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Banks Adopting More Strategies to Court Underbanked

Automation is making it easier and more profitable for financial institutions to provide services to lower-income customers. And offerings such as check cashing and money transfers are enticing the underbanked to form relationships with banks.

Global Opportunity: Remittance Services

Another offering popular among the U.S.' underbanked and unbanked -- and thus a necessity for courting them -- is remittance services, says TowerGroup's Roth. As many of the United States' underbanked are recent immigrants, sending money to family in their home countries often is a top financial priority.

But while Boston-based Aite Group estimates the worldwide remittance market at almost $400 billion, the market is dominated by traditional money transmitters, such as Western Union (Englewood, Colo.), a household name throughout the world -- even in households that have never sent a wire transfer. In order for banks to compete, Roth stresses, they must find a cost-effective solution.

San Francisco-based Wells Fargo ($468 billion in assets), which is participating in the Bank on San Francisco initiative, boasts one of the most robust remittance services in the country. Whereas most banks' remittance programs offer account-to-account transfers and most non-banks offer cash-to-cash transfers, Wells Fargo offers a combination, according to Daniel Ayala, Wells Fargo's head of global remittance services. The bank offers cash-to-cash, cash-to-account, account-to-account or account-to-cash transfers through its ExpressSend remittance product, which was relaunched in July 2007, Ayala explains, adding that Wells Fargo offers its remittance services to both customers and noncustomers, although current customers are able to have the fees discounted or waived.

Ayala says that 90 percent to 95 percent of remittances currently are carried out through cash-to-cash transactions, but a gradual shift to account-to-cash-based remittances is occurring because banks offer lower costs and more flexibility than remittance providers. "Most Latin American and Asian countries have significantly large unbanked consumer populations, and eliminating the bank account requirement for the receiving country makes it much easier for recipients to get their money," he explains. Wells Fargo's account-to-cash transfer option "opens the service for use by a large number of remitters whose friends and family overseas do not have bank accounts in their home country," Ayala adds.

Another characteristic that sets Wells Fargo's remittance services apart, according to Ayala, is the number of countries with which it transacts. It currently has relationships with banks in Mexico, El Salvador, Guatemala, China, Vietnam, India and the Philippines.

Ayala says about 70 percent of the technology behind Wells Fargo's remittance service was built in-house, while the remainder was purchased from vendors. Though he declines to elaborate on the specific details of the technology, he notes that the bank does have a patent pending for its proprietary system.

There are challenges to setting up a successful remittance program, Ayala points out. To be successful, he suggests, the institution must understand its target market and develop products for the traditional remittance customer -- one who remits money to his or her home country -- as opposed to a traditional bank wire customer. A bank wire customer, for example, usually sends a commercial payment, which is a much larger amount and done less frequently.

In addition, banks must consider the experience of the receiver of the remittance payment, Ayala adds. If the receiver calls the sender and says it was a bad experience or inconvenient, the sender probably won't use the same method again, he comments. "It takes a lot of knowledge, time and effort to make sure you select the right banks" in other countries for the bilateral arrangement, Ayala says.

Despite the challenges, "We encourage more banks to enter this business," Ayala says. "Competition is good."

But the biggest competitor in the remittance space still is Western Union. And a new enhancement to its services has put it another step ahead of most banks, says TowerGroup's Roth. The company announced late last year that it would begin offering cross-border mobile money transfer services using consumers' mobile phones. Considering that more than 69 percent of the underbanked and unbanked have cell phones, the mobile service gives Western Union a competitive advantage over banks, including Wells Fargo, Roth notes.

Such innovation, however, requires a committment to serving the underbanked and often necessitates considerable technology investments. Banks can be hesitant to make the changes required to meet the needs of the underbanked population, according to CFSI's Tescher. "Technology changes can be time consuming and costly," she says. "A lot of banks try to tweak their systems without making costly investments. This strategy won't always work. ... If you want to attract the unbanked, you are going to have to think differently about risk management tools and how you apply them."

BANKS ARE TAILORING PRODUCTS and systems for the underbanked

THE GLOBAL REMITTANCE market provides a huge opportunity for banks:

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