Beyond the Unbanked
How the recession pushed mainstream consumers toward alternative financial services.
Unbanked. The term has become more commonplace as the country’s languishing economy pulls millions of Americans from using the banking system or obtaining lines of credit, leading to the prevalence of a new term: underbanked.
“Unbanked and underbanked, to me, are really the same thing,” says Jeffrey Lewis, vice president and general manager of financial services for Atlanta-based prepaid service provider InComm. “They’re consumers who have chosen not to utilize existing financial institutions for lots of reasons: the fees banks and credit unions charge; they may have overdrafted in the past; they can’t get an account open because the banks may perform a credit check on those consumers, and they are perceived to be a risk with writing checks.”
According to the most recent biennial National Survey of the Unbanked and Underbanked, conducted by the Federal Deposit Insurance Corporation (FDIC) and the U.S. Census Bureau, 28.3% of U.S. households were either unbanked or underbanked as of June 2011. The report also found that one in four households surveyed had used alternative financial services (AFS) at least once in the previous year.
So it should come as no surprise that reloadable prepaid credit and debit cards—an increasingly popular financial alternative for the unbanked and the underbanked—are also on the rise. The “Prepaid Market Forecast 2011 to 2014” report from Mercator Advisory Group Inc., Maynard, Mass., predicts the amount of money loaded onto closed-loop in-store gift cards will grow at a 5% annual rate in 2012, 2013 and 2014, and that the amount of money loaded onto open-loop cards will total $281.7 billion in 2013.
This boom has been quite profitable for c-store retailers who carry AFS products. But with the economy showing hints of a recovery, will the unbanked and underbanked populations choose to access traditional financial services? And if they do, can retailers really expect the success of prepaid cards and alternative financial services to continue?
Perhaps. Both Lewis and c-store retailers have observed a demand beyond the traditional unbanked and underbanked consumers. It may even be possible that AFS products will not just survive in a post-recession era, but thrive.
Lessons from the Recession
If the U.S. economy is rebounding, as some economists suggest, few will forget this time of economic turmoil, just as with the Great Depression. It has caused many consumers to rethink their spending habits.
“I don’t think that it’s only the unbanked that are buying [prepaid] services,” says Michael Turco, category manager for Rockland, Mass.-based Tedeschi Food Shops. “I think people learned from the recession and are now doing things that control their spending or limit their liability.”
Some actions consumers are taking, Turco says, include loading prepaid cards with a set amount of money they want to spend on a vacation or during a shopping trip to ensure their spending stays under control.
“There’s a lot of that going on, and I think we’ll continue to see that grow,” he says. And he’s not alone in observing these types of patterns when it comes to prepaid financial services.
“There is more of a need for these kinds of products and services now than in years past as a result of the recession,” says a large c-store retailer who preferred to remain anonymous. “Consumers have lost trust in the banking system and want to feel in control of their money and spending. These products are also used as a budgeting tool for many consumers.”
However, Lewis of InComm believes the shift away from banks and credit unions is not just about the recession; it’s also about changing generational attitudes. It used to be the assumption that everyone had an account at their local bank, where they had to go to transfer money, and deposit or cash checks. This is no longer the case.
“If you look at what a bank does today, you can no longer very easily go to a bank and cash a check,” Lewis says. “They’re charging fees differently depending on your relationship. If you have a loan, if you have savings, your fees are all structured differently.”
He also believes banks have become less convenient for the modern on-the-go consumer, making the option of being able to reload a debit card while filling up on gas and picking up soda at a convenience store all the more appealing.
“I don’t have to find my bank, I don’t have to get to a PC or go to an ATM and deposit something in it,” Lewis says. “I open up the world in a hurry because the availability of my products are no longer limited to Bank of America or a credit union.”
All of which is good news for providers of alternative financial services, such as c-stores.
“Not only do I think [the prepaid market] is going to continue to exist, I think it’s going to continue to grow,” Turco says. “People are much smarter to the product lines that are available, how to use them and how to work the system. It’s just people being more diligent, and I think it’s here to stay.”
As Turco points out, consumers are becoming more comfortable with alternative financial services, in part thanks to the recognizable Visa and MasterCard branding offered on a multitude of prepaid credit and debit cards.
When Tedeschi first started offering reloadable prepaid cards, the stores carried Futura Card Services and Visa NetSpend branded products. Tedeschi switched recently to InComm’s vast variety of branded cards, and Turco is already noticing a difference.
“We’re just starting to deal with Visa products, and we’re finding that it’s such a well-recognized name that people are really attracted to that product line,” he says. “We are hoping to add more branded cards (to Tedeschi’s financial service offerings).”
Companies such as InComm—along with Futura, Epay, Wells Fargo and several others—offer a variety of reloadable branded credit and debit cards to meet the needs of different consumers. There are what Lewis describes as “self-use” cards, such as InComm’s One Vanilla. These give consumers the option of purchasing a single-load product for paying bills or making purchases online. These cards can be purchased in a variety of denominations and used until the funds are depleted, without having to register any information.
For consumers looking for a true alternative to a traditional debit or credit card issued by a bank, there are general-purpose reloadable cards, such as InComm’s My Vanilla.
“It’s really a financial card that you can use any way a debit card can be used,” says Lewis. “The only thing you really can’t do with it is write a check. Therefore, you can be a fully functioning individual within society, using a branded Visa or MasterCard-type card.”
Many companies also offer a program so consumers can reload their cards at retail locations. For InComm, that’s the Vanilla Reload Network.
“If you don’t have an account or bank to be able to deposit funds, how do you get money onto your card if you’re not direct-depositing?” Lewis says. “The Vanilla Reload Network becomes that avenue through our retailers where consumers can add value into their accounts and use that card as they normally would.”
All of these options mean that the consumer—whether unbanked, underbanked or opting to use prepaid cards for other reasons—is able to purchase the right card to fit a specific need.
“The flexibility of the product line is very attractive to consumers,” Turco says. “It gives them anonymity if they want it and also can be used without anybody realizing that it is a card from a nonfinancial institution.”
The New Corner Bank?
The kind of flexibility and convenience these prepaid cards offer fall right in line with the kind of service expected at convenience stores, making it an ideal fit (as opposed to banks, which are often viewed as untrusted and inconvenient).
“If you look at c-stores, when you start evaluating their customer demographic, they have repeat customers,” says Lewis. “C-stores then become an avenue for consumers to be able to acquire these financial products and allow them to move their cash into an electronic form at a trusted location.”
The anonymous retailer agrees: “It goes back to the idea of convenience. [These products] meet the on-the-go needs of our customers, giving them a one-stop place to shop for much of their needs.”
And though these financial-service products may not drive the kind of sales that stalwarts such as cigarettes, beer and salty snacks bring in—Turco estimates AFS products make up roughly 2% of Tedeschi’s in-store sales—the convenience factor and one-stop-shop appeal often leads to additional sales.
“I have no detailed information to quantify that it does produce other sales,” Turco says. “But I feel strongly that it does due to today’s time-starved consumer and their multipurpose shopping occasions.”
And if, as both Lewis and Turco predict, the demographic for prepaid cards moves away from the unbanked and toward a more mainstream consumer, it will become even more important for c-store retailers to provide convenient alternative financial services.
“In today’s environment, turning away a new customer or an additional visit from any of their current customers would be a silly decision,” says Turco. “It’s one of those products you absolutely should have, and we offer it in every store. It’s the future. This category is anticipated to do over $80 billion this year. You can see that the prepaid or financial-service business is here to stay.”