The rapid proliferation of smartphones has sparked a wave of innovation and speculation about how the trend will affect mobile payments. Experts suggest that the underbanked — people or businesses with little or no access to the mainstream financial services of retail banks — offer big potential for market growth.
The underbanked have their roots in the Great Depression, when people who were wary of losing their money (despite Roosevelt’s signing of the Banking Act of 1933, which established the FDIC) preferred dealing in cash to trusting banks. Eighty years later, the ranks of the underbanked are growing, with 68 million people — that’s one in every five U.S. households — steering clear of traditional financial institutions.
Hamed Shahbazi, CEO of bill-payment service provider TIO Networks, notes that the underbanked have been quicker than average Americans to adopt mobile phones.
“Not only are they more likely to own a cell phone, but because these low- to moderate-income consumers are less likely to have in-home internet access, they rely more on their phones for everyday activities, such as paying bills and managing money,” he writes for GigaOm. “Ironically then, it may turn out that the underbanked may have a strong influence [on] tomorrow’s mobile payments.”
In fact, the underbanked are adopting mobile payments at faster rates than the rest of the population. According to the Center for Financial Services Innovation, 29 percent of consumers have used mobile banking in the past 12 months, compared with 21 percent of all consumers, and 17 percent of the underbanked population has used mobile payments, compared with 12 percent of the total.
Why Target the Underbanked?
According to a CFSI report [PDF], the demographic groups that overlap significantly with the underbanked — including Hispanics, African-Americans, and young people — also rely heavily on texting and data. They’re hungry for new solutions for managing their money.
This owes, at least in part, to the fact that individuals outside the mainstream money market are often required to pay high service fees for even basic transactions, because traditional banks view them as risky investments (based on low incomes and bad credit scores), Shahbazi says. In 2011 alone, the underbanked paid $78 billion in interest and service fees.
Tech companies willing to invest in alternatives that save these consumers time and money could be met with open arms.
The CFSI report outlines some potential obstacles in reaching the underbanked with mobile-payment technologies, particularly mobile wallets and near-field-communication devices.
“They face substantial barriers to widespread adoption, including issues related to the business model and revenue potential, customer ownership, infrastructure, the value proposition across the payments ecosystem, and consumer psychology,” the report states, adding that mobile wallets and NFC payments are currently structured to support existing accounts rather than new ones.
A 2013 study on digital wallets by comScore found that only 51 percent of consumers are aware of digital wallets other than PayPal and only 12 percent of consumers said they’ve used a digital wallet other than PayPal. If more consumers are to adopt the technology, they need to be educated about how it works and what its benefits are.
Beyond education, government regulations at both the federal and state levels will likely prove another hindrance to financial tech companies, Shahbazi writes. Startups face often high costs to comply with licensing requirements in each state.
What This Means for Small Business
The CFSI suggests that the key to helping the underbanked adopt mobile payments is through prepaid accounts that can be used for making deposits, conducting person-to-person transactions, and paying bills. These accounts are easier to acquire than checking accounts and are safer and more convenient than cash.
The global prepaid market is expected to reach $822 billion by 2017, a number fueled largely by the underbanked, according to a study commissioned by MasterCard [PDF].
If small businesses make it easier for the underbanked to make mobile payments via prepaid accounts, both parties are bound to benefit. Becoming an early adopter of mobile-payment technologies could help you win over a growing segment of the population.