Serving the Underserved

Why mobile is the key to financial inclusion

By Jacqueline Cremos

Every day, our industry is finding new ways to use technology to create economic opportunities and empower the least advantaged among us. The Federal Reserve just released a study on the growing consumer usage of mobile financial services like mobile banking and mobile payments. This new data suggests that unbanked and underbanked consumers, who lack access to traditional financial services altogether or heavily rely on alternative—and often costly—financial programs, can reap some of the benefits of the financial sector through mobile applications. ETA has released a whitepaper examining the ways in which payments companies are serving the financially underserved.

Although it may seem like everyone has a bank account, in reality unbanked and underbanked consumers are a large (if often overlooked) demographic in the United States. A 2013 survey from the Federal Deposit Insurance Corporation (FDIC) found that 7.7 percent of U.S. households were unbanked (i.e., had no bank account), and 20 percent were underbanked, meaning that they had a bank account but also used an additional financial service (e.g., a money order, check-cashing service, tax refund anticipation loan, pawn shop loan, payday loan, auto title loan, or a paycheck advance/deposit advance). Together, unbanked and underbanked households represent 34.4 million U.S. households, or nearly a third of the population. Globally, about 2.5 billion adults lack any kind of access to financial services provided by regulated institutions.

Consider all the activities that depend on a bank account: saving up for short-term emergencies or long-term milestones (e.g., college or retirement), obtaining a credit card, paying bills online, taking out a mortgage, or obtaining a loan to start a small business. These all become exponentially more difficult—even impossible—without reliable access to banking.

Research conducted by the International Monetary Fund (IMF) shows that improving access to financial services (and particularly credit) stimulates economic growth in developing countries by facilitating entrepreneurship. As you remove barriers to credit (e.g., high fees, daunting bureaucratic requirements, and information asymmetries that specifically disadvantage small borrowers), it becomes easier to start or grow a business, and so economic output naturally increases. The World Bank has found that, in countries with stronger financial sectors, growth tends to disproportionately benefit the poor, whose incomes rise faster compared to poor people living in countries with less developed financial sectors. Access to a bank account or credit helps households better manage risk and afford short-term emergencies, such as medical bills. Financial inclusion is a win-win proposition—good for individuals and households that are struggling to gain a foothold, and good for the overall economy. Because banking and credit access are closely related, it’s hard to get one without the other.

Respondents to the Federal Reserve study who identified as underbanked reported using both mobile banking and mobile payments services at much higher rates than fully banked respondents. Of the underbanked respondents, 55 percent said they used mobile banking in the year before the study, compared to 39 percent of fully banked respondents. That is, the underbanked were 40 percent more likely to report having used a mobile banking service than the fully banked. And underbanked respondents were 70 percent more likely to have made a mobile payment than fully banked respondents. One explanation for this phenomenon may be that underbanked consumers rely more heavily on their cell phones to access the internet 
(perhaps lacking a computer or any other channel of online access). The Pew Research Center found that about 21 percent of the U.S. population relies mostly on their cell phones to go online. The implication of the Federal Reserve’s finding is that providing financial services to underbanked populations can be accomplished through mobile platforms because many underbanked consumers are already used to using these devices for these purposes. With 70 percent of underbanked respondents owning a smartphone (the same rate as fully banked respondents), there’s a large customer base that’s well suited to mobile financial solutions.

Accurately measuring the proportion of the U.S. population that is unbanked or underbanked can be difficult. That’s because alternative financial services providers tend not to keep track of their customers, and cash is hard to trace. But we know that mobile payments are gaining traction across several demographics, including the very groups that are statistically likelier to be unbanked or underbanked: minorities, poor people, and younger people. Across the board, 24 percent of mobile phone owners reported having made a mobile payment in the 12 months prior to the survey (up from 12 percent in 2011). Mobile payment usage was highest among the following:

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Minority groups: 32 percent of black respondents (nearly one in three), 29 percent of Hispanic respondents, and only 19 percent of white respondents reported using mobile payments. Additionally, 56 percent of Hispanic respondents reported having used mobile banking in the 12 months prior to the study, while 50 percent of black respondents and only 37 percent of white respondents did so. According to the FDIC, there are nearly 16 million black and Hispanic households in the United States that are either unbanked or underbanked. (Note: Although the Federal Reserve and FDIC studies define and use varying ethnic and race categories, this article focuses on the categories used in both: white, black, and Hispanic.)

