Monday, October 7, 2013

State, Federal Crackdowns Targetting Online Payday Lenders Intensify

State and federal regulators are turning up the heat on companies making payday loans online and claiming they are immune from laws against such loans because they are operated by Native American tribes.

Last week, Arkansas Attorney General Dustin McDaniel announced a "consumer protection lawsuit" against three companies and two individuals accused of colluding to offer payday loans online at usurious rates to Arkansans and falsely claiming tribal affiliation.

Saturday, September 21, 2013

Fighting Global Poverty through More Inclusive Payment Systems

Can electronic payment systems be adapted to improve access to financial services in the developing world? A new report from the Bill & Melinda Gates Foundation says Yes, and that it can be done in a manner that benefits all stakeholders.

Fighting Poverty Profitably: Transforming the economics of payments to build sustainable, inclusive financial systems., (.pdf) prepared by the Gates Foundation and McKinsey & Company, provides an extensive analysis of the economics of payment systems around the world and concludes that costs associated with operating these systems could be slashed by as much as 90% simply by going digital. Plus, these systems can be made more efficient, sustainable and accessible to the poor, while also boosting revenues for financial services providers, the report states.

There are 2.5 billion people in the world who live on less than $2.50 a month; and only 16% of these people have access to formal bank accounts.

"Poor families have incredibly complex financial lives, but the tools available to them to manage their finances don't match up," said Roger Voorhies, Director of the Foundation's Financial Services for the Poor program. "People need affordable, efficient and secure ways to send and receive money, and this report shows how this can be achieved, especially through digital transactions that can reduce costs by up to 90%."

The report draws on lessons learned in developed countries (like the U.S.) that highlight how digital payments are cheaper, more efficient and ultimately more sustainable, and they create potential new revenue opportunities for banks and other financial services providers.

Here are some key findings highlighted in Fighting Poverty Profitably: Transforming the economics of payments to build sustainable, inclusive financial systems:

  • Digital payment systems offer the highest potential for financial inclusion. The are more efficient and can reduce transaction costs by up to 90%, plus offer more opportunities for revenues from additional products and services.
  • There are no perfect systems - payment systems in all countries have the potential to lower costs and broaden access.
  • Models where fees are based on customer activity are best suited for sustainable access.
  • Innovations hold increasing potential for improving payment systems as new technologies, revenue sources and models emerge.
  • The highest levels of financial inclusion are in countries where access to digital payments is widespread. In those countries where at least 70% of people pay digitally, financial inclusion exceeds 85%.
  • To foster financial inclusion, regulation should focus more on systemic issues and less on individual financial institutions.

Wednesday, September 11, 2013

Going Mainstream: Underbanked are Becoming Alternatively Banked

There's a movement afoot to deep-six labels like "unbanked" and "underbanked" in favor of a more inclusive moniker, like alternatively banked. It's easy to see why: hardly a week passes when some alternative to traditional bank checking accounts gets introduced. These typically are tied to reloadable prepaid debit cards, and increasingly, mobile banking technologies. And many are functionally indistinguishable from checking accounts.

This week's news: Kmart is making a new play for the unbanked and the federal Department of Health and Human Services (HHS) has issued a ruling under Obamacare requiring health plans to accept prepaid debit cards.

An estimated 8.5 million Americans without health insurance would have a tough time qualify for tax credits toward health insurance using the new, online marketplaces created under Obamacare if plan providers banned certain types of payments such as prepaid cards and money orders. Prepaid cards have become immensely popular with underbanked Americans, as well as the banking public, and often seem indistinguishable from debit-card enabled checking accounts.

Now a new ruling issued by HHS requires insurers to accept just about every generally accepted method of payment from enrollees, except cash. The ruling came at the urging of consumer groups and tax preparers who do a lot of business with the financially underserved.

Attention Kmart Shoppers

Kmart, a wholly-owned subsidiary of Sears Holdings Corporation,is not a stranger to the underbanked. It sells re-loadable prepaid cards and houses Western Union money transfer kiosks and ATMs in many of its locations. Plus, Kmart + Sears are the only major retailers offering customer layaway plans. Most recently, Kmart expanded its layaway program to include on-line as well as in-store purchases.

