Most believe the underserved are large in numbers and small in market potential. Of course micro lenders around the world, such as Nobel laureate Grameen Bank, who serve the poor with small, market rate “business” loans have demonstrated it’s big business – and largely, good for the world. But here in the US, the unbanked and underbanked have until recently been left to the alternative financial services industry (like check cashers and payday lenders) or the philanthropically funded nonprofit industry (financial literacy programs and credit counseling).
But the underbanked are big business. My fund, with our partners at CFSI, estimate people who don’t rely on banks for their financial needs spend $45 billion in fees and interest, alone. This is for services such as check cashing, remittances, rent-to-own, title lending, prepaid cards, walk-in bill payments, even bank overdraft.
Based on thorough secondary research from dozens of sources, including our own analysis, this chart shows dollars spent on fees and interest – not the volume of dollars processed (that’s $455 billion) – in 2010.
It is fair to say that most of these products are generally more expensive than what most of “us” pay. APRs higher than 30% (if not 300%); transaction costs of $2+; money transfer costs of $10+; access to payroll check for 2-4%. But lest you think most of this comes from the “predatory” and “shark” players, think again. The biggest categories you’ll see are originated or funded mostly by banks: overdraft and mortgages. We have taken only the subset of fees generated here by the part of the population that is underbanked. (And this doesn’t include a penny from the debit card charges so popular today).
But even the smallest slivers here are big business. “GPR prepaid” ($1 billion) refers to prepaid program managers, including recent IPOs Green Dot and Netspend. Walk-in bill pay ($1.9 billion) is dominated by Western Union, MoneyGram and Fiserv.
These services are thriving during this recession, by and large. The largest growth came from internet-based payday loans (35% YOY), followed by prepaid (33%) and payroll (25%) accounts. Year over year contraction was led by refund anticipation loans (-18%, which give customers instant access to tax refunds, in return for a hefty fee) and followed by check cashing (-5%) and bank overdraft (-5%).
The moral of this story, in my mind, is that the underbanked are big business. And it’s growing. AND it’s an industry that should contract significantly. Counterintuitively that contraction should yield greater profits, billions saved by the bottom third of Americans (in terms of income) and a stronger middle class (and therefore a stronger economy, and greater global stability and strength). This will happen through innovators who drive efficiencies through smarter technology and smarter distribution channels. Click here to see the report.
Thanks for this study Arjan. I Love it with one exception. Would like to better understand where you came up with the $60 Billion market estimate on check cashing and the 5% year over year decline. I don’t think either number is accurate and I’m glad you marked that one as “low confidence”. If that were the true size it would put Walmart at over 50% market share and yet they only attempt to cash about 50% of the checks in the market (payroll and government and some limited other categories). For the total market to be $60 Billion would mean they would have to be cashing 100% in that category based upon their volumes and we all know that isn’t the case as we process millions of payroll and government checks as well and they only represent around 55% of the total volume we see nationwide across all channels.
I wish there was a good source for the actual market but we believe it is north of $100 Billion a year and we don’t know how anyone can estimate a decline year over year because the volumes are shifting nationally from niche players to mainstream players which clouds the date even further. Just saying.
Hope to catch up with you someday. Drew
One additional add that I believe is relevant. The size of check cashing is less relevant than its importance on the other categories such as prepaid, bill pay, money transfer, money orders, mobile reloads, mobile banking, etc. For this underbanked consumer, as you know, converting all of their checks into “good funds” is the “money in problem” and the process of converting those checks into “good funds” is the underbanked form of the DEPOSIT. Until checks go away, which will take years, that deposit stands between this consumer and all of these other revenue opportunities. At the same time, new technologies and access points to accomplish this more efficiently and conveniently is having one of the most dramatic impacts on this consumer’s financial life. Finally, transitioning this process into a bank friendly, regulatory friendly, creditor friendly solution will escort this consumer more rapidly into more mainstream opportunities for credit and more.
Keep up the great work Arjan and Jennifer and teams.