Held to Accounts: reaching the nation’s underbanked

With a large underbanked population set to increase in the wake of the economic downturn, Ian Clover investigates how financial institutions can leverage technology and adapt their customer relationship approach in order to serve this growing portion of the market.

“When you look at many check cashing locations, you see the glass dividers, so we wanted to ally our business model with a store that offered something fresh and new.”

A working mother and aspiring artist, Laura is a rather typical American. She possesses ambition and dreams to one day become a successful glassblower. But she also feels the pressure to support her child while earning an honest wage. So when Laura lost her part-time job in the recent economic downturn, she soon began to struggle financially. With her income severed, overdraft fees and non-sufficient funds charges began mounting up, and her bank wasted no time in closing her account. From hardworking mother to yet another financially eviscerated statistic, Laura's change in fortune was quick, brutal and demoralizing. It was also depressingly commonplace.

"When your bank account is closed on you because you lose your job, it really makes it harder to take care of the things in life that you have to take care of," says Laura. Living paycheck-to-paycheck like Laura is a way of life for an estimated 7.7 million Americans who are classified by the FDIC as 'unbanked'. They have no access to an account, no safety net against fees, no access to credit and no savings to cushion them if they lose their job or are hit with unexpected expense.

A further 30 million people in the USA are regarded as 'underbanked' - while they may have a bank account, they rarely use it, instead preferring the instantaneous services and convenience of the widely stigmatized check-cashing outlets (CCOs) that compete with liquor stores and pawn shops for custom throughout America's more deprived neighborhoods.

This situation has been the status quo for quite some time. Banks cater for the financially stable and prosperous, while all other members of society have little option but to deal in the hand-to-mouth practices of CCOs. Without a bank account, the unbanked can turn only to the alternative financial market characterized by these CCOs, many of which will charge up to ten percent to cash a handwritten check. Such practices have been criticized for many decades, but only half of the states currently cap rates.

Meanwhile, established financial institutions have been reluctant to reach out to this section of society because it directly clashes with their own business model. Banks generate a large portion of their profit through the interest they charge on money they lend out from long-term deposits. In contrast, CCOs depend upon high volumes, small transactions and fees to generate their revenue. This way, everybody is served, but one demographic is punished and ostracized much more than any other - the poor.

The issue of why large swathes of the poor population in the USA have no bank account is a thorny one. Surveys by the FDIC largely reveal that many poorer families have no real need for accounts because they lack the month-to-month financial cushion that make banks a good option. For others, bank fees are too high, minimum balances are too high, or there is a general distrust of the banking sector. The unbanked population has simply made do without banks - they have no savings so require no safeguard to their savings; they have no real need for credit and so have little reason to improve their credit score; they deal primarily in cash and so do not require a credit or debit card, and they cash their checks at their local CCOs, willingly paying the extortionate fees because, in their eyes, what else are they to do?

Jennifer Tescher is the founder and director of the Center for Financial Services Innovation (CFSI) and she believes that a deeply ingrained sense of distrust of the banking world has excluded this section of society from forming a relationship with the financial industry. "We at CFSI, and the FDIC, both estimate that there are between 30 million to 40 million households in the USA that either have no formal relationship with a bank or a credit union, or do not have their needs met through that relationship. I think that distrust of the financial services industry is at an all-time high because of the financial crisis, but the underbanked have been excluded either by their own choice or by someone else's for quite some time, so this is not a new problem."

For some, it is not a problem at all. The financial services industry has been clearly defined for many decades, and there are fewer better indicators to separate the 'haves' from the 'have nots' than one's banking status. The system is extremely unyielding, with banks meeting the needs of those with money and CCOs catering for those with a more intermittent, erratic source of income.

"The basic banking model doesn't always make a whole lot of sense for someone who is living paycheck-to-paycheck," says Tescher. These 'just-in-time' consumers have constant cash-flow problems and so manage their lives accordingly. "A checking account assumes you have some cushion, and it assumes you have some time," she says. "But for folks living paycheck-to-paycheck, that is not true. They need the immediate liquidity, and they don't have a lot of cushion, so a checking account doesn't always fit the bill."

Banking outreach

The societal circumstances that have created such a disparity of wealth, ambition and opportunity are well documented, if a little misunderstood. But do banks have a duty to tailor their products and services to reach out to poorer sections of society, or is it of little concern for banks to consider such assistance when there exists a plethora of far-reaching reasons behind why the current situation persists?

Carol Kaplan, director of public relations at the American Bankers' Association, thinks that banks - despite having previously offered assistance to the unbanked in society - are not the solution. "US banks have offered free and low-cost checking accounts for many years, yet a small percentage of families don't have bank accounts because they have chosen instead to utilize non-banks for certain financial transactions.

