Financial Inclusion in the U.S.:Spending Time In Our Own Backyard

As we look globally for innovative business models and technologies, it’s a shame how little we (as two Americans) focus on our backyard in the U.S. Despite our comfort drawing similarities and lessons across markets as different as Brazil, India, and Kenya, we seem to assume that the U.S., with its technology and banking infrastructure, relative wealth, and uniquely complex regulatory context, is truly different. To test this and see what we might uncover “locally,” we attended the 6th Annual Underbanked Financial Services Forum in June to learn more about the state of the art in the domestic financial inclusion world and look for ways where global and local conversations overlap and can be integrated.

We were not disappointed. The event, terrifically organized by the Center for Financial Services Innovation (CFSI) and sponsored by the American Banker, played host to hundreds of participants representing banks, nonbank financial service providers, retailers, regulators, and other policymakers and researchers. Some of our takeaways:

• Prepaid is the talk of the town. Prepaid instruments, particularly the general purpose reloadable (GPR) card, seemed to be one of the most talked-about innovations in the domestic market. The general feeling (particularly among the various prepaid vendors in the crowd) was that prepaid has a number of characteristics that make it better for the underserved – lower cost structure, more accessible reload points, less intimidating, easier to open, and lower/more transparent fees. Certainly the recent IPOs of prepaid giants NetSpend and GreenDot help fuel excitement around these business models.
• “Mobile” may not be as exciting in the U.S. Given the strong build-out of various types of channels and infrastructure in the U.S., many were skeptical that mobile phones hold the kind of transformative potential we’ve seen realized in markets like Kenya – at least when it comes to banking the underbanked. The biggest topic within mobile is near field communications, but NFC’s potential value seems to lie more in convenience and marketing tie-ins (particularly for data collection and in connection with location-based and loyalty services) and has limited potential to deliver significant access benefits for the financially underserved.
• Nonbank players are driving innovation. In much of our global branchless banking work, we focus on large banks and MNOs as the actors with the greatest potential to “move the needle” on financial inclusion. But in the U.S., startups and nonbank players are leading the charge to build businesses targeting the underserved. In particular, a number of players in the prepaid, payments, and savings ecosystems have managed to prove business models (often playing narrow but critical roles in particular financial service value chains) leading to acquisitions by banks or even IPOs (namely by the above-mentioned NetSpend and Green Dot), and others are chomping at the bit to follow in their footsteps.
• Cash is still king. There was a refreshing and open acknowledgement that, even with the U.S.’s advanced and relatively pervasive technology and payments infrastructure, cash is still the dominant store of value and payment instrument, especially for the underbanked. Some interesting business models are in fact built on a foundation of people’s widespread preference for cash-based transactions, including PayNearMe, which enables customers to pay for remote transactions (like bus tickets) in cash at service points (like at the retailer 7-11).
• Big emphasis on retailers and non-branch channels (e.g., internet). Retail stores are now displacing check cashers. For example Sears now has its own Sears Financial Services. WalMart has MoneyCenters in 5,700 outlets, representing one of the most profitable parts of its business. There was a general buzz and excitement around the opportunity for retailers, and non-branch channels in general (particularly internet), to reach the underbanked.
• Financial regulation in the U.S. is unique and very complicated. In an international context, we are accustomed to dealing with a single (or small number) of regulatory/supervisory bodies relevant to branchless banking. However, in the U.S., financial services are regulated at both federal and state levels amid a complex interplay of congressional/legislative action and a number of regulators/supervisors (Treasury, Federal Reserve, Office of Thrift Supervision, etc.). Even within the same state or city, it’s common for different companies engaged in the same activity (say, transaction accounts or credit) to be subject to completely different rules and regulatory/supervisory regimes based on their entity form or charter. Let’s see if this becomes more or less complicated with the rise of the Consumer Financial Protection Bureau (CFPB) – hopefully the latter, since the CFPB intends to subsume much of the consumer-facing regulation and supervision under one body.

Above all, we learned that the global and domestic U.S. financial inclusion spaces have more in common than you might think, and we hope to start promoting a greater exchange between the two.

- Paul Breloff & Sarah Rotman