If delivering financial services to the low and moderate income(LMI) community was easy, banks would already be satisfying thatmarket without the regulators forcing that action through communitydevelopment initiatives.
But it isn’t easy and it is expensive and so most banks, with somevery recent exceptions, have avoided the LMI market. The productsthat do satisfy the needs of this market, Prepaid FinancialServices (PFS) products, are condemmed by regulators and consumergroups because they cost more than free checking. But cost isirrelevant if the product doesn’t meet the needs of theconsumer.
The LMI community has voted against bank products and for PFSproducts with their hard-earned dollars. It is about time wefocused on this value proposition that drives adoption rather thanthe price that is higher than free.
I contend in my upcoming report “Grasping the Benefits of PrepaidFinancial Services: A Battle Plan for Banks” that the key benefitsthat drive adoption by the LMI community are Liquidity, Convenienceand Cost, and in that order.
The inability to access the funds locked in the check could mean adisappointing dinner for the family tonight; the inability to getmore minutes on the mobile phone needed to get the next job; orlate fees on a utility bill.
The report identifies how this urgent need for liquidity is theweakest aspect traditional retail financial institutions offeringsand that this is the primary driver that sends the LMI consumer toPrepaid Financial Services and to alternative financial servicesproviders despite the higher cost.
The report investigates liquidity as it relates to three financialservices: withdrawals, deposits, and check cashing. But suffice itto say that is where traditional financial institutions fall short;Prepaid Financial Services deliver, especially from the perspectiveof service availability.
The most common method for evaluating convenience is to look at thenumber of ATMs and branches available for withdrawals and depositsin a specific geography, in this case a geography where the LMIcommunity works and lives.
In this report, Mercator selected three zip codes in Stockton,California that represent the core of the Stockton low incomeneighborhood. Within these three zip codes we found that Bank ofAmerica is represented with 2 ATMs and 1 branch, where as a GreenDot cardholder has access to 5 MoneyPass ATMs and 8 retail outletsthat include Walgreens, K-Mart, 7-Eleven, Rite Aid, Radioshack, andQuick Stop Markets.
Note that in conducting this research, Mercator also looked forATMs and branches participating in the CO-OP network and the CreditUnion 24 (CU24) network, but found only three ATM locations, noneof which were surcharge free even to members. The LMI consumer thatlives or works in Stockton will discover that dealing with a creditunion is very inconvenient.
Mercator also plotted the addresses for all of the above financialservices providers against the transit map of Stockton. Thisexercise makes the benefits of the Prepaid Financial Services evenclearer because it delivers a higher value to the LMI community.The resulting map clearly indicates that if a consumer uses masstransit they will find that a Prepaid Financial Services product ismuch more convenient.
First, recognize that several Prepaid Financial Services productstoday already come very close to satisfying the FDIC’s Safe modeldesigned to establish criteria for how well a financial servicesproduct meets the needs of the LMI community.
That said, the Safe model does not evaluate liquidity orconvenience which are the top two issues that Mercator believeswill determine the acceptability of a PFS product for the LMIcommunity. Cost, after all, is a relative issue. If all competingproducts offered equal liquidity and convenience, then the lowestcost product would win, assuming equal brand awareness and the lackof additional features or services. But it is never thatsimple.
There will always be a wide range of issues associated withliquidity and convenience as well as with brand awareness. One cardmight be very convenient to the apartment, the other moreconvenient to work. One card may cost more to use at the ATM, butchecks can be deposited as cash onto the card at the retail storeacross the street from work. Or perhaps the liquidity andconvenience are exactly equal, but one card costs a little more butalso includes a savings account, a pharmaceutical discount, oroffers discounts for local merchants. When contemplating eachvariance, a very complex decision matrix evolves, and price israrely the top consideration.