"Reasons may vary from unstable income, perceived costs and benefits, misinformation to desire for privacy. The banking industry in this country favors competition and agrees that consumers should have freedom of choice to conduct their financial transactions. We would like to have everyone as bank customers, but concede that for these reasons, some consumers feel there are better choices for them."

There are certainly legitimate reasons why some people do not use banks. The problem lies, however, in the fact that the alternatives to banking effectively cut the cord on an individual's financial future. The unbanked and underbanked are not just underserved but effectively excluded from channels of credit, opportunities for financial comfort and progression and an increasingly numerous range of services and products that are debit or credit card-only. Identifying a solution remains a challenge. Does responsibility lie with the banks, the people or the powers-that-be?

"I don't think this is about teaching people to become 'better' at banking," says Tescher. "I think this is about making the products and services that are available to consumers more useful and user-friendly. If you required a money order to pay your rent because your landlord doesn't take a check - which is a very common phenomenon in a low or moderate income community - you went to the bank and they might charge you as much as $5 or $10 for a single money order when you can go to a convenience store or even the post office and get one for much less."

Tescher's argument that banks should be doing more to tailor their products, services and marketing messages to the actual needs of these consumers is supported by her belief that the non-bank providers need to change, too. "CCOs and their ilk need to make sure that their practices are consumer-friendly, but they also need to think about how they can enable their transaction-based customers to climb the ladder of financial prosperity, so that when they are ready to start saving or looking at buying an asset such as a car or a home, they are helping people find a way to do that."

Despite Tescher's claims that banks should identify areas where they can re-deploy their services and products in order to better serve the unbanked and underbanked, Kaplan argues that the banking industry has consistently promoted affordable accounts. "Many banks actively reach out to the unbanked with 'second chance accounts'," says Kaplan. "These include advice and counselling for those who have had trouble managing an account in the past."

FDIC research indicates that the annual cost of maintaining a bank account runs between $250 and $300 per year. While this may seem a lot, a typical low-income family that brings home $18,000 a year and uses CCOs regularly is estimated to be spending between $400 and $700 per year in fees and payment services (according to a 2008 study by the Pew Charitable Trusts). These statistics reveal that the issue may well be a combination of misinformation and distrust of the traditional banking sector.

The recent economic crisis has further shaken confidence in the banking industry, and Kaplan believes the situation may get worse before it gets better. "While the majority of banks have offered free and low-cost checking accounts for many years, all banks will need to reconsider the feasibility of continuing to offer free accounts given current economic and regulatory pressures. This," she continues, "could make it even more difficult for banks to attempt to serve the unbanked population."

New innovation

The entire financial industry is in a tough situation as we move into 2011. The global financial crisis has not only impacted upon the poorest sections of society, but has also begun to unravel the carefully woven fabric of middle-class, American life. Job losses and foreclosures abound throughout the country, forcing the job market and real estate industry to seriously address how they are to effectively operate in the forthcoming landscape of increased competition and austerity. The financial industry is no different. Previous practices may soon become anachronistic, with more and more people unable, or unwilling, to jump through the many hoops of typical banking protocol.

"More and more customers are becoming economically challenged," says Tescher. "Many have lost their jobs, or their house is in foreclosure, or their credit score has plummeted. They are really challenged right now, so I don't think banks can easily say 'we don't have to worry about them', or 'they're a really small percentage of our customer base.' A much larger percentage of their customer base are really hurting financially and may soon require a different set of products and services to what are currently being offered."

There has already been change, of course. Regulations on credit cards and overdraft charges have already been imposed, and there is increased pressure on banks to change their fee structure. Such a fraught financial landscape should open up the playing field to a more nimble, proactive approach to banking; one that enables the consumer to get hold of their cash for less, to manage their money more easily, and to develop newer lines to credit and security.

Bertrand Sosa is the co-founder of Mango Financial, Inc. an Austin, Texas-based financial store with a difference. Catering for the city's sizable unbanked population, the Mango Store opened in April 2010 with the aim being to straddle the divide between the warmth, welcome and enthusiasm displayed by the nation's leading bank branches and the garish, transient and faintly intimidating experience of frequenting a CCO.

"We're providing a one-stop shop that offers customers a service that not only saves them time and money but is also a place where the daily financial needs of the unbanked population are met," says Sosa. Mango is hoping to forge lasting relationships with those who have either never used a bank or have grown disillusioned with traditional banking fees and practices. Members who pay a one-time fee of $10 can cash as many checks as they want by loading their funds on to a pre-paid debit card that acts just like a normal card. For an additional fee, customers can also send money transfers and pay bills.

