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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Pursuing Quality Innovation in the Prepaid Card Industry

Compass Advisory Note on Prepaid Quality Innovation

The Center for Financial Services Innovation has just published its Compass Advisory Note about pursuing quality in prepaid cards. It features NetSpend and Banking Up as early adopters of the Compass Guide to Prepaid.

The Compass principles have helped Banking Up prioritize its pipeline of technical and operational developments: we have brought to the front of the line those developments that would have the most immediate impact along the Compass Principles.

We looked at our pipeline of future product development items and identified those that would have an immediate impact on improving consumer trust. At the time, we were:

  • Building a new mobile app,
  • Reconfiguring our live Customer Support service,
  • Trying to optimize our online customer acquisition,
  • and we wanted to improve our online self-help system.

We took each of the above topics and looked at how we could deploy them in the way that was the most consistent with the Compass Principles.
For example, we started by simply including in our mobile app a button that would immediately display all the fees in a box formatted as suggested by the Compass Principles.
We switched vendors for our Customer Identification Process and chose a solution that minimized the need to escalate to faxing or scanning paper documents, because many applicants don’t have easy access to faxes or scanners.

Some of the things we planned to do have proven more challenging than others. For example, we had under-estimated the amount of effort needed to improve the education & guidance intended to help customers understand the product and optimize its use or minimize the fees.
We have planned to create an interactive contextual help system to replace our FAQs and to produce a number of simple “how to” videos. We still have not deployed those items because they require a lot more content production work than we had anticipated.

Overall, our advice to those who want to use CFSI’s Compass Principles in Prepaid would be to consider this first and foremost as a “consumer trust building” initiative.
Ask yourself what changes you can make to your product and operations that will result in consumers trusting you and your service more than they would otherwise. Whatever the size of our organization, this is a simple criteria to apply, and potential detractors inside your organization will have a hard time fighting this because no one can be seen siding against increasing consumer trust.

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Charlotte Stallings on prepaid cards

Good advice from Charlotte Stallings on My Fox Houston about reloadable prepaid cards:

  • read the fine print
  • select a card with low or no monthly fee
  • get direct deposit on the card to avoid trips to the check casher

Pretty Popular Prepaid Payment Cards:

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Help me figure out the fees!

Many in the payment industry have complained that fees for payment cards or for checking accounts are difficult to figure out.  So much so that respectable institutions like Bretton Woods and Consumers Union have published contradictory conclusions about which products are the least or the most expensive, while looking at pretty much the same set of products.

I have been arguing that fees are usually fairly explicit and can be found on websites or on paper agreements sent by mail to account holders. Evidently, the current action by the State of Florida against a number of prepaid card providers shows that there is still some improvement to be made in the quality of disclosures. Nevertheless, the most important factor in the impact of fees tends to be forgotten: how will people actually use the product?

That’s why we have introduced recently an interactive fee calculator on the iBankUP website. The calculator allows people to specify how they intend to use our payment  service.

We ask 7 questions to our visitors:

1- how much $$ will you direct-deposit to the card every month?
2- how many cash deposits will you make per year (using a Green Dot MoneyPak)?
3- How many cash withdrawals will you make from ATMs every month?,
4- How many bills will you pay (i.e. by writing checks) per month?
5- How many PIN-based purchase transactions are you likely to do every month?
6- Are you accident-prone? How many times per year will you attempt to spend more than you have?
7- How often do you think you will need to call customer support and speak with an agent?

Fee CalculatorOnce a visitor to the site has answered the seven questions, a simple press on the “Calculate” button will produce the total sum of fees that the user would incur during an entire year. Of course, we also show how much fees some of our competitors would have charged based on the same behavior.

You can try the calculator by clicking here.

We also explain the math behind the calculator in an accompanying document.

We sure hope that others in the industry will  do the same and publish their own calculators for all to see.

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Get the right kind of overdraft protection

During tough economic times, many of us can get dangerously close to the bottom of our checking accounts several times a year. As checks may not clear in the order we write them, sometimes our balance will even go negative by accident.  This is the dreaded overdraft.

Many years ago, banks invented a curious form of protection against overdrafts: you are permitted to overdraft, so that you don’t get embarrassed by a bounced check or a decline of your debit card in the shop, but you are charged a fee for this tolerance. The overdraft protection fee punishes you for having gone negative on your balance, while you find some money to get back into positive territory.

In all fairness, banks are giving you a temporary credit while your balance is negative and they deserve to be compensated for it. But $38 Billion during a single year? That’s $126 for every single of the 300 Million Americans, including newborns and the millions without a bank account.

According to economic research firm Moebs Services, here are the yearly revenues from overdraft fees collected by US banks since 2005:

2011 $38.0B estimate
2010 $35.4B estimate
2009 $37.1B actual
2008 $35.4B actual
2007 $34.1B actual
2006 $31.5B actual
2005 $29.7B actual

In 2010, under congressional and public pressure, banks and credit unions started changing the terms of checking accounts to ask for voluntary opt-in to overdraft protections instead of making it a systematic feature. That year, revenues from overdraft fees fell slightly back to their 2008 level.

In 2011, they are resuming their steady rise.

Not all of us overdraft our accounts. But those who do, tend to do it repeatedly. You don’t want to be part of the club of “frequent overdrafters”; this dubious distinction is costing hundreds of dollars per year.


Unfortunately, the people hurt the most by these fees are the ones who can least afford them.

The Consumer Finance Protection Bureau, which starts operating this summer, will certainly try to protect you against these overdraft protection fees and other abusive clauses hidden in bank disclosure statements that average 111 pages in length according to a report by the Pew Charitable Trust.
This is quite a long shot though. With steadily increasing revenues in the tens of billions, banks will not be tamed easily.

So, what are you to do to protect yourself? Oddly enough, don’t opt for overdraft protection: this is when the fees kick in. You could choose prepaid accounts that cannot overdraft and never charge an overdraft fee. Some of us in the financial industry are adhering to these simple “do no harm” rules, but we obviously need to do a better job of making our products known.

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