In the past year, countless prepaid cards have flooded the nation to target the large portion of the American population that is either unbanked or underbanked. Acknowledging that the market for these alternative financial products is rapidly growing, more tech companies are catering to this group of consumers.
According to a recent survey by the FDIC, in 2011, 8.2 percent of U.S. households do not have bank accounts, up from 7.6 percent in 2009. And 20.1 percent of U.S. households have bank accounts, but rely on alternative channels for financial services (e.g., check-cashing, payday loans and money orders), up from 18.2 percent in 2009.
Even traditional banks have jumped on the bandwagon to compete against non-bank prepaid-card companies and get a piece of the prepaid-card market.
Last fall, Regions Bank started rolling out a suite of products and services that included a prepaid card and check-cashing and Western Union services. In July, Chase, the largest bank in the country, launched the Liquid prepaid card that does almost everything that a regular Chase checking account can do.
“As banks have steadily inflated the cost of banking, more and more depositors are seeking substitutes for bank accounts with escalating costs, high minimum balances and surprise fees,” said Jim Wells, president of Wellspring Consulting, a firm that specializes in solutions for the unbanked and underbanked.
But, with the proliferation of financial technology, the focus is shifting to serving the unbanked and underbanked through mobile devices.
Last week, at a Finovate conference, two companies demonstrated their versions of a mobile wallet for the unbanked or underbanked consumer.
The CAT (Cash and Transact) mobile wallet, by Emida, is an app that is based solely on the consumer’s smartphone. Through participating retailers, users can refill their CAT accounts with cash (for a convenience fee of $1.50). Then, they can use the funds to pay for purchases through the app.
The Flip mobile wallet, from PreCash, is an app that allows users to perform instant mobile check deposit and make expedited bill payments — two services that were never before available on a prepaid card account.
“Although these mobile-enabled, prepaid card-based accounts are attractive to far more than just low-income consumers, one key to success will be in making the services available via even the simplest of mobile devices,” said Wells.
In countries where financial institutions are hard to come by, mobile devices are the preferred channel for financial transactions. For example, more than 17 million mobile subscribers in Kenya use a mobile-phone-based money transfer service called M-Pesa, which enables users to deposit and withdraw money, pay bills, buy phone minutes and send money to bank accounts or other users.
In the U.S., the decreasing cost of smartphones may make it seem like everyone has a smartphone — but non-smartphones are still the most common mobile devices among the low-income population.
According to the Federal Reserve, 64 percent of the unbanked have access to a mobile phone (18 percent have a smartphone) while 91 percent of the underbanked have access to a mobile phone (57 percent have a smartphone).
Regardless of the types of mobile devices, the demand for alternative financial products and services is there.
And, history tells us that unbanked and underbanked consumers could be the users of the next wave of financial innovation.
In last year’s fall Finovate conference, card-linked offers made regular appearances on stage. Since then, card-linked offers became more available to bank customers. Bank of America®, Capital One, American Express and many other financial institutions began providing card-linked deals.
Considering that the conference offers a good idea of what products and services we’ll see in the near future, it wouldn’t be a surprise to find that, by this time next year, there are more prepaid card accounts and other financial services that live on mobile devices.