"We are targeting customers who, for one reason or another, are paying more for a lot of the services that traditional bank customers enjoy at a reduced price, or maybe even for free," explains Sosa. "These paycheck-to-paycheck customers end up paying a premium on services that we believe should be made available to them, so we have created a store environment that is very interactive; it's a place where they can come in, conduct their business and leave in a very quick timeframe."

Sosa's own MPOWER Labs company has developed the technology - operated by Mango sister company Rêv Worldwide - to enable Mango to deliver this service at vastly reduced operating costs, while the innovative and unique look of the money center has been designed to be as transparent and welcoming as possible. It attempts to create a unique warmth and sense of belonging to a demographic that has grown used to conducting their heavily penalized financial transactions through impersonal bulletproof dividers and under the intense glare of flashing neon signs so beloved of CCOs.

"This particular customer doesn't go through traditional banks because they do not feel welcome there," says Sosa. "So we didn't want to call Mango a bank because we felt that doing so would bring with it all of the association to what that represents to this kind of customer from a banking standpoint; and that's overdraft charges and other hidden fees." The Mango Store clearly displays all fees in bright banners throughout the interior, augmenting the feeling of openness, trust and transparency that is already engendered by the lack of bulletproof screens and security cameras.

"When you look at many check cashing locations," continues Sosa, "you see the glass dividers, which do not exactly create the most customer-friendly environment. So we wanted to ally our business model with a store that offered something fresh and new." Drawing inspiration from Apple, Sosa believes Mango's own retail operation will also soon start bearing fruit. "There was no need to reinvent the wheel. We thought a lot about what Apple had done with its retail model and realized that we could do the same thing for financial services. While some banks have attempted to refurbish their lobbies and rework how their flow of traffic is managed, there hasn't ever really been a fresh approach in the sector. Starting from scratch, we were able to think outside the box and can control our brand and the experience of the consumer through the look and feel of the store."

Tech to check

Redefining the retail space solves just one part of the problem for the unbanked. The affordable upfront fee both enables and empowers consumers to start taking control of their finances, making them more comfortable and confident in undertaking standard banking transactions and procedures. "Fees charged at standard banks have been excessive given the relative funds available to this type of consumer," says Sosa.

With non-sufficient funds charges of up to $30 at traditional banks, just two or three bounced checks can start adding up very quickly, leaving the underbanked with little choice but to rely on the alternative financial centers of CCOs. Now, believes Sosa, this demographic has a happy medium. "We got inspired to get involved in the alternative financial space because we [Bertrand and his brother Roy are Mango's co-founders] felt that the current players had sub-par technology. They didn't really understand how to capture the customer's attention, either through branding or building a relationship with their clients. Banks are very smart and very savvy about marketing, CRM and brand-building, but the CCOs don't really know how to do that as effectively."

Utilizing and building upon the knowledge and expertise the Sosa brothers had accrued from their earlier ventures with Netspend pre-paid cards, they set about delivering the right customer experience for the nation's underbanked population. From both a technology and branding standpoint, the Sosa's identified a product and a service that could meet the needs of this consumer in a cost-effective and empowering fashion.

"One of the most important elements of our strategy is pricing," enthuses Sosa. "We're talking about an industry that is within some product categories very predatory, and at best it is very high pricing, high margins. So we felt that through technology we could deliver a much more effective and cheaper alternative."

The technology employed by Mango to deliver affordable financial services to the underserved uproots no trees. Rather, it is a shift in focus that has enabled Sosa and his team to reach the needs of this consumer base.

"We have taken a multilevel approach," says Sosa. "There is the core payments processing technology that we leverage from our group of companies. So when you go into the Mango store and you walk out with a Mango MasterCard Prepaid Card, that debit card is processed through the systems and technology that we developed. So it's not like we are outsourcing the payments processing to somebody else. From the beginning, this provides a clear advantage in terms of being able to offer not only the experience, but also the pricing that we have in store.

"One level up from that there is the integration of all the different product functionalities; the ability for a consumer to remit money to another country is very straightforward, as is the ability to pay a bill from that same account. This is all integrated together at the point of sale. Therefore, when you come in and present a check and thus become a Mango member, the system that is processing that transaction is the same system that is plugged into the card processing account generation system."

By integrating their point of sale functions into a single system that also incorporates the 24/7 ATM located outside the store, Mango consumers are instantly hooked up to the traditional banking services of normal account holders.

