When the Federal Reserve set out to find who is using mobile financial services, it uncovered a surprising trend: The people who don’t have strong ties to traditional banks are the ones leading the charge for mobile financial services.
They’re known as the “underbanked” — generally low- to moderate-income consumers who may use some bank services, but often cash checks, pay bills and get small loans elsewhere, often with hefty fees attached.
Why the underbanked are attracted to mobile
The Fed study, called “Consumers and Mobile Financial Services,” shows that the underbanked are not underphoned. Results show 91 percent of those identified as underbanked have mobile phones and 57 percent have smartphones, whereas 87 percent of U.S. consumers have mobile phones and 44 percent have smartphones.
The numbers show that the underbanked are more likely to use mobile banking services than the average American. Twenty-nine percent of underbanked respondents used mobile financial services in the past year, compared with 21 percent of consumers overall. They’re also much more likely to use their mobile phones to transfer money between accounts than the average user — 55 percent, compared with 42 percent across the board.
That growing demand represents big opportunities for lower-income consumers who are starting to get more notice from the financial industry, as well as for banks trying to win new customers.
“Up until now, financial providers haven’t focused on the unbanked and underbanked when they think about financial services,” says Kate Marshall Dole, analyst with the Center for Financial Services Innovation.
Rather, they’ve concentrated on hooking more affluent consumers.
But those shunning banks make up a significant portion of the population. The Federal Deposit Insurance Corporation (FDIC) puts the number of unbanked, (those who have no access or don’t want access to traditional banks) and underbanked together at about 25 percent of consumers (that’s about 30 million).
The Fed study represents the first large-scale research examining how unbanked and underbanked consumers interact with mobile devices.
Among its findings:
- 17 percent of the underbanked report having used mobile payments in the past year.
- 62 percent of the underbanked who use mobile payments have used that method to pay bills.
- 10 percent of the completely unbanked used a mobile banking platform (such as digital wallets) in the past 12 months, and 12 percent have made a mobile payment. How are those without bank accounts able to use mobile banking? Mobile banking in the Fed report includes using a mobile phone to access a bank account, credit card account or other financial account, such as a payroll card or prepaid card (which do not require bank accounts).
Marketing to the underbanked
The fact that the underbanked are early adopters of mobile financial services presents an opportunity for payment services companies. Yet the mobile wallet solutions that will work for the underbanked will need to let users load money directly into a mobile account, CFSI’s Dole says. If a mobile wallet is based on accessing existing bank accounts, it won’t be meaningful for the underbanked.
Bill payment firm TIO, for example, is rolling out the first phase of its TIO mobile wallet, called TIO MobilePay, which is targeted specifically to the underbanked, says Rob Goehring, chief marketing officer at TIO.
The company already has in-person representatives and 60,000 kiosks in retail centers that work like reverse ATMs. Shoppers walk up to the customer-service person or the self-service machines, find their bills and pay with cash, checks or prepaid cards. The addition of the wallet app connects customers’ phones to this way of paying.
The ability to pay a bill instantly, without using a bank account, is often crucial to the low- to moderate-income people that make up the majority of the underbanked, Goehring says. With digital wallets like TIO, users can add prepaid cards to their wallets and use the money loaded onto them to pay bills — no bank account necessary.
“Many of them get their paycheck, they go to a paycheck casher and get cash. They have to pay their cell phone bill that day or it gets cut off. Or they have to pay the utility bill to keep the water on. …Being able to pay instantly and get up-to-the-minute account updates — all of these coming together have created an interesting opportunity for this [mobile] wallet,” Goehring says.
Goehring says the company had been watching the growth in mobile phone and mobile banking use among the low- to moderate-income sector for years.
“So many of [the underbanked] are skipping over this in-home broadband Internet experience and jumping straight to these high-speed smartphones,” Goehring says. “Why pay the cable provider for high-speed Internet if you can get it through your smartphone and your smartphone’s always with you? And that’s what you use to communicate with your family, with your employer who’s going to call you into work tomorrow or not.”
Proceeding with caution
Among the unbanked and underbanked is a disproportionately large percentage of Hispanics, according to the FDIC. Meanwhile, the Fed study found that online banking users (those who have traditional bank accounts and access them via computers) are predominantly non-Hispanic whites (73 percent), while Hispanics and non-Hispanic blacks make up just 12 percent and 8 percent, respectively, of online banking users.
Marisabel Torres, a policy analyst at the Hispanic advocacy group National Council of La Raza, says previous studies have noted several trends among Hispanic consumers: They are heavy users of smartphones (instead of computers), most don’t use online banking and there’s a high level of mistrust about banks in general.
Torres, whose work centers on finding safe and affordable banking products for Hispanics, says mobile financial services hold promise for people who have been left outside mainstream banking. But there are security issues that need more uniform standards, she says, such as who’s responsible if personal information is stolen. The underbanked are already heavy users of prepaid cards, which don’t require having a bank account, but also may not have the federal protections against loss and theft that credit cards have.
“Without uniform standards, it is a space where people could easily be taken advantage of,” Torres says.
Torres says transparency will be critical to entice this population that is fed up with “gotcha” fees and have little trust in mainstream banks. Yet if mobile banking solutions get people away from fee-heavy check cashers and payday lenders, the underbanked will benefit.
“The skepticism is healthy,” Torres says. “If it’s part of a larger strategy to get them connected to legitimate products, then I would say it can be positive.”