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.
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 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.
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.
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.
- 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.
The 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.
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.
Bill Gates talks about access to banking for all on Bloomberg Television.
His take: the banking fees from the developed world are just too high for the “rest of the world”.
While pervasive low cost technology like cellphones is the obvious product solution, the business model needs to be different.
It is not as insurmountable as it sounds, because the costs of doing business are also different:
- marketing can be significantly cheaper: no need to advertise on TV
- risk is lower: smaller amounts are involved and there is a lot less credit (mostly deposits & payments)
- regulations can be lighter: see how M-Pesa got local support from the government in Kenya
While this may be too much to ask from large banks from the western world to adapt to, local players can greatly optimize their services and reduce dramatically the number of un-banked in the world.
Tell me and I forget
Teach me and I remember
Involve me and I learn
In other words, we learn most by doing.
Up to now, most financial education has attempted to “tell” or “teach”. Even in today’s digital world, financial literacy has mostly consisted of transposing to computer screens the content of courses and books about managing money. Video tutorials are more entertaining than text and can replicate some of the experience of a physical classroom, but they are still a one-way teaching method.
Some have ventured into the world of interactive games, all the way to letting players navigate inside 3D virtual worlds. Role playing can let users manage some fictitious wealth, pretty much like the game of Monopoly. However, these games do not get you involved in managing your actual finances.
Budgeting tools like Mint or Money Desktop do connect to your actual money by reading information out of your bank accounts and credit cards. However, they remain separate from the online management access that your bank may have given you, so they duplicate some of the functions while not allowing you to actually initiate any movement of money.
I believe that the holy grail of efficient financial education is going to be smartphone apps that combine financial guidance and budgeting with the full management of your money into a single application. GoBank is an example of bundling budgeting with the full access to a payment card within a single app. It is currently limited to one single payment instrument, so it does not help you manage other bank accounts or cards, but it is a promising first step.
I am pretty excited at the prospect of developing an application for low to medium income (LMI) consumers, which will combine:
- the management of a prepaid card used as alternative to a checking account
- the management of a credit card used to pay certain bills and build up a credit score
- financial guidance in the form of just-in-time over-the-air delivery of advice, exercises, and call-to-actions applicable to the 2 cards
I am looking forward to the work that we will have to put into developing and fine-tuning the “algorithm” that will trigger the proper pieces of financial guidance at the right time and in the right amounts to foster best cardholder behavior.