By: Drew Edwards
August 10, 2011
Banks have always talked about "banking the unbanked," however, what they meant was "how can (they) educate these consumers so they can become bankable." Banks have never been willing to change their product offerings to meet the real needs of this massive consumer group by adding services such as check cashing, money transfers, walk up bill payments, and now prepaid Visa/MC debit cards.
More and more today banks are focused on redefining their product set to meet the needs of these consumers by offering them the services they are buying today at the corner check casher or market. This shift in mentality has been pushed along by recent legislative changes in Washington (Durbin, etc.) that will significantly reduce the fee income these banks generate from deposit accounts, debit cards, and credit cards.
Forced to re-evaluate their fee income models, banks have spent the past year performing internal analysis that has helped them realize that as much as 25 percent of their current deposit account holders are actually going outside the bank to obtain these services. While they have long feared that check cashing, for example, would threaten the income they derive from overdraft fees on "free checking accounts," this same analysis is helping them realize that the consumers that ARE going outside the bank to cash checks ARE NOT the same consumers that pay them for overdrafts or for payday loans.
Chexar has been trying to convince bankers to offer these services for almost ten years now and we have seen the same two points of resistance consistently until this year. First, bankers grew up telling the world that "check cashing was predatory and bad - a dirty business." Second, if they did entertain the prospects of offering these types of services to "those people" it would be limited to their "under performing branches in those areas that have changed in demographic and were no longer populated by 'bankable' consumers."
Today, Walmart is the largest check casher in America with over 2,000 Walmart Money Centers directly targeting these consumers and offering them FDIC insured accounts in the form of Prepaid Visa/MC debit cards. This has both legitimized the business in the eyes of banks and given them a wakeup call. Now we are seeing major financial institutions developing new product sets for the underbanked consumers that are packaged as a branded "relationship" with the bank and offered as a CORE product in all branches. This is going to be a huge shift in the marketplace as banks are finally going to stand up to Walmart and say to this massive consumer group "we don't want to change you. We want to serve you and we aren't just going to play lip service to it by adding a single sideline product. We are going to provide you the whole package in a way that works for you."
Contrary to popular opinion, banks are uniquely positioned to serve this consumer and they have advantages over retailers in several areas. First, one of the hurdles for a retailer entering this space is regulatory licensing and compliance. Banks are exempt from this licensing and they are already in the compliance business. Second, retailers don't like to deal with cash and this consumer favors cash. Banks have the cash and the infrastructure to deal with it. Finally, transactional costs associated with offering these consumers check cashing, for example, are extremely high for a non-bank. For a bank, these costs are by definition "wholesale."
And while most advocates like to tout that this consumer "doesn't want to go to the bank," the facts say something to the contrary. In fact, a few years back the major retail banks in this country started charging "non-customers" that walk in and want to cash a check drawn on that bank. These are called "non-customer on-us checks". They started charging in many cases in hopes that the fee would drive the consumer to the check casher. But still today, each of these major banks cash staggering numbers of these items! There is proof that millions of these consumers every day are actually more comfortable doing their confidential financial transactions in a bank.
It is our opinion that all major banks will offer full product sets in their branches that serve as true alternatives to the check cashers within three years. And with Chexar's help, they will be able to offer these to all consumers at their teller lines, on their ATMs, on self service kiosks both in their lobbies and in the retailer's lobbies, and on mobile phones.
What's more, these services do not just appeal to the traditional underbanked consumers as we think of them today. The millennium generation today is very much into prepaid and instant gratification. They will likely never adopt the bank account as we know it today where you have transactions in transit, such as deposits and checks, that need to be reconciled and accounted for each month to determine your true balance. Prepaid cards give them instant updates on the available funds and overdrafts don't exist. As banks begin to repackage their accounts, they are utilizing technology like Chexar's that was built to "cash checks" and offering a "new kind of deposit" for a fee that includes instant risk free gratification. If prepaid is the "new bank account," then instant check availability is "the new deposit." And this works in a traditional account just as well as in a prepaid account.
As banks arm their branches with a complete product set for the underbanked consumer (including the millennium consumer), including the ability to cash or deposit risk-free any type and any size check, they stand to hold their own in the contest to win these valuable consumers.
Drew Edwards is CEO and founder of Chexar Networks, Inc.