On Monday, Kmart announced a new cash-cashing service for members of its rewards program. For "a low fee of $3 or less" members can now cash government-issued checks for amounts up to $2,000, payroll checks for amounts up to $1,500 and personal checks for up to $400, the company said. The pricing is pretty competitive with Walmart.

This is not the first foray by Sears into the world of financial services. Thirty years ago the then retailing giant made a play for becoming a financial services conglomerate: it introduced the Discover Card, owned a brokerage house and even a credit card bank. Eventually Sears shed those units. Now, I can't help but wonder, are in-store financial services counters a next step for Kmart? With Sears behind the name, Kmart could pose a challenge to Walmart's premier position as banker to America's un/under-banked.

Saturday, August 10, 2013

Crackdown on Payday Lenders that Skirt Restrictions

Saturday, August 10, 2013

Payday lenders have operated below the radar for years. Not anymore. These days at least 7 state and federal agencies are scrutinizing payday lenders, especially those making loans via the Internet.

Payday lenders have been flocking to the Internet for the past several years to sidestep state and local restrictions on their activities. Earlier this year federal bank regulators told banks and credit unions to think twice before getting into bed with payday lenders, especially those that skirt the law. Soon after, the regulators warned banks and credit unions that they would be scrutinizing deposit advance lending in future supervisory exams.

Tuesday, July 23, 2013

International Remittances: New Models Offer Some Growth

International remittances between consumers is a large and growing market. New branchless models are contributing to the growth, but not overwhelmingly.

According to a new report by CGAP (the Consultative Group to Assist the Poor),remittances to developing countries will top $515 billion this year. Since 2004, these remittance flows have been growing at a compound annual growth rate of 12%, CGAP reports.

"The sheer scale of international remittance flows speaks to the potential for development impact," CCAP wrote. And for greater financial inclusion.

The report - International Remittances and Branchless Banking: Emerging Models - was released last week. It is the third in a series examining new and creative models for facilitating affordable, accessible transparent remittance services. The bottom line: innovations abound (think mobile wallets), leading to increasing deployments,but transaction volumes and revenues need to grow.

"Are international remittances through branchless banking helping enable access to a range of financial services for the unbanked?" the report asks. Its conclusion:"not yet."

Monday, July 15, 2013

Blow Back Over Payroll Cards Reaches Washington

The blow back over payroll cards just became heftier. An influential group of U.S. Senators wants federal investigations into fees and practices associated with these reloadable prepaid debit cards that have become a popular way for employers to cut payroll costs.

In a letter addressed to Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB), the Senators asked the consumer watchdog agency to render an opinion on whether employers who require employees to accept pay via a prepaid debit card are in violation of Regulation E.

Sunday, July 7, 2013

Employers Face Blowback Over Payroll Cards

Reloadable prepaid debit cards are becoming bank accounts for a new generation of consumers. These consumers are younger, tech-savvy, and they want anytime, anyplace access to their accounts. They are not necessarily unbankable. Many say they just don't like fees and policies. Now some of that blow back is being directed at nonbanks.

According to a July 3 article appearing in the American Banker, Green Dot Corp. is coming under fire for placing long funds availability holds on personal checks deposited electronically to GoBank.

Moble Phone App GoBank

Thursday, June 13, 2013

Changing Names Reflect New Market Dynamics

Last week the Center for Financial Services Innovation (CFSI) announced it was changing the name of its flagship event, the Underbanked Financial Services Forum. The new name - Emerge: the Forum on Consumer Financial Services Innovation - aims to reflect the changing nature of the underserved market, CFSI said.

Tuesday, June 11, 2013

Underbanked Trifecta: Strivers, Millennials & the Debanked

When I began this blog, in 2009, the notion that nearly a fifth of American households had little to no interaction with federally insured financial institutions wasn't much of a conversation starter. These days, even more Americans are unbanked or underbanked - about 1 in 4 households according to the FDIC.

But it's not as bad as it might seem. In the U.S. today there's a veritable army of companies vying for a piece of the $78 billion a year revenue pie that is the market for alternative banking products. Few of these companies would have stood a chance of attracting investors just a few years ago. But awareness is spreading - an awareness that first prompted me to launch this blog: there's a huge opportunity banks and credit unions are missing out on unless they embrace alternative customer service strategies.

