MarketsandMarkets: Banks to Enter Prepaid Card Industry to Woo the Underbanked

DALLAS, June 24, 2010 /PRNewswire/ -- With a population base of nearly 43 million people, the underbanked offer an immense, untapped consumer segment for federally-insured banks. 'Wooing the Underbanked' is a market research study designed specifically to understand the financial needs of the underbanked. The report offers vital market data for banks intending to tap this consumer segment, identifying the most profitable ways to ensure its economic inclusion into the traditional banking cycle.

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The underbanked are educated and employed but are reluctant to use traditional banking products such as debit/ credit cards and short term loans, primarily due to the fear of hidden costs and convenience issues. They make little use of the services provided by the mainstream financial institutions, limiting themselves to traditional banking services such as checking/ savings accounts.

However, the underbanked and the unbanked together spend around $10.4 billion annually on more than 324 million alternate financial services (AFS), such as non-bank money orders, payday lending, check cashing facilities, rent-to-own agreements, and refund anticipation loans. The report analyzes the various reasons for the low adoption of traditional banking products by underbanked and their preference for AFS.

The report identifies the traditional and novel banking and financial services that banks can offer these consumers, indicating prepaid cards as a potential financial vehicle for banks to penetrate the underbanked segment. The prepaid card industry generated $290 billion in 2009. Our research suggests that a significant proportion of the underbanked in the U.S. prefer prepaid cards to checking accounts for basic financial transactions, provided the costs are equal. Prepaid cards can also help the underbanked enhance their credit scores, provided the card-issuer reports regularly to the three main credit bureaus.

Not all underbanked customers afford equal market opportunity. A significant number of consumers have a thin or no credit file, while others have prime and subprime credit scores. Our segmentation of the consumer segment by credit scores and the tendency to use cash as a means of transaction will help banks judge the consumers' propensity towards different banking products, and thus to formulate successful product development strategies. The report also segments the underbanked on the lines of income, age, education, and region, and race to help banks refine their marketing, distribution, and risk minimization initiatives for the underbanked.

    Key findings from the report

    - Our estimates suggest that in 2009, approximately 21 million
      or 18% of all U.S. households were underbanked.

    - An estimated 32% of the African-American population is
      underbanked, followed by American Indians/ Alaskan Indians at
      approximately 29%.

    - As the underbanked already have basic savings and checking
      accounts, it is easier for banks to cross-sell and up-sell their
      products to this segment.

    - Ineffective differentiation between underbanked and unbanked
      has been the primary challenge that has so far hindered banks from
      effectively tapping the underbanked.

    - Underbanked mostly use alternate financial services (AFS)
      instead of banking (transaction and credit) products because of the
      former's customizability, easy availability, and minimal need for
      personal information. In addition, many underbanked localities also do
      not have an adequate number of bank branches.

    - The prepaid card industry is expected to reach a market size
      of $791 billion in 2014 at a CAGR of 22.2% from 2009 to 2014.

    - Open-loop cards accounted for approximately 32.4% to the
      total amount loaded in prepaid card in 2009. Open-loop prepaid cards
      are expected to surpass closed-loop cards due to their convenience and
      accessibility.

    - Large banks have introduced low denomination loans to
      compete against pay-day loans offered by AFS providers.

    - Banks have opened branches and kiosks at retail stores to
      tap underbanked market. This strategy is often successful since
      customers are already used to visiting retail establishments for
      shopping and are often reluctant to visit traditional bank branches.

    - To improve customer access and acceptance, banks are setting
      up branches in the vicinity of the target community, imparting
      financial education to up-sell their products; and applying targeted
      marketing initiatives.

    - As non-bank check cashing and non-bank money orders form the
      most demanded financial service by the underbanked, banks have
      introduced cashing check and money orders for non-clients at their
      branches.

    - Very few banks are using prepaid cards to tap the
      underbanked, though network-branded open-loop prepaid cards have gained
      popularity with almost all sections of society. These cards have been
      monopolized by the non-bank facilities.

    - Banks are focusing on efforts such as extended hours, bank
      staff who speak varied languages, and modification to retail operations
      in order to more effectively tap the underbanked market.


    Scope of the report

    - Strategy Formulation

    Market definition, industry overview, market size, key drivers, and
    issues in wooing the underbanked

    - Business Models

    Go-to-market strategies, how to reach the underbanked with
    what products, competitive pricing strategies, risk factors, underwriting
    and collections

    - Customer Needs and Attitudes

    - Vendor Analysis

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