Banks may have opportunity with underserved market

As banks look to replace billions of dollars in lost fee revenue, a new report asserts that the low-income consumer financial services market is more profitable and larger than the banking industry has realized.

The report from Core Innovation Capital and the Center for Financial Services Innovation found that consumers with minimal or no relationships with banks nonetheless generated roughly $45 billion in interest and fees last year.

The firms also estimated the total underserved market in the U.S. was worth $455 billion in 2010. The underserved market includes both underbanked and unbanked consumers.

"We were surprised how big the market was," Core Innovation Capital managing partner Arjan Schutte said in a phone interview. "There are
60 million underbanked consumers in the country. That is 1 in 4 wallets walking down the street."

The 2010 market volume figures include principal borrowed, dollars transacted and deposits held.

The survey also reported that Internet-based payday lending grew by 35 percent between 2009 and 2010, while the general purpose prepaid card business grew by 33 percent and payroll cards by 25 percent.

Schutte, whose venture capital firm invests in technology companies that serve the underbanked and unbanked, said he was surprised about how much money people were spending to conduct their financial lives.

But a question remains: What do the figures mean for traditional financial institutions?

Several major banks with branches in Las Vegas offer "alternative financial services" in a bid to gain business from both noncustomers and existing customers.

Those fee-based services include reloadable prepaid cards and money transfers.

For example, Wells Fargo & Co. has long competed with nonbank Western Union Co. and MoneyGram International Inc. to offer international money-transfer services.

U.S. Bancorp, parent of U.S. Bank, has introduced a reloadable prepaid Visa card. The cards, which have an initial cost of $3, then a $3-a-month fee, are available in branches in Las Vegas.

The prepaid card, marketed as the Convenient Cash Card, competes in an industry dominated by Green Dot's prepaid Visa and Wal-Mart's MoneyCard.

Schutte expects banks to have problems competing with Wal-Mart and Green Dot.

"Consumers at both the middle and bottom have significant trust issues with banks," he said. "Just look at Bank of America."

The offerings come as banks have to work harder to find new business. New regulations have reduced income generated from debit cards, interest rates are near all-time lows and revenue continues to suffer from weak consumer demand for loans.

Banks have generally neglected underserved consumers, seeing little profit from people who live paycheck to paycheck.

In Clark County, which includes Las Vegas, 6.9 percent, or 46,430 households, are considered unbanked compared with 7.7 percent nationwide. The percentage of underbanked households in the county stood at 19.5 percent, or 131,216 households, figures complied by the Federal Deposit Insurance Corp. show.

The definition of unbanked is someone with no checking or savings account, the FDIC said. Those who are underbanked have an account, but continue to rely on alternative financial services, like check-cashing services or payday loans.

"The problem is the products they do have are not very attractive," Schutte said.

The prepaid cards offered by Walmart are "very convenient," Schutte said, because they allow consumers to do everything in one place and then shop for the items they need.

He said the cost might be marginally higher, but the goal is liquidity. Schutte said consumers can cash their paychecks, get cash and refill their prepaid cards, while there is no wait for a check to clear like at a bank.

"It's about access and liquidity," Schutte said. "Two issues that banks have problems with. For better or worse, (consumers) are willing to pay for liquidity."

Contact reporter Chris Sieroty at
csieroty@reviewjournal.com or 702-477-3893.