Alternative is the operative word here, because increasingly Americans are choosing not to abide traditional banking institutions, with their stuffy rules, inconvenient offices and hours, and onerous overdraft charges. This is especially true of the so-called Millennial Generation: the estimated 80 million Americans between the ages of 18 and 34 who grew up never knowing what it was like to live without PCs, mobile phones or the Internet.

"This is a generational shift we're seeing," Jennifer Tescher, CEO of the Center for Financial Services Innovation (CFSI), observed last week at the start of the 8th Annual Underbanked Financial Services Forum. Harris Interactive recently polled a group of Millennials and found that although most had bank accounts (over 90%) nearly half (45%) also did business with non-bank providers of financial services, such as prepaid card, check cashing and payday loan companies.

There's no clear-cut definition of underbanked in America today. Some consumers are kept out of the system because of economic circumstance. Visa, the card giant, uses the term "strivers" to describe this demographic. The average "striver" is 42, is more than likely female and black/hispanic, and ends each month about $200 in debt, says Lisa McFarland, a Visa executive who spoke at the Underbanked Forum.

 Increasing numbers, however, are disgruntled consumers; the term "debanked" often is used to describe this group. "While the Unbanked are often misperceived as disadvantaged consumers living outside mainstream society, the Debanked are anything but underprivileged," says Ron Shevlin, Senior Analyst with the consultancy Aite Group. The debanked expect features and functions that are similar, yet better, than checking accounts.

"They want instant gratification," said Terri Ferrisi, Vice President at Cachet Financial Solutions. Cachet has developed a mobile check deposit solution that is used by several prepaid and check-cashing services, including, Ingo, the Good Funds Network (nee Chexar).

Several products and services that were demonstrated and discussed last week respond to that need for instant gratification, leading one speaker to quip about the new "just in time" consumer service model. Many of these will be described and discussed in future posts. These are a few of the more novel alternatives that were showcased:
eNova is an online micro-lender that says it aims to "fill the gap" between traditional lending products and payday loans - was showcasing NetCredit. NetCredit is used by customers in 5 countries and 32 U.S. states, who together have taken more than 4 million loans totaling over $3.5 billion since 2012. NetCredit loans are available for amounts up to $6,000 at rates that are "a fraction of the typical payday lending instrument," company executives noted during a demonstration.

Fuze is a payment network that rides on existing POS card network rails and enables transactions to any payment card from any other card. The company's reCHARGE service "fuzes" together existing networks to support activities like bill payments and prepaid card loads that get handled like any other transaction at the merchant checkout. ReCHARGE is up and running with several retailers, including Old Navy, as well as check cashing establishments.

Mitek, a San Diego firm that holds patents on several mobile image capture processes has developed a consumer bill-pay app for smartphones. It works pretty much like photo check deposit products. "This may be a transitory product, as paper bills are going away," said Mike Strange, Mitek Chief Technology Officer. But for those who still receive bills, this app saves money, helps them to avoid late fees and provides greater convenience.

PayPerks pairs engaging tutorials about products features and benefits with the excitement of sweepstakes to promote financial behavior changes that are good for consumers and make money for financial services providers. It won an innovators challenge at the start of the Forum. More than a dozen new products and services competed in that challenge

Saturday, May 18, 2013

Tech Companies Find Greenfield Opps In Underserved Markets

May 18, 2013
There is a common perception that unbanked and underbanked consumers (collectively, the "financially underserved")are poor. This may be the case in some countries (notably those in the developing world). But not in the U.S., where many choose to shun banks and credit unions for some but not all of their financial services needs.

The FDIC's defines an "underbanked" household is one where one or more member has a bank account but they also use prepaid debit cards. And according to new report, released this month by the Center for Financial Services Innovation (CFSI) and Core Innovation Capital, the underbanked market in the U.S. is sizable and robust, and made all the more attractive by an emerging market of financial services technology start ups.

"The underbanked market in the United States is currently estimated at $78 billion in annual revenue, serving 68 million consumers across 22 different financial product types," the two organizations stated in a press release.

The report, Financial Technology Trends in the Underbanked Market, highlights recent innovations in mobile technology, computing power, and data availability that are driving development of high-quality products and services for the underbanked. Morgan Stanley provided both strategic input and financial support for the report.

