banked people to avoid traditional banks, and their preference for smartphones.
To take one example, Hamed Shahbazi founded Tio Networks in 1997 with the original intent of putting self-service kiosks in public places, so people who did not have home Internet access could deposit cash electronically and browse the web. In 2002, the company began using bill acceptors with those kiosks so customers could conduct financial transactions. Now he’s added a smartphone wallet app to that model, so his customers – who he says are primarily underbanked – can deposit funds via kiosk or walk-up retail locations, view their balance and transfer money to pay bills. Like a bank. Except not.
“We realized that a lot of under-banked folks were getting smartphones. In fact, they have a greater penetration of smartphones than even higher socioeconomic brackets,” Shahbazi explained. “They’re a lot more reliant on their smartphones than higher socioeconomic brackets, though, because they usually skip the in-home PC connection. We’ve focused on the mobile phone being the kiosk in your pocket.”
A Billion-Dollar Business
To be certain, the conversation about how to better reach the unbanked and under-banked is nothing new. Bankers have paid attention to this for years, but typically, the dialogue revolves around the question: “How do we bring them into the mainstream banking system?” Shahbazi, and others like him, seem not to make any sort of value judgment about these populations’ decision to remain unbanked, or “cash preferred,” as Shahbazi puts it, but instead accept that as fact and design products around it.
“This is an enormous sector. It’s huge. This is a billion-dollar business,” says Justin King, a federal policy liaison for the New America Foundation. “It runs the gamut from check cashers and payday lenders to rent-to-own businesses, and that’s even before you get into the online world. There’s an online segment to almost all of those business types.”
“Given their high uptake of smart phones, mobile apps, and even social media, there’s a real opportunity to improve financial access for these consumers,” said Rob Levy, director of research at the Center for Financial Services Innovation. “Some of the more advanced mobile apps enable additional features that can improve consumer financial capability, such as budgeting and expense tracking tools, or simply improve convenience, such as mobile check deposit or mobile bill pay, as with Tio.”
Dr. Michael D. Goodman, an associate professor and chair of the public policy department at the University of Massachusetts Dartmouth, says that the unbanked and under-banked sometimes have well-founded concerns about banking. In some cases, when one is living very close to the edge, it can make more sense for a person not to deal with a bank.
“I think for many people who’ve had bad experiences with unexpected fees and charges and those sorts of things, or who’ve gotten in trouble with overdraft protection and those kinds of issues that end up becoming loans, I think it’s understandable that they are leery of a formal banking relationship,” he said.
A Need For Regulation And Education
That’s not to say that Goodman is hunky-dory with leaving the unbanked system as-is.
“I still think the problem of the unbanked is a problem,” he adds. “In the long run, having a formal relationship with a financial service provider is in the best interest of households, because it’s a basis for building credit and a credit history, and because having a relationship with an institution is critical for purchasing a home or taking out a loan or starting a business.”
King, meanwhile, says the New America Foundation would like to see a regulatory structure in place that polices these alternative financial services and provides clarity over fees.
He added, “Many people put a really high premium on convenience, and I think that there’s some real vulnerability there for folks who are financially fragile where that can cost them money. I think for a lot of folks, banks and credit unions are a friendly home, but there’s no doubt that this sector is putting pressure on banks and credit unions to up their game in terms of mobile service and customer friendliness. To a certain extent, that competition is a good thing.”
At the end of the day, the onus for determining the good of a financial product or service falls squarely on the shoulders of the consumer, advocates say.
Goodman, who conducted extensive research on the unbanked and under-banked in New Bedford, says there is no lack of credit unions and mutual co-operative banks that cater specifically to disadvantaged populations. Financial education is what people really need.
At the end of the day, the onus for determining the good of a financial product or service falls squarely on the shoulders of the consumer, advocates say.
Levy concluded, “When it comes to basic transactional needs, the lines have so blurred between a prepaid card and a bank account, in terms of the consumer value proposition, that it ultimately becomes a consumer choice about what they most prefer and what works best for them.”
Email: lalix@thewarrengroup.com
