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.