"The growing number and sophistication of companies point to the incredible opportunity presented by the underbanked market," said Arjan Schutte, Managing Partner at Core. 

The report (click here to download) IDs four key trends impacting the underbanked market, each illustrated with a real case study of companies that successfully leveraged these trends. Success comes with:
  1. Harnessing social networks;
  2. Solving the cash in/out problem;
  3. Leveraging big data for better risk management; and
  4. Scaling up to accommodate B2B2C (business to business to consumer) transactions
Making Cash Pay Easier in an Electronic World
Recently, while attending a payments conference, I witnessed a demonstration of an innovative "electronic" cash product that addresses #2. PayNearMe, is a cash transaction network consumers can use to pay for online purchases, bill payments and the like. Online shoppers and bill payers who have the option of using PayNearMe receive bar-coded receipts which they take to payment locations (such as thousands of 7-Eleven convenience stores) to be scanned and tender their cash. The company claims transactions on the network have been growing at rates in excess of 30% a month.

Danny Shader, PayNearMe's CEO, demonstrated a new smartphone-enabled bar code option for making cash payments the company developed. He said both Progreso Financiero, a provider of financial services to the Hispanic community, and Greyhound, the bus line, were already offering customers PayNearMe mobile.

Dave Leach, President and CEO at Greyhound, said that within days of adding the mobile option 20% of the company's PayNearMe payments were coming in that way. "Our passengers represent a wide cross-section of the public, but the one thing they have in common is their smartphones," he said.

"This is a service that every bank should provide," Shader said.

Monday, May 13, 2013

Understanding the Underbanked

"No sign" over bank cards in the shape of a house.

Atlanta-based FactorTrust is partnering with FICO, the credit scoring folks, to produce a new quarterly report on underbanked Americans  in hopes that it will lead to more and better credit decisions for the financially underserved.

FactorTrust collects and analyzes non-traditional data sources (e.g. prepaid debit card usage and social media) to help lenders assess the risk of lending to consumers who have thin credit files, or none at all. The FactorTrust Underbanked Index uses a variety of data sources and more than 100 million distinct transaction records covering all phases of the consumer credit life cycle, with real-time updates.The first quarterly report is due out this month.

"The demand for alternative financial services continues to grow as consumers look for instant, efficient and secure products that they haven't been able to get from traditional lenders," said Greg Rable, CEO at FactorTrust.

G20 Financial Inclusion Indicators

This is not just a U.S. problem. Worldwide, but especially in developing countries, financial inclusion has been an elusive goal.

Now a group of organizations affiliated with the World Bank has launched a Web site dedicated to Financial Inclusion Indicators. Endorsed by G20 leaders, the Web site is interactive and features basic data on financial inclusion in 192 countries.

The aim is to help countries get a handle on how well financial inclusion initiatives are doing in terms of access and usage. "Over time, new indicators that provide deeper coverage of all financial services and various delivery channels as well as measure of quality will be developed so as to provide a more complete picture of financial inclusion," the group said in a statement.

The Global Partnership for Financial Inclusion is behind the initiative; it's member roster includes CGAP (the Consultative Group to Assist the Poor) and the International Finance Corporation (IFC); both are affiliated with the World Bank.

You can learn more about the Financial Inclusion Indicators at the Partnership's Web site.

Friday, April 26, 2013

Regulators Eye Bank Payday Lending

The nation's lead bank regulators want banks to think twice before they get involved with payday lending. Supervisory "guidance" proposed this week by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) would have examiners closely scrutinize banks offering deposit advance products.

Deposit advances look and act like payday loans: they're small-dollar, short-term loans made available to bank customers who receive recurring Direct Deposits. The products have been a point of contention with consumer groups and even regulators in the past because like payday loans deposit advances come with high-interest rates and unrealistic repayment schemes. The bank gets first dibs on any funds that come in via Direct Deposit so as to receive repayment of the deposit advance in one lump sum; that, in turn, leaves the borrower with insufficient funds to cover other expenses and little choice but to borrow again.

The Consumer Financial Protection Bureau has been looking into payday loans and deposit advances; it held a series of field hearings last year and this week it published a detailed white paper and initial data findings on payday lending and deposit advance loans. Reflecting the cycle of debt scenario opponents invoke, the CFPB said its research revealed the median deposit advance made by a bank was for $180, yet the average daily advance balance per borrower was $343.

