The Promise of Stored Value
By Peter Lucas
It could be the key that unlocks billions in new electronic transactions—and a host of entrepreneurs, retailers, and others are scrambling to get first-mover advantage. In the process, they’re starting to bring under-served populations into the electronic-transaction economy.
Every payday, millions of workers without a demand-deposit or savings account pay a premium to cash their paychecks, pay utility bills, purchase a money order to pay their rent, or send funds to relatives back in their native countries. What money is left over is pocketed to cover their other monthly expenses, such as groceries and gas. For the so-called non-banked, estimated to total 48 million in the United States, according to UniRush Financial Services, a New York-based provider of prepaid payment products, check-cashing services are an expensive proposition, but a necessary evil. That’s because those who seldom or never do business with a bank lack either the assets or trust in a bank to establish a full-service relationship. Service fees for check cashing average 1.5% to 3% of the total check amount, depending on the state where the service is performed, and reportedly can be as high as 8%, according to payments experts. In addition, fees can be charged for bill payment, and money orders start at about $14.99 to send up to $500 from Chicago to another consumer in Mexico. Check-cashing services gross roughly $8 billion annually from the non-banked, according to the Center for Financial Services Innovation (CFSI), a Chicago-based organization. Banks earn billions too, cashing checks for non-banked employees of clients to which they provide payroll services. Banks earn anywhere from $5 to $12 on average per check. Add in the billions of dollars more the non-banked pay out in cash for such bills as rent, utilities, and everyday purchases, and the total transaction volume generated by the non-banked that could be captured on payment cards or through ATMs is conservatively estimated at $100 billion annually.
Growth Curve
That has caught the attention of numerous entrepreneurs and retailers. They sense a huge opportunity to convert the transactions of the unbanked into electronic tender. The vehicle of choice for these players is Visa and MasterCard branded, general-purpose prepaid spending cards holding payroll or other funds that can be used to pay bills and make purchases.
In their view, electronic stored value could tap a vast reservoir of pent-up demand—and do it efficiently and securely. And, they say, the stored-value opportunity has never been riper than it is now. Immigrant populations, which for a variety of reasons avoid domestic banks, are growing fast, while retailers and service companies are coming to realize the strong advantages they have over financial-services companies in serving this market. Already, many non-banked consumers use some form of specialized prepaid card, be it a phone card, a traveler’s check card, or gift card, so the stored-value concept is nothing new to this demographic. “Prepaid phone cards, travel cards, etc., are the starting point to sweep the non-banked up into the trend of electronic payments and get them to use general-purpose prepaid cards,” says Sherri L.W. Rhine, a senior economist with the Federal Reserve Bank of New York. Prepaid general-spending cards accounted for more than $23 billion in transactions in 2003, the latest figures available, according to the CFSI. That figure, however, is on a rapid growth curve. Several entrepreneurs and retailers are moving aggressively to provide financial services to the non-banked that go beyond check-cashing to include bill payment and money transfers at prices well below those charged by traditional check-cashing services. Ultimately, these players hope to create a full-blown menu of financial services not only for the nonbanked but for the under-banked, that is, consumers who have a limited banking relationship, such as a savings account but no DDA or credit card. These ancillary services include check-writing capabilities and other non-card-based credit products. So far, the rapidly expanding roster of companies moving to exploit this opportunity includes UniRush, GE Consumer Financial, 7-Eleven Inc., NetSpend Corp., and Next Estate Communications Inc., operator of the Green Dot network (box, page 32). Even Wal-Mart Stores Inc., which changed the rules in the signature-debit card game by staring down Visa and MasterCard over their accept-all-cards mandate, recently started offering payroll check-cashing. The move is the first step in a much grander financial-services strategy that includes offering mortgages and auto loans at rates below the market average. “Retailers and non-bank financial-service companies can offer a more compelling business model that in some cases can cost customers less than the channels they are currently using,” affirms CSFI Director Jennifer Tescher. “There is a growing awareness of the opportunities in this market segment.”
A ‘Gateway’
The advantage retailers and even supermarkets, which for years have provided check- cashing services, have over financial institutions is two-fold. First, their willingness to provide basic financial services to a customer segment banks tend to overlook has created a strong affinity among their customer base. Anecdotal evidence indicates that the non-banked and under-banked shop with greater frequency at supermarkets that provide check-cashing services than do these grocers’ other customers.
