Bill Gates’ take on frictionless banking with cellphones for all

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.

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Mobile Phones Foster Financial & Economic Inclusion

Apple confirmed yesterday Sept 9 2014 its unsurpassed ability to address the high end smartphone market with the introduction of the iPhone 6 and Applepay.

While there may be 25M people in the US whose contracts are up for renewal and who will jump at (or rather wait in line for) the opportunity to buy a new iPhone, there is a larger number of people for whom a smartphone means a lot more than a 25% gain in screen size or processing power.
They are the economically and financially under-served, or even the excluded.

Two government agencies have published whitepapers about the positive impact of mobile phones on economic and financial inclusion:
Federal Reserve Bank of Boston's Mobile Financial Services Article

FDIC White Paper On Economic Inclusion Via Mobile Phones

  • The FDIC published earlier this year a study assessing the potential impact on economic inclusion of financial services delivered by mobile phone
  • The Federal Bank of Boston just published an article by Elisa Tavilla about expanding financial access an inclusion with mobile financial services.

Download the documents by clicking on the cover pictures.

Both documents point to a promising and positive influence of mobile phones on fostering economic and financial inclusion. The anticipated “Haves versus Have Nots” problem with access to technology does not actually come into play here because under-served people use more smartphones than the average US population.

It is now up to the banking industry to leverage the unexpected penetration of smartphones and the expected positive influence they will have on helping people climb the financial inclusion ladder.

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The mobile phone as the solution to the financial education conundrum

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.

smartphone financial guidanceI 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.

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Prepaid is the new checking… Now what’s next?

Prepaid As Checking is a FoundationI think the prepaid card industry has reached a maturity plateau in terms of features, access, and acceptance. Products like H&R Block’s Emerald, American Express Bluebird, T-Mobile’s Mobile Money and our own UPside card are pretty good alternatives to checking accounts.

While you don’t get a paper checkbook with those cards, you can pay your bills electronically, and at least the Bluebird and the UPside cards offer paper checks on demand.

You can also deposit paper checks directly into the cards through mobile photo deposit powered by companies like FIS and Ingo Money or services like WalMart’s Rapid Reload.

Don’t get me wrong: prepaid cards still have a lot of growth potential. A majority of people who could benefit from them still don’t use them, mostly because they are not aware of their availability, or because they confuse them with one-time use gift cards. So, the industry has some work to do marketing the cards to the right people through the right channels. For example, under-banked employees who work for small and medium businesses generally do not have access to dedicated payroll cards; so the new generation of “prepaid as checking” has an important market to address among the 110M Americans who work for the 2M businesses of less than 1,000 employees.

Prepaid cards have the ability to upgrade most consumers out of the “cash only” economy by offering them a way to manage their deposits and payments electronically (and with paper checks for as long as paper checks will survive). So far so good.

What should the industry do now to bring consumers one or several more levels up in the world of banking?

Beyond prepaid: Savings and CreditAmong the several services that people need beyond deposits and payments, are at least 2 obvious ones:

  • Savings: the ability to set money aside for later
  • Credit: the ability to borrow some money

Neither of those two services are easy to deploy, in particular among those who need them most: low to moderate income (LMI) consumers.

Savings

Allowing people to set money aside for later is in fact technically easy: several prepaid cards already provide savings “purses” or sub-accounts. Others offer a separate but easy to open savings account.

What is difficult is to motivate people to save, especially when they live paycheck to paycheck and don’t have much to save at all. Current interest rates are so low that the interest accumulated at the end of the year is just a few dollars or even less for most people.

Research is being conducted by the likes of Doorways to Dreams to “gamify” savings: this consists of combining the act of savings with some fun, challenging and rewarding activities other than just accrued interest. Financial fitness games, sweepstakes, contests… are all options being explored. SaveUp is a good example of savings gamification.

Credit

Credit is even more difficult: prepaid cards cannot help build up credit files and credit scores because they are just a deposit instrument.

Very short term loans from payday lenders and pawn shops are easily accessible to prepaid cardholders with no credit history, but they are costly and don’t usually build credit scores.

Alternative (to FICO) credit scoring services that rely on “Big Data” tend to have a market ignition problem, because they are of little use to creditors if few borrowers use them, and of little use to borrowers if few creditors consult them. While the law requires creditors to consider all available credit scores, the market reality is that the FICO score is still indispensable for the vast majority of consumers, while the recent interest in Big Data based scoring has not yielded practical scalable products yet.

Un(der)banked people eagerly seek credit cards because they do build up mainstream credit files and scores by reporting to the top 3 Credit Bureaus. However, the standard qualification criteria for mainstream credit cards are ill-suited because they rely on the very same credit scoring system they contribute to.

Here is how we think access to credit can be provided to prepaid cardholders:

  • use the savings that users of certain prepaid cards have been able to set aside as the security deposit  for a secured credit card
  • use the history of prepaid card transactions as input data for the underwriting decision, to evaluate the creditworthiness of the cardholder

Secured credit cards are not very widespread but they require little of no prior credit history and they do report to the 3 main credit bureaus.

Eligible people would end up with two cards in their wallet:

  • The prepaid card available as a ‘safe to spend’ instrument for everyday purchases.
  • The secured credit card to be used very carefully as its bill will come at the end of every month. When handled within the intended rules, the card starts contributing to the user’s FICO score.

In summary, the prepaid card industry has the opportunity to “graduate” its customers into savings and credit services, by using prepaid cards as a foundation. This is a bright and promising future.

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