*This is the second post in a series of blogs about financial service companies and their efforts to serve the unbanked and underbanked population in the United States.
From the outside Mango Financial looks more like a trendy yogurt shop than a financial services retail center. It doesn’t look like a bank, but that’s ok. It doesn’t want to.
The location, which opened in Austin last year, draws customers who aren’t looking for a bank. The company’s mission is among a growing trend in the industry, to serve the unbanked or underbanked (some 60 million people in the US). Mango and other companies like it offer prepaid debit cards, savings accounts, and other services to people without checking accounts.
People choose not to open bank accounts for various reasons — they don’t qualify, fees and costs are too high, or they don’t have the proper identification. Traditional banks, which are struggling to recover from the economic recession, have tighter lending criteria and new government regulations may force banks to charge heftier fees. Those same fees may drive some people away from banks and they will start looking for other options.
New non-bank companies on the scene are taking advantage of the opening in the market. One such company, Green Dot Corporation, which has more than 3 million active prepaid debit cards, went public through an IPO in July 2010. The offering was so successful that it exceeded the company’s own expectations, raising nearly $165 million. The IPO got the attention of the financial world and has helped encourage Green Dot to develop new products and services such as a smartphone application which allows customers to take photos of checks and then deposit them directly into their prepaid accounts. Other strategies include growing its online services in order to attract more long-term customers.
Green Dot also is looking to make acquisitions. It plans to purchase bank holding company Bonneville Bancorp of Utah. Owning a bank holding company would cut operating costs for Green Dot by allowing the company to issue cards to customers directly, instead of using a third-party bank to issue the cards.
Rival NetSpend (with more than 2 million active cards) also went public in 2010, raising $204 million. NetSpend pointed to the solid trends in the industry to entice potential investors. Card-based electronic payments are increasing and NetSpend says that within the electronic payment card market, debit products are growing significantly faster than credit products, with growth from 2004 to 2009 estimated to be more than 16% for debit versus a nearly 12% growth rate for credit. According to NetSpend’s IPO filings, growth of prepaid cards has accelerated significantly, with the transaction value estimated at $178 billion in 2010, up from $113 billion in 2007.
The prepaid debit industry is appealing to a lot of businesses, even a few less likely players. Retail giant Wal-Mart is slowly beginning to offer more financial services to its traditionally lower-income and middle-class customers. Wal-Mart already sells Green Dot’s prepaid cards in its stores and the company took a minority stake in Green Dot before its IPO in 2010.
In the United States, Wal-Mart also is busy opening in-store MoneyCenters, which offer wire transfers, check-cashing, and bill pay services. Those MoneyCenters are among the 7,000 US companies that are known as check cashers or payday lenders, which cater to consumers who don’t meet prime lending criteria. Top companies in the industry include Dollar Financial and ACE Cash Express. These companies suffered a backlash in the last several years for charging fees and extremely high interest rates (up to 300%). Many payday lenders are criticized for charging the most to a low-income population that can afford it the least. Some states have banned such companies from offering payday loans. New financial regulation also will likely impact this industry and make it more difficult for them to operate by putting new limits on payday loans.
Companies in the prepaid debit industry — which often act as third-party service providers to banks — also face some risk with respect to regulation. NetSpend’s IPO was delayed after partner Meta Financial Group, which issues more than 70% of NetSpend’s cards, was blocked by regulators from issuing short-term, high-interest payday loans. Regulators also forced MetaBank to seek written approval before it enters into any new third-party agreements, including prepaid access. The setback for Meta Financial Group sent NetSpend looking to add additional issuers for its products. Since NetSpend is not a bank holding company, it cannot issue its cards directly and must rely on issuing banks, along with a network of financial service centers and other retailers. Green Dot is trying to avoid such problems by acquiring its own bank holding company.
*Tomorrow I will discuss how traditional banks are reacting to competition from nonbanks.
Ultimately, even the financial services companies which are not banks themselves, must partner with banks to provide depository services and comply with regulations. Disclosure: I run Plastyc, a new financial services company that must rely on a good relationship with banks.
The money of both unbanked and banked consumers ends up being kept at a bank.
Financial services companies which will succeed beyond the traditional banking market will do so based on what they can build around (or on top of) banks to make services better and more accessible at competitive prices.
Look at the wireless telephony industry: both Virgin Mobile and Apple are changing the way they serve their respective customers while relying on established and licensed wireless carriers that they partner with.
Fostering creativity, focusing on user experience and innovating at Internet speed are the key factors reshaping the banking services industry. Like with telephony, the Internet, mobile phones, applications and communities of creative developers will make all the difference.
I am not sure that banking at WalMart or CVS Pharmacy instead of at a bank branch is a sustainable engine of growth for new financial services. Purchasing financial products in supermarkets was just the first phase of the change in banking, and probably did not do much to improve customer service.
The next wave will be anywhere anytime banking, with new market players un-incumbered by physical channels.
These “new” financial services companies are like banks in sheep’s clothing. They offer bank-like services to people who either don’t like banks or don’t qualify for traditional checking accounts. BUT their money winds up in a bank anyway.
They infiltrate the flock by touting their “non-bank” status… but are forced to partner with banks anyway.
I think there is a need for different financial services that traditional banks don’t offer. That is why companies like these are finding success. Big banks will either just have to partner with these companies or start offering other services in order to cater to different customers.