Inside the store, the relaxed, airy and colourful atmosphere is further augmented by the presence of onsite financial coaches who are on hand to help clients operate the self-help kiosks that are used in place of teller stands. "The self-help kiosks allow you to create your account and then check balances and conduct a number of other transactions, all without ever really needing the assistance from the onsite coaches. It is a holistic, integrated approach that has enabled us to utilize technology to reach the unbanked through lower pricing and the creation of a stress-free, unthreatening environment."

Sosa regards the self-help kiosks found inside the Mango stores as similar to the automated check-in counters now widespread throughout airports. "When these were first installed in the early 90s, airline staff were always on hand to help you navigate how to use them," says Sosa. "Quickly though, it all became second-nature to us, which is the same approach we are taking at Mango. We feel that instead of having tellers to process transactions, we wanted to go beyond that and offer just the right balance of assistance and education to encourage consumers to learn a little bit more each time they come in, building their confidence and making them a bit more financially savvy each time." Such an approach also helps to keep overheads down, too.

Since losing her job, Laura has found the Mango Store to be something of a godsend. "Having a service like this helps emotionally because it allows people to handle their life and their finances just like they used to." The onsite coaches not only offer assistance, says Laura, but they also encourage clients to learn more about taking control of their finances. "Since money management is a goal of mine and something I am working towards, Mango is a tool that I am able to use to help me achieve that."

Empowering the underbanked

The underbanked population of the USA is a sizeable and potentially profitable group of consumers currently languishing under the defeatist guise of disempowerment. The traditional banking system is adrift of their needs, and the alternative financial providers offer only short-term services rather than long-term assistance. This group deal in insecurity. They are well versed in the stresses associated with living paycheck-to-paycheck. They have adapted to this way of life, burdening themselves with the physical and emotional baggage that comes with being in a perpetual state of personal financial constraint.

It is unsurprising to discover that the proportion of unbanked and underbanked populations varies drastically across the country, and rarely cuts across racial lines - ethnic minorities are more likely to be unbanked or underserved. FDIC statistics estimate that 31.6 percent of black individuals are underbanked; a figure that stands at 28.9 percent for American Indians and 24 percent for Hispanics. By contrast, only 3.3 percent of white households are classified as underbanked.

Such statistics tally with Mango's first few months of operation. "The demographic that we have targeted from the get-go has been predominantly Hispanic," says Sosa. "We anticipated that we were going to attract a lot of the Hispanic market, and this has absolutely been the case. We have also noticed that we have attracted a large segment that is African-American, which is also in line with the statistics on the underbanked. What I didn't expect, however, was that much of our existing base would come from customer referrals and word-of-mouth."

Sosa estimates that some 30 percent of Mango's traffic and footfall is generated this way, which justifies to him that they are offering a service that a great deal of people were in desperate need of. "This will help us keep our costs down through a reduction in marketing for example, and so we can then maybe funnel that money back in through product innovation or more competitive pricing."

Such high referral rates are a result of an empowered population finally receiving a service they thought they would be forever excluded from. However, Sosa has already begun making plans to further develop the types of services Mango can offer, which will bring a more in-depth level of financial service and satisfaction to the client.

"The pre-paid Mango card is really a means to an end," says Sosa. "It is just the channel by which consumers come into the system. We are working on services and account enhancements so that the customer can enjoy more benefits. The account and card combo is a natural way to engage customers not only in store, but outside in places where they shop. We give them a 5.1 percent return on their money when they put it on to a savings bucket we have made possible."

While these fledgling customer relationship management strategies may appear charmingly twee to those of us already well practiced in traditional banking practices, to the underbanked, such small gestures are going a long way in fostering trust between Mango and its consumers.  "We have already begun developing the provision of loans to our customers," says Sosa. "We feel that as we educate customers on how to better manage their money, if we are successful in delivering the right experience, the right pricing and the right approach, they will stay with us for as long as we can provide the services that they need and that they are looking for."

An important factor for many of the underbanked population is the ability to improve or build upon one's credit score, which is also something that Mango is working on. "By definition, through what we are doing on the loan side of things, plugging into the credit system is a component of that, and it is something that we know is extremely important to this particular customer."  Additional services being offered include the ability to text money transfers via mobile phone, consult bilingual in store coaches and learn more about the financial industry as a whole.  There are expansion plans in the pipeline, too, with Sosa identifying a number of opportunities to develop the Mango model along a national footprint, including partnerships with banks and CCOs who want to evolve in the direction Mango is headed.

The recent financial regulations prohibit banks from charging overdraft fees unless a customer is pre-signed up for this service, and they now also impose strict restrictions on a number of other fees that customers have previously been liable for. While these measures have been welcomed, there remains an inherent need for the financial sector to diversify, to become more flexible and to seek a broader client base.