Meanwhile, measures have been introduced by lawmakers in several states and localities that aim to either regulate or outright ban payday lenders.

In a press release announcing the proposed guidance, the OCC said it "encourages national banks and federal savings associations to respond to customers' short-term credit needs. However, deposit advance products can pose a variety of safety an soundness, compliance, consumer protection and other risks."

A press release from the FDIC expressed the same sentiments, but had this to add: "If structure properly, small-dollar loans can provide a safe and affordable means for borrowers to transition away from reliance on high-cost debit products. A number of banks are currently offering such reasonably6 priced small-dollar loans at reasonable terms to their customers. The FDIC encourages banks to continue to offer these products, consistent with safety and soundness and other supervisory considerations."

Consumer groups lauded the agency's proposal, but took a swipe at the Federal Reserve Board which has remained mum on the subject despite having regulatory authority over some banking companies that make these controversial loans.

The FDIC and OCC both said they are rescinding previous guidance on deposit advances by banks, and they gave interested parties 30 days to comment on their latest proposals.

Tuesday, April 2, 2013

Mobility Can Help Bank Underdserved, Sometimes

Mobile banking and payments are a growing part of the commercial landscape. Also a popular and cost-effective way to mainstream the financially underserved. Especially here in the U.S.

According to the Federal Reserve Board, 90% of underbanked Americans have mobile phones and 49% of those consumers had used mobile devices to conduct banking during the 12-months leading up to November 2012 that was up from 29% a year earlier. The Fed's report also reveals that about one in three unbanked Americans has a smartphone, which makes these individuals candidates for mobile financial services.

The Fed's data was contained in a report on mobile financial services released last week, the second such report out of the Fed in as many years.

That mobile phones can help mainstream the financially underserved is pretty much a no-brainer. What's fascinating, however, is how many different types of payments can be facilitated by mobile technologies.

Last month, while attending the Bank Administration Institute's Payments Connect conference I had an opportunity to witness a demonstration of one of the newest twists in mobile financial services: a mobile cash payment option called PayNearMe.

PayNearMe began as an online cash payment option; sellers render bar code receipts which buyers can then have scanned at thousands of payment locations (mostly 7-Eleven stores). Now it's being made available to brick and mortar merchants who can have bar-coded receipts sent to customers' mobiles. Greyhound bus lines was among the first to sign on. Several property management companies are using the service too, for rent collections, said Danny Shader, PayNearMe's CEO.

"Our passengers represent a wide cross-section of the public, but the one thing they have in common is their smart phones," said Dave Leach, Greyhound's President and CEO.

Some Women Remain Underserved
While mobile phones may be responsible for helping to mainstream the financially underserved in the U.S., that's not necessarily the case in other countries.

A new report from card company Visa and GSMA, an international association representing mobile companies, reveals that women in developing countries are a huge underserved market for mobile financial services. This despite the fact that women often handle household finances.

Daryl Collins, co-author of the report and a Director at the consultancy Bankable Frontier Associates,said the research shows that "low-income women undertake complex financial management for their households using a set of often substandard instruments."

Chris Locke, Managing Director at GSMA, said the research "clearly demonstrates that women play a critical role in the success of mobile financial services deployment."


Monday, April 1, 2013

Feds Want Tighter Money Laundering Rules for Prepaid Debit Cards



Prepaid card are a great stand-in for cash. Annual payroll card loads alone are expected to reach $68.9 billion by 2017, according to a new report from Aite Group. That’s more than twice the total loaded onto payroll cards last year ($34.1 billion, by Aite’s reckoning). 

Typically branded with a Visa or MasterCard logo, payroll cards are used as alternatives to cash payments for unbanked and underbanked workers. 

Payroll cards are just one 18 different types of reloadable prepaid debit cards identified by the consultancy Mercator Advisory Group which follows the prepaid card space. The Federal Reserve Bank of Atlanta estimates $202 billion will be loaded onto government benefits, payroll and other categories of prepaid cards this year, up from $28 billion in 2009.

That’s a lot of cash, and now the federal regulators want to be sure criminals aren’t using the cards to smuggle ill-gotten monies out of the country. 