“Providing financial services to the non-banked and under-banked is a way for retailers to grow their business and increase customer loyalty,” adds David G. Grano, president and chief executive of Lake Oswego, Ore.-based Vero Financial Group, a provider of biometrically secured check-cashing kiosks. One merchant making a major investment in this idea is 7-Eleven, whose Vcom network of 1,050 instore kiosks allows customers to perform an ambitious range of financial-service functions, including ATM withdrawals, check cashing, and money orders. 7-Eleven charges cardholders between $1.50 and $3 to cash a check, and about $1.50 to pay a bill. Second, the real money for these players lies in interchange, not consumer transaction fees. By teaming with card-issuing banks, providers of financial services to the non- and under-banked are putting generalpurpose stored-value cards into the hands of consumers who don’t carry a credit or debit card or can’t qualify for one. In doing so, they are expanding the universe of consumers who generate interchange income, a trend from which issuers, sponsors, and the processors that route those transactions can profit handsomely. “We make money on interchange, so we can charge lower customer fees,” says an unabashed Steven Streit, chief executive of Next Estate. “We aren’t just a check-casher or a money-order provider, we are a gateway for the non-banked and credit-challenged to a variety of trade lines.” Those lines of trade include bill payment, online purchases, auto rentals, hotel reservations, and cash access through ATMs, all of which require some type of general-purpose credit or debit card. Non-banked and under banked consumers can have annual household incomes as high as $50,000, according to Ted Dargan, vice president, Stored Value Team Lead for the Americas for MasterCard International. So why don’t households earning $50,000 automatically establish a full-service banking relationship? Some people don’t trust banks, some have gotten overextended and prefer not to use a credit or debit card, others have been cash-oriented their whole lives. “For a lot of non-banked and under-banked people, paying with cash is more a habit than anything else,” explains UniRush President Craig Marshall. “That is a tough habit to change.” Still, companies such as UniRush are successfully leading the conversion to prepaid cards, payroll cards, and electronic check cashing services. UniRush, which grew out of the merchandising business of Rush Communications, founded by rap-music impresario Russell Simmons, has a combined 500,000 customers using its Rush and Baby Phat prepaid cards. The Baby Phat card is linked to the Baby Phat Line of clothing, which features urban and hip-hop styles for females. UniRush introduced its prepaid card program in 2003. Cardholders pay a one-time $19.95 activation fee and can use their cards at 20,000 billers by calling a toll-free number or by logging onto the UniRush Web site. Cardholders are charged $1 per transaction, up to $10 per month. Milwaukee-based processor Metavante Corp. provides the links to billers.
Ready to ‘Explode’?
Cardholders can also instruct a UniRush service agent to send a check, which is the equivalent of a money order, or request a bill payment through the UniRush Web Site, to pay rent or other bills requiring a paper
draft. Funds are drawn on the account at the time of request, and if the account lacks sufficient funds, no check is cut. Cardholders receive unlimited check writing and are charged $1 per check. Currently, fewer than 10% of account holders have checking capability tied to their cards. Cardholders pay no fees to deposit funds to their accounts via direct deposit, ACH transfer, or deposit of a personal check via mail, but are charged up to a $2 if their accounts remain inactive for 90 days. Currently, 40% of cardholders use direct payroll deposit.
Prepaid Cards By The Numbers
2.2 million Number of payroll cards issued in 2004 $500 billion Amount employers issue on pay checks annually 25% Portion payroll cards represent of all prepaid cards 15% Portion general spending cards represent of all prepaid cards
Sources: Financial Insights, Visa U.S.A., The Pelorus Group, Mercator Advisory Group
Account holders also can access their account statements online, but are charged 50 cents for balance inquiries made over the phone or via ATM. Cardholders checking their balance via the 800,000 ATMs in the UniRush network are also subject to cardholder fees charged by the ATM owner. “We feel this is a market that can explode,” says UniRush’s Marshall. “People with cash may need other ways to make a payment. Our cards provide that vehicle and a record of spending.” UniRush promotes its quarterly account statements as a way to help identify deductions at tax time, after which any tax refunds can be deposited directly into the prepaid accounts. The average tax refund has been between $2,500 and $3,000, according to Marshall. “Having refunds deposited directly saves the customer from paying to cash the check elsewhere,” he adds. While stored-value cards open the door to a new array of payment options for the non-banked and underbanked, this market still wants easy cash access to accounts at a cost less than that charged by traditional check-cashing services. This demand has given rise to a burgeoning network of kiosks that cash paper checks, draw funds off payroll cards, allow customers to move funds from a payroll card onto a prepaid spending card or into a non-bank savings account, and initiate a wire transfer. These ATM-like machines are finding their way into merchant locations, primarily convenience stores and supermarkets. Already, several third-party providers of the technology have launched fledgling networks. The two most prominent names are Vero Financial Group, which operates the Automated Check Cashing Solution, and Frisco, Texas-based CashWorks Inc., a division of GE Consumer Finance. Both networks offer check-cashing, bill payment, and money-transfer services. The strategy is to leverage the loyalty of c-store customers, many of whom already buy prepaid phone cards, by offering them
a one-stop financial-services center. C-Stores also make good destinations for these solutions because they cater to the primary demographic groups that make up the non-banked and under-banked, that is, Hispanic and Asian immigrants, according Vero’s Grano. Consumers go through a one-time enrollment process in the Automated Check Cashing Solution, which relies on a biometric application to scan one of the enrollee’s fingerprints and store the image for future identification. Enrollees must also present a photo identification, which is scanned, along with other personal information such as name, address, and phone number, and the payroll check they wish to cash. The scans, which are stored in Vero’s data centers in California and Nevada, are required to prevent check fraud and provide customers with secure access to their accounts, Grano says. Vero’s fraud-detection engine also runs proprietary risk-management models on the physical characteristics of the check, and pulls in data from external sources such as credit agencies.
