More Customer Due Diligence is Good for Financial Inclusion

At first blush, increased due diligence on potential customers results in less customers being approved for a financial service, which goes against including more people. If we make it tougher for applicants to be accepted, aren’t we effectively engaging in “customer suppression”?Detect Fraudsters

In my industry of prepaid accounts deployed as alternatives to checking accounts, some increase in Customer Due Diligence, or “CDD”, will actually increase financial inclusion.

The imperative of low priced Alternative Financial Services

Extending financial services to under-banked consumers must obviously be achieved with low priced products that charge the smallest possible fees. This is not just an altruistic statement on my part: charging high fees to people who cannot afford them is a recipe for short product life times. Shorter life times mean lower life time value in dollars earned, as customers churn rapidly.
Therefore, providers of products for the 138 Million financially struggling Americans (as counted by the Center for Financial Services Innovations in its recent study on Financial Health) must operate at low financial margins to be successful in the long run.

Evidently, low-margin businesses must excel at controlling their costs. One of the most specific and vexing costs in financial services is fraud. Fighting fraud effectively in Banking Up’s main market of prepaid card services can make the difference between a profitable deployment and one that should be discontinued.

With interest rates at their lowest in many years, the yearly profit on a transaction account operated for a low-income customer may only be a few dollars or a couple of tens of dollars for the financial service provider. Such small profits can easily by wiped out many times over by a single instance of fraud.

Fraud can ruin a good service for everybody

Fraud in retail banking may appear to be relatively trivial compared to tax or securities fraud; however, it tends to be more common and more easily repeatable by perpetrators.
The most frequent instances of fraud in retail banking include:

  • Identity theft
  • Account takeover
  • Money laundering
  • Illegitimate disputes of transactions

In rare occasions, a good customer may suddenly become a fraudster under sudden hardship. In most cases though, thwarting fraud attempts can be handled through proper due Customer Due Diligence, at the time of opening a new account:

  • Is a new customer known to be a dangerous individual?
  • Is a new customer known to have perpetrated prior fraud at the detriment of other service providers?
  • Is a new customer attempting to impersonate someone else?
  • Is a new customer attempting to be unreachable by providing bogus or anonymous email address or phone number?

Letting a fraudster in has both a direct monetary cost for transactions liability, and an overhead cost in time and materials used to detect and handle the fraud. In some of the most insidious cases, a fraudster will add insult to injury by inducing significant and explicit customer support costs: people filing fraudulent cases of transaction disputes with merchants will often spend a lot of time on the phone posturing as victims when they are actually abusing shamelessly the consumer protection afforded by Regulation E.
Finding out about such abusers before granting them an account can avoid loosing several times the amount of yearly profit generated by legitimate customers.

In favor of stricter Customer Due Diligence

The due diligence questions are answered as part of the Customer Identification Process (“CIP”) during account opening, to satisfy the Know Your Customer {“KYC”} requirements in banking services. Our own experience with opening General Purpose Reloadable prepaid card accounts shows that  it makes commercial sense to exercise more scrutiny than typically required for KYC compliance purpose, in order to prevent fraud a few days, weeks or months after the opening of a new account.
In other words, we tend to go “beyond the call of duty”.

While there may be  slight risk of declining a legitimate user, it is easy to offer declined users the option to contact you in case they think they have been unduly rejected: we always display an invitation to email or phone us directly when we decline someone.
Given the very small amount of applicants who reach out to us because they are frustrated that we have declined them, I think we are quite right to have tightened our Customer Due Diligence.

Good customers should not have to pay for bad customers. Exercising tighter Customer Due Diligence than may be required by the banks and their regulators is a proven way to ensure the commercial viability of inclusive financial services, where low prices must be preserved for all.

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Prepaid and Credit: not as incompatible as you think

For Consumers, One Product = One Service

I learned from my days in the Consumer Electronics industry that most hybrid or combination products don’t make sense. For example, while well over 90% of people who have a TV also have a DVD or Blu-Ray player, nobody would buy a combination TV set + DVD/BR. Even when TVs used to be big and fat and had room for a built-in VCR, TVs with built-in VCRs stayed unsold on store shelves.

This is because consumers associate one device with one function: watching TV is not the same as watching movies, even if  the same screen is being used technically.

Granted, today’s smartphones look like the Swiss-army knives of consumer electronics, but they are really a whole new category of personal companions built around a new type of interaction not inherited from prior devices: the touch screen.

Swiss Army Knife CardPlastic or Plastic? The Seeds of Confusion

Consumer confusion is a terrible thing in more than one way: it can even hurt people. This is exactly the point that the Consumer Financial Protection Bureau is making when writing up 100’s of pages of proposed rule making about credit being extended out of prepaid cards through overdraft facilities. A credit card looks exactly the same as a prepaid card: a very standardized rectangle of plastic. The only difference between the two is that the prepaid card has the word “debit” printed on its front. And just to increase the confusion, why “debit” when it should really say “prepaid”? And why offer prepaid cardholders the option to run a transaction through the credit rails anyways??