Banks can no longer afford to under serve 40 million people, and completely ignore an additional 7.7 million individuals who do not even have a bank account. Change is coming from the government, from start-ups such as Mango, and even from a number of employers who now pay their staff via reloadable Visa or MasterCard cards instead of a check. But it is the banks themselves that hold the solution. Mango has proved that the technology and the client base are there. The only thing now lacking is a collective will and desire among the largest financial institutions to extend that first olive branch, and thus begin repairing relationships damaged by many decades of distrust.

FACT: Fees for most check-cashing stores are charged on a percentage basis, typically 1 percent to 3 percent per every $100 deposited. For frequent check cashers, this can add up to hundreds of dollars each year. 

FDIC: The Federal Deposit Insurance Corporation (FDIC) is working on a program to encourage banks to offer no-frills, low-cost checking and savings accounts. "The FDIC's model checking account [recently proposed] would allow customers to open an account for as little as $10. While banks may decide to charge a low monthly maintenance fee, the accounts will not have the kind of surprise fees - such as overdraft protection fees - that have led consumers to abandon banks", says FDIC Chair Sheila Bair.

Mobile, but underbanked

Research from Javelin suggests that banks hoping to reach the underbanked sector of society should first get their mobile banking department up to speed. Their figures show a correlation between adoption of mobile phones and the underbanked, revealing that mobile penetration among poorer Hispanic and black communities stands above the 65 percent nationwide average, at 68 percent and 66 percent respectively. Additionally, government-backed cell phone programs targeted at low-income consumers have increased penetration levels, suggesting that the underbanked demographic is likely to be much more receptive to mobile banking technologies than the general populace.

Argentina's underbanked run daily gauntlets

American citizens may have their own legitimate reasons for shunning the nation's banking system, but for millions of Argentineans, they are left with little choice but to conduct the bulk of their financial activities in cash - often with deadly consequences.

Ever since the 2001 Argentine economic crisis - when the government was forced to devalue the peso, freeze bank deposits and force even dollar-denominated accounts to be withdrawn only in the devalued currency - public confidence in the country's banking system has been at rock bottom. Ally that with 50 percent tax evasion rates, 65 percent taxes for those who do declare and a raft of painful other taxes forced by a government seeking other revenue streams in the wake of such low income tax compliance, and you have an economy awash with an underground cash market, with the US dollar the preferred trading tool.

And with so much cash on the streets, organised criminal gangs are running riot. While the government has refused to publish official detailed crime statistics since 2007, security consultant Louis Vicat has told the Associated Press that his own findings amount to more than 5000 'withdrawal robberies' throughout Argentina in the first half of 2010. These robberies usually occur just outside banks, where millions of Argentines use safety deposit boxes to store their stash of cash to pay for everything from cars to homes (with sales tax at 21 percent and a hefty wealth tax on personal property it is understandable that the majority of the population with any savings to speak of avoid the banking system) and, once withdrawn, a 'marker' - usually operating inside the bank - will alert their criminal counterparts outside, who act quickly, decisively and, often, brutally.

With such danger on the streets, the Argentine population has called upon its government to tackle the issue, but there appears to be a triumvirate of mistrust between the population, the government and the banks. While some officials have suggested banning moped passengers in order to reduce 'snatch and grab' robberies, others have suggested better privacy at the teller, more security cameras and more police presence at banks. Many, however, feel that these measures do not get to the root cause of the problem: Argentineans' collective mistrust of bureaucratic entities, such as banks.

The country's undeclared economy is so large that people are reluctant to use banks and so begin toeing the line, thus exposing themselves to the scrutiny of Argentina's tax agents. For every 100 pesos an Argentine makes, it is estimated that 65 will quickly be owed to the state through various taxes. Argentina also taxes money transfers, check deposits, withdrawals, transfers and other routine bank transactions, while most banks impose hefty fees.

Psychologically, Argentineans are hard-wired to steer clear of official financial channels: most will avoid peso-denominated accounts, preferring instead to convert their wages into dollars and then store their wads of cash either under the bed or in bank safety deposit boxes; a tactic the criminal gangs are wise to. Routine transactions are all conducted in cash, thus saving small businesses from large tax bills and the consumer 21 percent of the total value of their purchases. It is estimated that 90 percent or all house purchases are made in cash too. Cash is simply the only way to do business in Argentina, and until the government scraps its hefty levy on financial transactions (imposed after the crisis of 2001), the situation is unlikely to improve any time soon.