According to an article appearing last week in The Hill, a daily covering Congress, the White House is now reviewing regulations developed by the Financial Crimes Enforcement Network (FinCEN) that would require travelers to inform U.S. Customs officials if they’re carrying prepaid cards with more than $10,000 in value.

Not surprisingly, the planned regs have drawn opposition from banks and prepaid card companies. Some have suggested they discriminate against the unbanked and underbanked.

The Network Branded Prepaid Card Association (NBPCA) said in a comment letter that the plan creates numerous problems; that a case can be made even that it violates state and federal financial privacy statutes.

“In addition,” NBPCA wrote, “prepaid access devices are not at all similar to currency, monetary or other bearer payment instruments and indeed are distinct as payments methods in that their use requires pre-authorization, similar to debit or credit cards.”

Some opponents have met with Administration officials, The Hill reports. But it’s unclear if that’s going to make a difference, as at least one Senate aide told the daily that getting the new regs in place is a to-do item for Democrats in that chamber.

Friday, March 22, 2013

Pressure Mounts on Payday Lenders

To the growing list of adversaries of payday lenders add JPMorgan Chase. The mega-bank this week announced a series of moves intended to make it tougher for payday and other short-term lenders to decimate borrowers’ bank accounts.

Chase said it wants to protect its customers from situations where a payday or similar type of short-term lender presents and re-presents checks or ACH payments repeatedly and deceptively for collection. So, beginning June 1 the bank will only charge a customer one return item fee in a 30-day period if it believes the lender is not acting “in the spirit of their signed agreement with the customer.”

The bank also plans to start working with NACHA, a private sector group that writes and enforces rules for the ACH payment system, to ferret out short-term lenders who make excessive presentments.

Chase also said it plans to make it easier for consumers to challenge payments when abusive collections techniques are suspected.

When a consumer with a bank account takes out a loan with a payday lender that borrower agrees to allow the lender access to their accounts to collect repayments. The thinking is that there should be sufficient funds in the account once the borrower receives their next paycheck (which, of course, may be an ACH Direct Deposit). The reality is that seldom is the case. In fact, the average borrower ends up indebted for 5 months and pays $520 in finance charges on loans averaging $375, according to a new report from the Pew Charitable Trusts.

The Pew Trusts has a Safe Small-Dollar Loans Research Project, which has conducted extensive surveying and analysis. Last month the group released its second in a series of reports on payday lending in America,titled How Borrowers Choose & RepayPayday Loans. Here are some additional data points presented in that report.

  • Only 14% of recently surveyed borrowers can afford enough out of their monthly budgets to repay an average payday loan;
  • 41% needed cash infusions to pay off their payday loans; and
  • 27% had experienced bank account overdrafts atleast once due to payments collected by payday lenders.

The report doesn’t stop at its condemnation of non-banks, either, arguing that “although bank deposit advances are advertised as two-week products, average customers end up indebted for nearly half the year." That’s why the move by JPMorgan Chase – which is home to tens of millions of consumer checking accounts – is good PR. It also makes good business sense.

At least a dozen states and scores of municipalities have under consideration, or already have passed, laws aimed at curbing payday lending, and a group of ranking Senate Democrats has called on regulators to crack down on banks that do business with payday lenders.

Even before this latest plea from lawmakers the Comptroller of the Currency, a federal bank agency with supervisory authority over Chase, had been making it clear that it’s not keen on banks having close ties to payday lenders. In September the regulator rapped a bank in Florida on the knuckles, contending that its relationship with a payday lender could “raise heightened risks to the bank.”

Sunday, March 3, 2013

Banking Giants Back Efforts to Boost Financial Inclusion

Piggy bank with silver coinBanking giant Citicorp and Visa Inc., the card network, are backing the micro-lender Accion in a worldwide effort to accelerate financial inclusion.

Financial Inclusion 2020 is a program of the Center for Financial Inclusion at Accion. Created in 2008, It unites public and private sector entities, along with NGOs and other relevant parties to create conditions that foster comprehensive financial inclusion.

Over 2 billion people worldwide lack access to basic financial services, missing out on opportunities to contribute to their countries' growth," said Elisabeth Rhyne, Managing Director of the Center.