On the one hand, a prepaid card with no overdraft capabilities is a very safe product: nothing wrong can happen to the cardholder except the embarrassment of being declined for insufficient funds. On the other hand, a credit card can drive cardholders into more debt than they can afford and can damage their credit score. Unfortunately, everything about prepaid versus credit cards, from the physical device to the choice of credit versus debit network is prone to creating confusion in the mind of cardholders.

Prepaid Cards and Credit  Complement Each Other

Remarkably, prepaid cards and credit can be made to work together in a very powerful way and without confusing consumers: by either using prepaid cards as a precursor to credit or by using prepaid cards as a channel for credit disbursement and loan management.

Prepaid  As Precursor To CreditPrepaid as Precursor to Short Term Credit

Prepaid cards can be a stepping stone towards short term credit, in particular for people with no or thin credit files.

Under-banked people as well a Millenials and recent immigrants use prepaid cards as substitutes for checking accounts. A paper checkbook being the only thing missing from the best prepaid card accounts, when compared with regular checking accounts, people can deposit their salaries and tax refunds, pay bills, pay in shops and even set money aside in the built-in saving purses of prepaid cards.

For such users, prepaid card usage history can be leveraged in much the same way as checking account usage history to evaluate how much money people have access to, and how responsible they are in its management. Prepaid card usage can either be used in the underwriting process of granting a loan, or can be used to pre-qualify people with the best chances of success with certain types of loans.

For example, prepaid cardholders who have been able to set aside $300 in the savings purse of their prepaid card, and have organized the regular direct deposit of their salary in the card have significant chances of being approved for a secured credit card, if they agree to turn the $300 they had saved into the required security deposit for the credit card. Prepaid cardholders with recurrent direct deposits but without a savings “pocket” may be eligible for an unsecured loan of the kind provided by LendUp.

The loan product that prepaid cardholders may qualify for is completely separate from the prepaid card and does not need to be issued by the same financial institution.

The US Treasury is devoting a part of its recent Financial Innovations fund to researching how prepaid cardholders and safely by offered access to secured credit cards and what type of financial guidance will help them be more successful once they have been approved for a secured credit card. The project participants are Banking Up, the Consumer Federation of America, Payments Law and the Marketing and Consumer Policy Office of the George Washington University School of Business.

Prepaid As Disbursement for CreditPrepaid as Disbursement and Budgeting Channel for Short Term Credit

In the opposite direction, someone having been granted a short term loan could choose to receive the proceeds of the loan into either an existing or a new prepaid card, mostly for the purpose of separating the loan money from the rest of their finances and facilitate the management of the loan for its intended purpose.

People who open a savings account at the same time as a checking account are provably more responsible with their money than bank customers who don’t.

Oportun has disbursed $1.3B to more than 485,000 customers and is offering a prepaid card to their repeat customers as a way to help them better manage their loan money.

Even borrowers who are already banked benefit from being offered the option of receiving their loan into a separate prepaid card as it helps them keep their resolutions to use the money for specific goals.

Credit with Upstream or Downstream Prepaid

The industry has attempted so far to build prepaid with credit products by adding overdraft or other very short term lending options to prepaid cards. This has all the trappings of a two-in-one product that will confuse many customers.

Instead, the market should deploy credit with prepaid products, where a prepaid card is used either as a precursor to credit or as a vehicle for receiving the loan money. This will increase both the number of people who are eligible for good and safe short term credit, and the odds that they will be successful with the resulting loan.

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WebRTC: a revolution is coming in Customer Service

Providing good customer support is one of the most vexing problems with branch-less banking. The industry currently offers multiple but largely disconnected support channels:

  • Email: not a real-time interaction, with response times varying from a few hours to a few days. It is a good option for customers used to typing text for their jobs, but it can be uncomfortable for people who rarely get to type on a computer keyboard. The quality of the service is a combination of the response speed and the qualification and communication skills of the customer support agent answering the email inquiry.
  • Chat: this is like the real-time version of email. Customers type a question or describe an issue in a dialog box, and a customer service agent answers immediately by typing a response or asking for further clarification. The quality is defined entirely by the technical qualification and communication skills of the agent.

Bad Customer Service

  • Interactive Voice Response (“IVR“) server: an automated real-time service accessed by calling a toll-free number and by punching the numeric keys 0-9 on the keypad of the phone. The quality is a function how well the “call flow” was designed: easy-to-understand navigation, obvious options for rescuing the customer when lost somewhere down the navigation tree, and short voice prompts are all indispensable. IVRs are also unable to deal with complex customer input like serial numbers, dates of purchase or shipping addresses.
  • Call Center manned by customer support agents: this is often the most comfortable interaction for customers needing help, because it is a direct person-to-person interaction with no technology intermediary. Like with chat, the quality is defined entirely by the technical qualification and communication skills of the agent (and the waiting time during peak hours).

