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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“Consumers and Mobile Financial Services” report

The US Federal Reserve has just released a report about how consumers use mobile financial services.Download the report on Consumers and Mobile Financial Services - PDF reader required

The full report can be found here.

It contains a substantial section about how the under-banked population uses mobile phones to access financial services.

Just because people are un-banked or under-banked, does not mean that they are “unphoned”.

Mobile phone use is high among younger generations, minorities, and those with low levels of income—groups that are prone to be unbanked or underbanked.Mobile banking and mobile payments have the potential to expand financial access to the unbanked and underbanked by reducing transaction costs and increasing the accessibility of financial
products and services.

Although the report contains some contradictory numbers, it mentions that 91 percent of the underbanked have a mobile phone and 57 percent have a smartphone—rates far above those for the overall population.

As mentioned in an earlier post, we found that over 85% of the UPside Visa prepaid card users have a smartphone.
So we have just deployed a mobile banking application for both Android phones and iPhones.

Google Play Store iTunes App Store

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Rise of the underbanked

Below is an excellent video created by Bank 2.0 author Brett King.

This is exactly what we are seeing at Plastyc: strivers provide the core of the growth among the under-banked, not fresh immigrants.

Their motivations for being prepaid card accountholders?

  • Resetting their finances in a way that avoids further overdrafts (checking accounts) and debt (credit cards)
  • Choosing a product that costs less, has good mobile access, and does everything they need

Visa estimates that strivers are about 48MM in the US. A majority of them is Caucasian, 30% African American, and 7% Hispanics.

Read the article by Zachary Ehrlich in MyBankTracker

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Letter to the Board of Governors of the Federal Reserve System

On December 16, the Board of Governors of the Federal Reserve System met and proposed a way to implement the debit card interchange fee and routing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Board has requested comment before February 22, 2011, on their proposed rule that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

Here is a copy of the comment I have sent to the Board:

Board of Governors of the Federal Reserve System,
20th Street and Constitution Avenue NW
Washington DC 20551

RE: Comments to Docket 1404 – Debit Card Interchange Fee and Routing

I am the CEO of Plastyc Inc., a company devoted to delivering  financial services to the tens of millions of under-banked Americans.
We provide re-loadable prepaid card services in partnership with banks with less than $10B in assets.

Therefore, we are not impacted by the proposed regulations and can comment with the benefit of a position of neutrality.

We are particularly concerned by the un-intended negative consequences which are likely to impact the un-banked, under-banked and low income Americans. Below is a summary of such concerns, and suggestions on how to address them:

Issue Why will under-banked and low-income consumers
be negatively impacted
Suggested corrective action
Exclusion of fixed costs from the fee evaluation method, and delayed evaluation of fraud adjustment provisions As fixed costs to support risk management teams, charge-back processes and customer disputes support are excluded, issuers will charge for them through other service fees. Well-off consumers will afford first-class support provided by US-based teams, while second-rate support off-shored to foreign countries will be provided to lower-income consumers.
  • Include fixed costs related to consumer protection measures in the evaluation.
  • Wait until fraud adjustment provisions are ready to avoid a 2-step implementation and reduce implementation costs and consumer confusion
Merchants will be able to dictate the PIN versus signature based user identification method Under-banked and low-income consumers are highly concerned by the security of their limited funds and will feel threatened if a particular method of lesser security or lesser consumer liability limitation is imposed by merchants in certain settings. Keep the choice of identification method in the hands of the consumer
Exclusion of banks with less than $10B in assets combined with allowing merchants to set card acceptance threshold rules Consumers carrying the “wrong” cards, i.e. cards issued by smaller banks, risk being declined by large merchants wanting to favor cards from larger banks. Explicitly prevent merchants from using the identity of their customers’ issuing banks to adjust their routing choices or to enforce card acceptance thresholds.

I remain at your disposal for any further input you may require.
Very Respectfully Yours,

Patrice Peyret

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I am over-banked and I need help

9am sharp: my office phone rings and displays “Cell Phone, Boston, MA”. Not a good sign. When someone calls my direct line from their cell phone as soon as the office is supposed to open, this is a customer being upset with something our company did or did not do, and I need to be prepared to receive an earful.

We operate prepaid card services and a lot of our customers have no other financial instrument available. They are, as the FDIC puts it, “under-banked”. So, even a small hiccup can be a major issue, as most of their everyday money may be sitting in an account we manage.

The man at the other end of the line turns out to be rather courteous, and his issue of a forgotten account password is rapidly resolved. Before hanging up, he has one last question:
– “how much money can I have in this account?
– “$10,000”, I answer.
– “Good, so I’ll be able to set up my mortgage payments then.”

Gold Piggy BankAs he seems to be an atypical customer, I probe him for more details about how he intends to use the card. “See, I am over-banked…” he says. “…I have many accounts at several banks.  In spite of having been with my main bank for so long, they want me to maintain a minimum balance of $5,000 in my checking account and opt for the overdraft protection service, and then agree to pay a fee when transferring money from my savings account, all of this to get “free checking” where they would not charge me a monthly fee. So I like what you guys do and I am switching over.

Over-banked? This person is making my day, after all. I expect a lot more customers like him fleeing big banks in droves starting this year.

NPR’s marketplace had a segment earlier this month about banks targeting new fees towards lower income customers. The expected outcome: driving these customers away from the banks. Kind of “de-banking” them.

I thought our mission at Plastyc was to help the under-banked. Now we are getting prepared to welcome the over-banked and the de-banked.

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