"Expanding financial inclusion is both a development imperative for underserved communities and a forward-looking approach to unlockint the economic potential of new markets," said Pamela Flaherty, President and CEO of the Citi Foundation and Director of Corporate Citizenship at the bank.

Michael Schlein, President and CEO at Accion explained the effort this way: "Our vision is to build a financially inclusive world where everyone has access to financial tools that can improve their lives." And the best way to do that is to include all relevant parties. "If we can get a broader group of stakeholders to see themselves as part of the movement to build economic opportunity for all, this will be the moment when financial inclusion begins to be a reality," Schlein added.

Plans are for the group to present A Roadmap to Financial Inclusion in October during the Financial Inclusion 2020 Global Forum in London.

Saturday, March 2, 2013

Payroll Cards Gain with Rising Tide of Unbanked & Underbanked

Payroll cards have been available for decades, but the market is really taking off now, with employers expected to load nearly $69 billion on to the cards in 2017, up from $34.1 billion in 2012, says a new report from Aite Group. That works out to a compounded annual growth rate (CAGR) of 19.9%!

First introduced in the 1980s, payroll cards special purpose re-loadable debit cards used by businesses that want paperless payroll but for various reasons they can't get all employees to sign up for Direct Deposit.

A few years back, retailing giant Walmart made headlines, in fact, when it mandated payroll cards for all employees not being paid by Direct Deposit. Now the prepaid debit card company NetSpend is teaming with CompuPay, a leading provider of integrated payroll services, to support a new payroll card program, Skylight PayOptions, for CompuPay customers.

The Skylight PayOptions program is designed specifically for companies with unbanked and under banked employees, the companies stated. And it conforms with all federal and state regulations that govern prepaid debit card programs, including free access to money via ATMs, branch withdrawals and checks.

"The opportunity for payroll cards is far more significant than that for Direct Deposit," says Madeline Aufseeser, Senior Analyst at Aite.

In 2012 Aite conducted a consumer survey that revealed recently "debanked" Americans consider prepaid cards better and cheaper than checking accounts.

Tuesday, February 12, 2013

How Well are Banks at Reaching Financially Underserved?

United Stated dollar sign puzzle
Anyone who still wonders why there are so many unbanked and underbanked in America here's the Number 1 reason: only 4 in 10 U.S. banks design products that address the basic financial needs of low-income consumers.

The data is contained in a report released last month by the FDIC.

FDIC Chair Martin J. Gruenberg said banks have made some real advances in serving the needs of this segment of consumers. And that has been the case; in 2009 the FDIC reported that only 25 percent of banks targeted marketing to reach the unbanked and underbanked. However, the country's unbanked population grew during those same 2 years, by almost 1 million. (Check out this previous post for more details from a report on unbanked and underbanked consumers the FDIC issued in September 2012.)

The 2011 FDIC Report of Banks' Efforts to Serve the Unbanked and Underbanked draws from results of a voluntary online questionnaire completed by over 500 U.S. banks representing various asset sizes. It addresses marketing and retail strategies, basic account features, auxiliary products (think money orders, check cashing and prepaid debit cards) and financial education and outreach. And it includes detailed data sets.

Among the less than stellar findings reported:
  • Almost all surveyed banks require an initial deposit of at least $100 to open a basic checking account
  • 20% impose monthly service fees of $3.00 or more; although nearly two-thirds charge no monthly fees when account-holders use Direct Deposit.
  • Only 21% offer "checkless," card-based checking accounts
  • 20% offer "second chance" accounts to individuals who don't qualify for basic checking accounts
  • 71% cash payroll checks; 47% offer this service to both account-holders and non-account-holders
  • 68% offered domestic remittances to basic account-holders
  • 11% provide domestic remittances to non-customers; 9% offer international remittances to non-customers

In addition, 80% of surveyed banks offer small-dollar unsecured personal loans; the minimum loan amount at most (53%) is between $1,000 and $2,500.

There are no minimums on small-dollar loans at 43% of banks. Generally, these loans are made with repayment terms of 90 days or more and annualized interest rates under 36%. Typically, the banks offering small-dollar loans approve such loans in less than 24 hours.
How Can Banks Reach the Underserved?

The FDIC report also highlights opportunities to increase access to basic financial services. These are pretty basic suggestions, such as "Expand Offerings of Basic, Low-Cost Checking and Savings Deposit Accounts." Banks can do this by offering low-cost card-based (checkless) checking accounts, the report noted.