Service 24/7
Grano says the self-enrollment process is a more dignified way for consumers to enroll, compared to going to a bank and being fingerprinted each time they want to cash a check. “There is a bit of an indignity with that process for some people,” he says. “Plus, it raises the fees to cash the check through the bank, because it is a manual process. Merchants are service-oriented, so they want a self-service solution.”
The Opportunity Among Immigrant Groups
(Percentage of each group that is unbanked)
All Immigrants Mexican Other Latin American Asian European
32% 53% 37% 20% 17%
Source: The Center for Financial Service Innovation
Once enrolled, account holders cash future payroll checks by touching a fingerprint reader while the clerk scans the check. The check’s bank-routing and account numbers and the digitized fingerprint scans are compared to data on file. Funds for the cashed check are loaded onto a magnetic-striped, Vero-branded card that can be used at any ATM linked to the Star, Interlink, and Plus networks. Vero relies on devices ranging from a personal computer linked to a teller or customer-service station up to a full-function ATM, which lists for around $40,000.
In June, Vero began a 10-unit pilot with an unnamed retailer and is discussing the possibility of deploying its machines in banks, according to Grano. California-based Palm Desert Bank, which operates three branches, is preparing to roll out the kiosks. The machines have a starting price of $10,000 and run as high as $40,000 for the most sophisticated models. “The machines are a way to automate a manual process and provide service 24/7,” adds Grano. CashWorks offers three solutions, ranging from a POS terminal known as PayPort that authorizes payroll and government checks or payroll cards to full-service kiosks for high-volume locations that also provide bill payment. Cardholders receive their funds on a CashWorks-branded prepaid card. Funds are held by GE Money Bank and are FDIC insured. Cardholders can also pay 4,000 billers. CashWorks has a presence in 4,000 retail locations in 41 states. The company latest gambit is a launch at 34 QuikTrip Corp. convenience-store locations in Wichita, Kan., scheduled for the end of July. To help give its card an edge in the market, CashWorks does not charge cardholders cashing their checks and downloading funds to their card an account activation fee. Cardholders are charged a 95-cent monthly maintenance fee. Check-cashers pay between 1.5% and 2% of the check’s value. “Our approach is to provide consumers with appropriate protections and economically priced products,” says Will Sowell, general manager for CashWorks. “The non-banked and under-banked are like any other consumer, they want products that are priced well, and that provide convenience and security.” CashWorks’ marketing pitch to merchants is that their kiosks generate increased traffic. The company, which absorbs the cost of its PayPort terminals and kiosks, says 45% of consumers that cash checks through its network make an immediate purchase from the merchant where the terminal is located. Eighty-one percent of customers surveyed said they will return to the same convenience store to conduct similar transactions in the future. “There is definitely some first-mover advantage in this market,” says Katy Jacobs, a senior analyst for CFSI. “And the technology offered has a lot to do with changing the habits of the non-banked and underbanked.” Putting the technology in place has been the first phase of providing prepaid cards and other fee-based financial services to the non-banked and under-banked. The next step will be marketing those products and services more effectively. “The prepaid card market is rapidly taking on a new shape,” says MasterCard’s Dargan. “As cardholders register their cards, they are in effect creating bank accounts.” Not to mention a huge opportunity for service providers to cash in big on a market long neglected by banks. And as they do so, they are, whether intentionally or not, bringing hundreds of thousands of new consumers into the electronic-transaction economy.