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Lower-income groups: 41 percent of respondents making less than $25K/year compared to 29 percent among respondents making $25-$40K/year and 19 percent among respondents making $40K-$75K/year.

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Younger age groups: 32 percent of respondents aged 30-44 and 30 percent of those aged 18-29 reported having made a mobile payment in the last 12 months. Rates of mobile banking usage were highest among respondents aged 18-29 (67 percent compared to 43 percent for the population as a whole).

The trends observed in the behavior of underbanked consumers seem to persist when reviewing the groups that traditionally lack—or are systematically denied—access to financial services.

What are the implications of the Federal Reserve’s findings for the aims of financial inclusion? Making mobile banking more convenient is one way for financial institutions to reach underbanked consumers. But the goal of financial inclusion is not necessarily to give everyone a bank account. In many cases, it’s simply not practical, or even feasible, for an unbanked consumer to open and regularly use a bank account. Developing economies lack the infrastructure or sufficient branch locations to enable widespread bank account ownership. Here in the United States, opening a bank account often requires producing more than one form of identification (a parallel to the challenge of obtaining voter ID), proving citizenship or residency, and travelling to a branch during the workday. Strengthening the alternative financial services that underbanked consumers rely on would benefit those consumers who struggle with the barriers to accessing financial services.

Mobile money services have enjoyed success in other countries. By some estimates, there are more than 100 mobile money systems serving more than 40 million customers worldwide. Roughly one quarter of these customers (many of whom live below the poverty line) are served by Vodafone’s m-pesa, which currently operates in seven countries. Rather than encouraging people to open savings accounts or take out loans, mobile money services are a new set of “rails” for transmitting value, with local cash agents (often airtime resellers or retailers) serving as the network end points. m-pesa users are safer from muggings because their cell phones are much less visible than cash; they tend to pay less in transaction fees than they would to cash checks or place money orders; and they can start building a history of transactions that financial institutions can later use to determine creditworthiness.

Here in the United States, prepaid cards can function in the same way that mobile money services do abroad. These are network-branded (think Visa, Mastercard, Discover, etc.), general purpose, reloadable prepaid cards that can be refilled either with cash or via direct deposit. ETA strongly supports prepaid cards as a tool for expanding financial inclusion, not least because they’re mobile-friendly. Most prepaid cards can be loaded onto smartphones, making it easy to view your balance and top it up. Having your paycheck deposited directly onto a prepaid card reduces—or even eliminates—your dependence on a bank account. Prepaid cards tend to be more secure than mobile money services; consumers are 100 percent protected from liability for fraud (just like with a conventional debit or credit card). Prepaid cards offer many of the same benefits as mobile money services—but with added convenience and security—making them an excellent choice for unbanked and underbanked consumers here in the United States.

Unbanked and underbanked consumers are a huge, untapped market. KPMG estimates that the financially underserved market represents nearly $1.3 trillion in wages. As underbanked consumers gain access to financial services, starting with electronic payments and moving onto more sophisticated financial services (e.g., savings, credit, and insurance), they create enormous value for our economy. The Federal Reserve’s research adds to an existing wealth of evidence suggesting that mobile platforms are a promising, if underused, way to reach people who lack access to robust financial services. There’s a promising market for apps that make it easy and convenient to save and spend money. And the payments industry is up to the challenge of finding new ways for consumers to benefit from mobile financial services. TT

Jacqueline Cremos is ETA’s program support specialist. Reach her at [email protected].