The report also suggests banks broaden offerings to underserved households to include, for example, check cashing, money orders and remittances.

It also recommends that banks enhance marketing of small-dollar loan products, noting that at least one-third of consumers who borrow from payday lenders and pawn shops complain that banks don't offer small-dollar loan products.

Perhaps most importantly the report urges banks to partner with community organizations to promote bank account ownership. Like the BankOn programs that have been springing up all over the country. (Check this post for more about BankOn programs.)

The 2011 FDIC Report of Banks' Efforts to Serve the Unbanked and Underbanked is available for downloading from the FDIC's website.

Senators Blast Bank Payday Loans

January 10, 2013 by Patti Murphy.

A group of ranking Democratic Senators - led by Connecticut's Richard Blumenthal - this week urged federal bank regulators to crack down on banks that offer loan products that resemble payday loans in most respects except by name..

The letter, sent earlier this week, echoes concerns expressed recently by the Center for Responsible Lending in a letter to the Office of the Comptroller of the Currency (OCC) complaining about payday lending practices of OCC-supervised banks.Regulators discourage banks from offering payday loans. However, several banks have devloped short-term loan products that get repaid after an expected Direct Deposit is received.

"These bank payday loans are widely recognized as predatory products designed to trap low-income consumers in a cycle of debt," Blumenthal wrote in a letter addressed to the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency (OCC). Blumenthal was joined by Senators Richard J. Durbin (D-IL),Charles Schumer (D-NY), Sherrod Brown (D-OH) and Tom Udall (D-NM). A copy of the letter was distributed by his office yesterday.

Connecticut is one of 14 states that ban banks from making payday loans. However, Blumenthal argues that the products many banks offer look and act a lot like the payday loan products nonbanks offer. That is, banks deposit the loans directly into customer checking accounts and debits the loan amount and interest from subsequent Direct Deposits. Typically, if there are insufficient funds to repay the loan after 35 days, banks repay themselves nonetheless, leading to potential overdrafts and a cycle of debt.

In the letter to regulators, the Senators said the typical bank payday borrower takes out 16 such loans a year, and some take out as many as 20 or 30 loans in a single year. And they urged "meaningful regulatory action" that assures this end result.

"Bank payday loans increase the ranks of the unbanked by making checking accounts unsafe for vulnerable consumers, a result clearly inconsistent with a safe and sound banking system. And payday lending poses serious reputational risks to any financial institution," the letter states. "As the agencies responsible for the safety and soundness of the financial institutions you supervise, you are compelled to stop them from making payday loans and from preventing additional banks from beginning to do so."

Getting a Handle on America's Underbanked

According to the 2011 National Survey of Unbanked and Underbanked Households on in 12 American households, representing at least 51 million adults, is underbanked. (Click here for previous coverage of the survey.) But some experts warn the FDIC's data may overstate the problem.


The Center for American Progress (CAP), a progressive think tank, for example, has asked the agency to reconsider using prepaid cards as a sole indicator of a household being underbanked.

Joe Valenti, Director of Asset Building at CAP, argues in a letter to the FDIC that the agency's survey doesn't discern which households are using prepaid debit as substitutes for bank accounts, as opposed to other reasons (such convenience, safety and budgeting). He also argues that payroll cards are bank account equivalents, so folks who are given prepaid cards for accepting Direct Deposits of payroll are effectively banked.

Valenti and CAP are not alone. I have heard this complaint from several quarters, especially given the rapid pace of growth in prepaid debit (especially network branded cards - think Visa and MasterCard).

The Boston-based consultancy Aite Group, which follows the prepaid space, predicts the U.S. market for prepaid debit cards (including payroll cards) will grow at a compounded annual rate of 19.9% through 2016 when the market is expected to top $168 billion. In 2011, prepaid debit was a $70 billion market. And those predictions preceded announcements last year that Visa would soon support mobile check deposits to prepaid cards, and that American Express was teaming up with Walmart to offer Bluebird, a branded prepaid card that's being marketed as an alternative to bank accounts.


Heck, even I have used a network-branded prepaid card, and I'm by no means underbanked. So, maybe it is time to refine that definition.