It amazes me how many business plans we get that basically ignore a distribution strategy.  It’s probably more amazing what obvious omissions most business plans suffer in general, but in our space – underbanked financial services – distribution is quite common.  It is not ok to merely make reference to distribution in the way that it might be to, say, the exit strategy.  To be sure, those who can articulate a clear exit strategy are more impressive to those who resort to, “IPO or strategic acquisition.”  But many plans we see will simply say, “the Latino market,” “the African American market,” or the “unbanked consumer market.”  So, I’m feeling compelled to identify the most important distribution channels and discuss some potential ones that still seem sketchy, but that come up often.

In bricks and mortar, the primary channels are alternative financial services (AFS), retail and banks.  AFS are the check cashers, payday lenders, and currency exchanges.  These come in many flavors, shapes and forms.  Some mono-line, some feature rich, some skanky and some professional.   A dozen or so big players are national or super-regional.  There are many, many chains ranging from 1-30 stores.  What’s great about this channel is that they target the underbanked, they are under tremendous regulatory and financial pressure and therefore generally open and eager to innovate.  What’s bad is that they are publicly maligned as bad for people and on the wrong side of current regulatory reform.

Retail is probably the most exciting and fast growing distribution channel in underbanked financial services.  Wal-Mart leads with a fairly broad suite of low-cost products, from check cashing to bill pay to money orders and remittances.  Sears, Kroger, BestBuy and others are joining.  A sub-set of retail are convenience stores (or C-stores as the insiders call them).  Folks like 7-Eleven, Circle-K, ExxonMobile and many many others are quite active in this field.  For all these retailers, financial services represents not just fee-based revenue (without additional overhead), but more importantly increased spend in the store.  What’s great about this channel is that it’s still mostly a green field with many who don’t want Wal-Mart to eat their lunch…again.  What’s bad is that financial services are not central to their business, which often serves to limit their long term commitment, their appetite for risk, the sophistication of their tellers and their interest in taking on additional regulatory burdens, typically as Money Services Businesses (MSBs).

Banks would make the most sense – hence the term underbanked – but do the least, to date.  With the exception of do-good community banks and credit unions (often specially designated as Community Development Financial Institutions), most banks are not motivated to move down-market, yet.  Banks’ Community Reinvestment Act obligations aren’t of much help either, as they are focused on safe commercial and tax-credit lending.  I’m cautiously optimistic that recent overdraft reform – said to wash away about $40B in overdraft fees – will push banks to find smarter, better consumer products that will generate fees.  This channel is great because the licensing and infrastructure exist, cost of capital is low and the upper and mass-markets are pretty saturated.  It’s bad because banks are slow, culturally negative to the underbanked and not incented to take risks serving this market.

Then there is the internet.  Payday is moving here in droves, like $8B in volume last year.  General purpose reloadable prepaid is active online – for folks who don’t trust or were turned away from banks.  And this is not just the mass-affluent-but-in-debt-to-their-ears.  But saying the “internet” is your distribution channel isn’t enough, obviously.  Direct customer acquisition is super expensive.  Most distribution partnerships don’t work.  Most affiliate deals don’t generate the volume intended.  The net is great because it eliminates all the cap-ex of physical locations.  It’s bad because it’s incredibly noisy.

In the category of un-proven but common, I’d put mobile and the workplace.  Everyone wants to deliver services through the phone, but consider how it REALLY is a better mousetrap, not just another iPhone app.  For example, how will money get on the phone and how will it get off?  At what cost? To whom?  This simple equation often erodes the savings originally proposed.

We have seen half a dozen lending programs to be delivered through employers.  Makes perfect sense in terms of following the money.  No one I have seen has cracked the code of, a) why the employer will care enough to bother, and b) if they do, how said employer will compel or intrigue their employees to sign-up.  We see lots of partial answers on this channel, but no slam dunks.

It is essential you consider your distribution channel and that your solution solves a high-level problem not just for the consumer end-user, but also for the distribution partner.  Not easy, but totally essential.