Payroll and other cards -- whether they are prepaid, reloadable or gift cards -- are gaining popularity and are an appealing product for banks and the unbanked/underbanked for a variety of reasons, experts note. "There's a higher level of security with a card because you're not walking around with your entire paycheck in your pocket," observes Metavante's D'Angelo. "You also feel confident when you can pull out a piece of plastic to pay for something."
BearingPoint's Ramsey agrees, saying that something as simple as the prestige associated with holding a card is appealing to a segment of the underbanked market. "Looking at this from the immigrant side, many of them don't have confidence in banks, but they do understand MasterCard and Visa," he explains. "There's a prestige factor associated with holding one of these cards."
Cards are not just good introductory financial instruments for underbanked individuals, according to Michael Archer, managing director, regional business leader, with MasterCard Advisors (Purchase, N.Y.). They also help banks mitigate risk, as there are strong controls around cards, he asserts. "You can decide whether to lend to the person and how much credit you want to extend to them; and you can see when the customer uses the card and can decide whether to allow transactions to go through," Archer explains.
Of course, banks are risk-sensitive by nature, and there is a perception that there is a great deal of risk in servicing this consumer segment. "Banks are at a disadvantage [when serving the unbanked/underbanked] from a risk management perspective," says CFSI's Tescher. "They are held to a higher standard from a regulatory standpoint -- they're programmed to think about risk differently from an alternative financial services provider. For consumers with no credit files or thin files, they'll just get spit out of the system even before the process starts."
"That doesn't mean these would be bad customers, but there's no way to extend credit to them," adds CFSI's Jacob. "So banks are using alternative data to find predictive measures for accessing these consumers."
Credit bureau and information solutions provider Experian (Costa Mesa, Calif.) is working to create a pool of alternative data sources for financial institutions to exploit when seeking the underbanked as customers. "Because there's a huge segment with little or no credit history, we need information to help with risk assessment," explains Laura DeSoto, Experian's SVP, product development and marketing, consumer information unit. "We want to create an alternative consumer report to a credit report to help underserved consumers."
Among the data Experian is considering are utility records, prepaid card histories, lease information, and, for those with a bank account but no lending relationship, demand deposit account or checking account data. Experian is conducting a pilot in the Los Angeles area with banks and credit unions in which they aggregate this information, which is not traditionally reported in its credit profiles, to see if it provides financial institutions with enough of a risk profile on individuals.
"Risk is probably banks' No. 1 concern [around the underbanked]," says DeSoto. "How can they assess this risk? Lenders want to use their current underwriting systems so data can be used in the same stream. Rather than creating a completely separate system, we want to help them create something integrated with what they have."
That is the crux of the matter, according to BearingPoint's Ramsey. With banked customers, it is generally quite easy for banks to manage anti-money laundering and know-your-customer issues. With the unbanked/underbanked, however, "A lot of these folks want to stay under the radar," Ramsey says. "If I can't completely know my customers, how can I be comfortable going after them?"
Xoom's Joaquin, however, thinks the hyper risk aversion among banks toward the underbanked is somewhat unnecessary. "They're a low-risk customer because they operate in a cash-only environment," he contends. "You receive cash for the transaction so there's little chance of fraud."
Put in the proper perspective, there indeed are some elements that make the underbanked somewhat of a lower risk than traditional customers. "Losses are minimal if they're handled properly," opines Accenture's Weisel. "The transactions are smaller, and you're dealing with cash or stored value cards where the funds have already been collected. I think the risk is manageable for banks."
With regard to payments risk, he adds, it all depends on how well the bank can verify the customers. "That's why I like the employer angle so much," Weisel relates.