Washington was at the height of cherry blossom season. A light breeze and plenty of tourists. From the FDIC Headquarters we could watch the exterior repairs on the French Second Empire-style Old Executive Office Building across the street or look south to the Mall and Washington Monument. At meetings where credit unions visit banks, I start out as a visitor, maybe even a tourist. As this meeting progressed, I realized incrementally, “Credit Union are in front of banking the unbanked now. But we have to keep moving!”
People we see on TV (Sheila Bair, Chairman, FDIC and Martin J. Gruenberg, Vice Chairman, FDIC) were meeting with the FDIC Advisory Committee on Economic Inclusion. This is the group that produced FDIC’s important two-year pilot project to review affordable and responsible small-dollar loan programs in financial institutions. For two days, ComE-IN (nice acronym) was holding hearings on Safe Targeted Financial Products and Designing and Executing Broad-Based Financial Programs for Underserved LMI Consumers.
Michael S. Barr, Assistant Secretary for Financial Institutions at the Department of the Treasury, reviewed various estimates of the size of the US underbanked market, ranging from 15-40 million consumers. He voiced the perception that prepaid cards might be the vehicle of choice for financial institutions to deliver services to the unbanked. These cards are cost-efficient (less breakage or friction, he said). They are a niche product and all about customization. Prepaid cards can be a multi-pocket budgeting tool. Barr quoted a recent study showing that adding a savings component adds 8% to demand for the cards. He acknowledged that there were hurdles regulators had to address: excessive ID requirements, potential for excessive ODP charges, and unnecessary expense caused by Reg E Statement requirements.
What role do credit unions play in reintegrating our financial markets? Lois Kitsch, REAL Solutions National Program Director, wowed them all with her presentation of credit unions’ leadership in innovation to underserved markets. She outlined the steps and mis-steps credit unions have taken. Lessons learned included starting with an offering your potential members already use (checking accounts won’t substitute for check cashing), building a continuous path, and keeping an eye on sustainability.
Paul Grinde, Executive Vice President of CoVantage Credit Union, followed up with his Load-n-go card, a stripped down debit card. Alan Branson, COO at the Hope Community Credit Union, represented the community development side of credit unions. William Myers, Field Coach at REAL Solutions, pitched in with a review of business models that drew from cost analysis to find sustainabilty in serving emerging markets.
Jennifer Tescher, Director, Center for Financial Services Innovation, dug up some of the more surprising leading edge innovations:
- From South Africa, a mobile communications with which a bank account is opened by cell phone (snap a photo of yourself, another of your ID, send them to the bank). “With Wizzit, you have a bank in your pocket.”
- Trumpet Mobile is a pay-as-you-go phone which includes a prepaid card in the clamshell. The card and the phone are coordinated so that you can make debit card (PIN) purchases, ATM withdrawals and reload Trumpet Mobile airtime using money on the Trumpet CashCard. The package is sold at Walgreens and RadioShack and issued by The Bancorp Bank. In merchant sales the sale fees go to merchants (and if the card is reloaded at the merchant, that fee goes to the merchant).
- Ms. Tescher noted that 90% of financial institutions use ChexSystems, which creates a blockage for new accounts. As with credit data, some institutions are reaching deeper into the data to improve the risk profile and designing products safer for the institution and the client. They are using transaction accounts to generate relationships.
- A new type of savings is emerging, where customers build a savings target by buying savings at a retailer. For example, at Lowe’s a customer would buy a gift card as savings for a home improvement project. Financial institutions are excluded from this arena unless they can distribute cards outside the branch.
- Mango Mastercard allows cards, phone internet, but no cash. it can be reloaded by phone, direct deposit or Paypal.
- "We know the ‘what’, let’s figure out the ‘how.’”
- "Wells Fargo is built of 10,000 historical banks.”
- “The average US household spends $500 per year on lottery.”
- "We shouldn’t open accounts with ODP for low income people."
Tim Sloane, Vice President Client Services at Prepaid Advisory Service of Mercator Advisory Group illustrated that during 2004-2008, prepaid card openings grew 68%. Consumers are using several cards for budget or savings. Because to issuers, card costs are upfront, churn is the enemy. Extending the period consumers use the card (eg with direct deposit) makes the cards profitable. Many cards follow Reg E and have deposit insurance. Live internet, online bill pay and direct debit are popular features. A savings feature is up and coming. These cards look like bank accounts!
Why do financial institutions sit on the sidelines? The reluctance is based on the newness of the product, its turnover, and the necessity of scaling. Some don’t want to manage a channel which needs differentiation. Though prepaid has the same interchange rates as debit and credit, there is a suspicion that the fraud rate is related to the acquisition channel.
Why would consumers prefer prepaid over checking? Certainly for liquidity (no hold at CU, no check cashing fee), no Chexsystems checks, and less intrusive Know Your Customer requirements. But the primary interest is in avoiding overdraft fees. The legislation restricting ODP demonstrates consumer discontent around banks. Checking doesn’t meet the fundamental needs of the unbanked market.
Heidi Goldberg, for the BankON program of the National League of Cities, introduced their new resource website.
Kathleen Tullberg, Manager, Massachusetts Community & Banking Council, showed how her agency guided financial institutions into unbanked markets with product checklists and quick surveys.
Key Bank has been building a check cashing program in their bank for a decade. It’s now rolled out in 25% of their branches. The slow rollout has allowed the bank to bring the board along and integrate check cashing clients into a their vision of stepped customer demographics. The new account procedure de-emphasizes immediate cross sale and replaces it with a thirty day on-board campaign and a six month transition cross sale.
With the caliber of people attending this meeting, it isn't surprising that quite a few key points and observations were made:
Notably missing was committee member Elizabeth Warren, likely now engaged in her role as the protector of consumer and taxpayer interests in the bailout.
Part of the hearing was on CSpan, and later the whole 480 minutes will be segmented into several videos on the FDIC ComeIN web site.
To view a video of this meeting in its entirety, click here.