Because these systems operate in parallel with each other, frustration can mount rapidly when customers are asked to start over from scratch and repeat the description of their problem when switching from one channel to another.

Now imagine the following interaction:

Alice realizes that her debit card has just expired, but she has not received a new card by mail (or she can’t find that replacement card in the mail anyways). She no longer has a fixed phone line at home, so she calls the toll-free number at the back of her card from her mobile phone. As expected, ordering a missing replacement card after the expiration of the current one is not an option in the IVR call flow.
Fortunately though, the IVR server has detected that she is calling from a cellphone and offers the option to explain “other” problems by escalating to a chat session with an agent: “we can send you a text message with a link to chat with one of our customer support representatives – Press ‘1’ to receive the text message with the chat link and terminate this call”. Alice presses ‘1’ and receives a text message 30 seconds later.
She clicks on the link in the message. This automatically starts her phone browser with a dialog box where she can type her request for a replacement card. The agent responds that Alice needs to provide the last 4 digits of her social security number and zip code for security reasons. Alice is uncomfortable providing this information by typing text in a browser window, so she responds by asking if she can talk to a customer representative instead.
Call Flow with WebRTCThe agent answers by inviting Alice to click on the “Talk to an Agent” button at the bottom of the browser window. Alice finds the button, clicks on it, and answers “Yes” to the popup question that appears on the front of the screen asking her to authorize access to her microphone to enable the call. The customer support representative greets her and asks her to confirm that she is calling to request a replacement card.
As the agent seeks to confirm Alice’s street address, Alice realizes that the bank still has her old address, so she needs to provide her new address to the bank. As she tells the agent that she has moved to a new place 3 months ago, the agent informs Alice that the security policy of the bank requires that she provides a proof of address because the move is less than 6 months ago. Alice starts feeling discouraged by the mounting hassle. The agent tells Alice that she has the option of providing this proof right away by taking a picture of a utility bill with her cellphone now, if she has one handy.
Alice does have her latest power bill from the mail she rummaged through to find her card, so she asks the agent “how do I do this?”. The agent invites Alice to look for the “Send Picture” button on the same browser screen she started the call from. Alice cliks on the button and answers “Yes” to the popup question that appears on the front of the screen asking her to authorize access to the camera on the phone. The browser screen changes temporarily to a frame showing what the camera sees surrounded by buttons to take the picture or cancel.
Alice lays her power bill flat on the table, takes the picture, and clicks the “Use” button that appears at the bottom of the screen as the picture looks OK to her. She tells the agent that she has just taken the picture. The agent asks for a minute of patience on the phone, and then confirms that she has been able to review the picture the bill and store it for future reference. Alice’s new card will be sent by mail tomorrow.


Web RTC diagram
Voice & video communication from within the browser

This scenario if possible thanks to a new upcoming technology called WebRTC or “Web Real Time Communication”. WebRTC is likely to do to voice and video telephony what HTML did to text: deliver the ability to handle voice and picture calls inside the formidable capabilities of the Internet, in a clickable and linkable manner. The distinction between channels of text, chat, voice and video evaporates as everything is handled from within the most ubiquitous of all platforms: the web browser.

From a customer standpoint, WebRTC will provide a rich and smooth interaction with a user-selectable choice of “closeness”, from any PC, tablet or phone, irrespective of the underlying operating system. It will reduce costs for service providers, as a single system will support multiple modes or interaction, and will improve quality and customer trust.

The WebRTC standard is not available yet on all browsers: somewhat tricky technical disagreements still remain between some large players.  Microsoft’s Internet Explorer and Apple’s Safari still lack native support for the WebRTC ingredients, while Chrome, Mozilla and Opera already support large parts of it. Part of the lag may also find its origins in the politics and vested interests in Skype (Mircosoft) and Siri (Apple). WebRTC can already be leveraged by developers of native mobile applications, so it would be possible for a service provider with mobile development resources to implement Alice’s scenario above from within a banking app.

Regardless of the implementation path, WebRTC is poised to generate vast improvements in mobile and online banking and accelerate the move towards branch-less banking.

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The tremendous cost of check cashing for American Workers (and how to avoid them)

The team at CurrenC SF has put together an excellent video about the benefits of direct deposits to alleviate the very high costs of check cashing for American workers.

Here it is:

This video Copyright CurrenC SF and the San Francisco Office of Financial Empowerment


Coming soon: DirectDeposit.Center  the place that delivers Direct Deposits to All.


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