Mainstreaming America's Unbanked

November 14, 2011

Some U.S. banks are having second thoughts about serving the poor and beginning to mimic non-bank financial services providers like Walmart and check cashing houses. That's the upshot of a November 11th article in American Banker, the banking industry's daily newspaper. (Please note, you may need a subscription to access the American Banker online.)

The article - Banks Begin Rolling Out Services for the Poor - discusses several banks, including Regions Financial Corp., Birmingham, AL,, U.S. Bancorp, Minneapolis, and KeyCorp, Cleveland. And it suggests banks are being motivated by a need to find new revenue-generating services to replace those lost to a new law capping debit card fees. And that may be true for some banks. But KeyCorp isn't new to this market. It's been quite active in addressing the underserved consumers, and in 2010 began offering an alternative to payday loans. (See this previous post.)

Debit interchange refers to the fee paid by a merchant to a card-issuing bank each time the merchant accepts payment from as customer using one of the issuing bank's cards. Think of it as the wholesale price that various other parties to the transaction (processors, networks and the sales channel) markup to arrive at the merchant discount. (Credit cards are priced similarly.)

Interchange is a huge money-maker for those banks that issue debit cards. The consultancy Aite Group estimates that U.S. banks issuing MasterCard and Visa cards were on course to collect a combined $19 billion in debit card interchange, alone, this year, until the so-called Durbin Amendment took effect.

The Durbin Amendment was a last-minute addition to the massive regulatory reform package signed into law last year  (the Dodd-Frank Act) that instructed the Federal Reserve to cap debit interchange at a standard rate that it deemed to be "reasonable" and proportional to the costs involved. The measure, backed by the massive retailing sector, capped debit card interchange at about 22-cents per transaction. Previously, the going rate for debit interchange exceeded 40-cents. (Read this previous post for a more detailed discussion of the Durbin Amendment and its potential impact on the unbanked.)

In response to the debit interchange price caps, which went into effect last month, many large banks began instituting new cardholder fees - a move many ended up reversing in response to public outrage. One of the banks that was on the hot seat - Wells Fargo - is mentioned in the American Banker piece, and credited with offering a new Spanish-language financial education classes in 13 cities, and its international money transfer service offering.

Amomg adults living in Asia, Africa and Latin America, 2.2 billion (62%) are unbanked