Bringing Same-Day Funds to Money Transfers
Cash is not the only currency traditionally used by the unbanked that is facing stiffer competition from prepaid card issuers. Money orders, too, may soon be experiencing a drop in volume as stored-value cards spread. American Cash Exchange, a Pennington, N.J.-based provider of payment solutions, has issued about 1 million Poni remittance cards in Mexico. What differentiates the Poni Card, launched in 2004, from traditional remittance services is that the money is available immediately, rather than next day. Sending money requires that both recipient and sender have a card. Senders pay the merchant and receive a one-time-use, scratch-off card bearing a PIN that recipients will use later to withdraw the cash at ATMs. The merchant initiates the transfer using a point-of-sale terminal linked to American Cash Exchange’s database. Upon receiving the PIN, the recipient takes his card to a Poni Card retailer, where a clerk swipes the card through a POS terminal to activate the account. The cardholder then feeds the card into the in-store ATM, enters the PIN, and receives the card’s full value. Cards are distributed to recipients at no charge through any of the network’s 1,000 retail outlets in Mexico. That figure is expected to swell to 5,000 in a few months. In the U.S., American Cash Exchange has 100 agents in Arizona, Nevada, and Illinois. By the end of summer, the company says it will have rolled out to a leading retail chain and have a presence in three more states. The privately held company says sales are growing 30% per month on average, but refuses to disclose details. By depleting the card’s value when the account is accessed, American Cash Exchange avoids accountmaintenance costs. Remittances are settled in part by Scotia Bank, which is a member of PROSA, Mexico’s national ATM network. “Recipients don’t need to go to an agent, which makes the transaction faster and more convenient,” says Debra Porter, executive vice president and chief marketing officer for American Cash Exchange. “About 70% of our customers send money once a week.” Consumers like the absence of a middleman, plus the ability to receive money 24/7. “We had people sending and receiving money on Easter,” adds Porter. “It was one of our biggest days for volume.” Cardholders can send up to $300 or 1,000 Pesos at one time for about $12. Cardholders also receive between five and 30 minutes of international calling minutes, depending on whether Poni Card agents are running a promotion. “With our system, we can send money to any country at any time,” says Porter.
An Effort to Set the Rules Surrounding Stored Value Cards
With prepaid and payroll cards becoming a hot ticket for the non-banked, card issuers and processors have begun moving to formalize the rules, regulations, and consumer-protection laws around these cards. Spearheading the charge is the ATM Industry Association’s Debit Council, which has attracted about 600 members in 30 countries. The Debit Council’s aim is to open dialogue with members and state and federal regulators about creating best practices for issuing payroll and prepaid cards. “Just as there are no clear definitions of what constitutes a stored-value card, so too are there lots of conflicting rules about stored-value cards,” says A. Lyle Elias, chairman of the council. “State law can’t restrict a federally charted bank from charging a fee for a stored-value card, but many states have enacted a complicated regulatory web for banks around stored-value cards, especially payroll cards.” For example, some states require that payroll cards be accompanied by a paper paystub. “The rule is part of state payroll laws,” says Elias. One major issue is whether federal regulators will apply Regulation E, which limits to $50 consumer liability for unauthorized transactions made to their checking or savings accounts. Although some prepaid card issuers, such as CashWorks and the GreenDot Network, say funds transferred onto their cards are FDIC-insured, Elias points out that most stored-value cards rely on a pooled-funds model that tracks individual accounts within the pool. Hence, funds accessed through these types of cards are not necessarily provided the same privileges or protection as a checking account under Reg E. The consumers most vulnerable to this loophole are those that receive payroll cards and leave funds on the card for future withdrawal. If their payroll cards are lost or stolen, there is no guarantee the funds can be replaced. “The big question at the federal level is whether Reg E will apply to a stored-value transaction, same as an FDIC-insured transactions,” says Elias. “So far the answer has been no, but the Treasury Department is looking into the matter more.” In the meantime, the council is working with state legislators and EFT networks around the country to “smooth out” some of the rough edges around payroll card regulations, adds Elias. The council is also gathering industry support to establish best practices for independent sales organizations that sell prepaid and payroll card applications to retailers and companies, as well as retailers that offer check-cashing services and sell prepaid cards. “Do the ISO and selling agent need to be registered as agents of the bank that is behind the program is a question we need to look into further,” says Elias. “For us, the holy grail is to create a uniform operating code for the stored-value industry.”