Serving the Underserved with Prepaid Cards
Half the world’s adults, over 2.5 billion people, do not have a formal bank account, according to the World Bank. In the United States, the segment of financially underserved consumers is substantial, whether they fall into the unbanked or underbanked categories. According to the FDIC, this seemingly high-risk group makes up over 10 million households across America. However, unlike elsewhere in the world, in the U.S. it isn’t a lack of geographic access that prevents people from utilizing banking services, but rather a lack of incentive.
Contrary to popular belief, many people in the underserved category are, by necessity, very financially-aware and adept at making careful financial decisions. In fact, a study conducted by LexisNexis in 2012 found that between 15% and 20% of unbanked and underbanked consumers were creditworthy. With the rising popularity of prepaid cards, there is an opportunity for financial institutions to gain financially from this segment while encouraging people to manage their money more responsibly.
Mimicking Bank Accounts
Prepaid cards in the U.S. are very different from those in Europe as they offer a range of capabilities that closely mimic the advantages of having a bank account, such as facilitating access to digital services; allowing the receipt of direct deposits including pay checks; and enabling bill pay, all without the possibility of allowing the cardholder to get into debt. In this sense, U.S. prepaid card issuers are ahead of the game globally by realizing that the underserved should have access to the same services as everyone else with the same quality of experience.
In fact, such is the growing popularity of this card type as a financial tool that, according to the Pew Charitable Trust, 59% of Americans with a standard checking account also use prepaid cards a minimum of once per month. The prepaid card therefore offers an unprecedented opportunity for financial institutions to drive loyalty within their current customer base, instill trust in their future customer base and create new revenue streams.
With increased pressure from non-traditional competitors seeking to take advantage of the potential this market segment offers, financial institutions need to reassess how they approach marketing the product. So how can they get the message out and increase the adoption of prepaid cards?
They can start by taking a page out of the competition’s book. Many prepaid providers in the developing world, such as Kenya and South Africa, realize that the value comes not in storing money, but in the customer acquisition potential that prepaid represents. Their products boast little to no monthly fees, load fees or transfer fees and this approach is worth considering. While fees are a natural inclination for financial institutions and represent increased revenue, they can ultimately deter the underserved, who are often seeking the lowest-cost alternative to a traditional checking account. Regardless of the pricing model, the fee structure needs to be completely transparent to users as education around the costs involved in using a prepaid card is essential in driving consumer confidence in the product.
Prepaid providers also need to create a compelling user experience. As much attention should be paid to the prepaid cardholders as is paid to other account holders. The card should therefore offer access to mobile and Internet banking services and enable the use of the loyalty and rewards programs and personal financial management (PFM) tools your institution offers.
The message needs to be clear: Underserved consumers need to be shown the value proposition of having direct access to banking services and this value needs to shoot other alternative financial services out of the water in terms of the advantages that lie therein. The message needs to demonstrate that prepaid cards are easy to use, safe, affordable, financially viable and, most importantly, that these products were developed to enable consumers to control their spending, avoid debt and eliminate risk of overdraft rather than to trick them out of their money with hidden fees and confusing jargon.
Active promotion is required. As with any product launch, the campaign needs to be distributed via multiple channels, including your website, mobile app, in-branch materials and promotion by staff. Social media and advertisements on ATM and kiosk screens are also important ways to reach people who aren’t currently doing business with your institution. Keep the message simple and hit on the main financial issues a prepaid card could solve for an underserved person, such as spending control, electronic bill pay capability, direct deposit and online account access.
The FDIC states that, currently, 28% of the U.S. population, or about 88 million people, fall into the underserved segment, and according to the Center for Financial Services Innovation, they spent approximately $89 billion just on interest and fees for alternative financial services in 2012. With prepaid cards regularly being used to dispense government benefits and as payroll cards, the habit for the underserved to use this card type has already been created. The foundation for use is already there and, with this large new potential revenue stream, financial institutions need to reassess their stance on the underserved population. The opportunity far outweighs the risk and with this comes a change in perspective: can financial institutions risk not catering to this segment?