Underbanked and Unbanked Consumers in the U.S. provides market size, industry and product revenue forecasts and analyzes the legislative and regulatory challenges driving the growth of alternative financial services (AFS). Increasingly, these products are seen as a viable alternative to banks by the 26% of U.S. households that are underbanked or unbanked.

This report analyzes the retail financial services activities and the macro and micro economic trends that have resulted in the percentage of households that are unbanked to rise for the first time since the Federal government began tracking consumer banking relationships. It also provides detailed demographic portraits of both underbanked and unbanked consumers while diving deeply into their financial behaviors and consumer psychographics. These consumers, buffeted by both the economy and the profit maximization strategies of retail banks, have been prime targets of non-traditional financial services providers offering transparent pricing, convenient retail locations and bespoke products that can be used according to the consumers’ needs and preferences.

The report examines the efforts of banks and non-banks to market to underbanked and unbanked consumers and provides analysis of AFS pure-play and retailer product introductions, feature enhancements and pricing strategies.

The report also delves deeply into AFS initiatives in international markets and focuses on the technologies, new products, marketing and branch-level strategies realizing success abroad and transforming vendors and institutions into must-knowns to U.S. bank executives, AFS strategists and industry regulators.

Underbanked and Unbanked Consumers in the U.S. presents historical data and 5-year revenue forecasts for the alternative financial services market and each major AFS product: Prepaid cards, remittances, money orders, check cashing and payday lending. We anticipate those revenues increasing from $338 billion in 2010 to $520 billion in 2015.

Chapter 1: Executive Summary

Scope and Methodology

Report Methodology

Characteristics of Underbanked and Unbanked Consumers

Who Are the Unbanked?

Which Unbanked Households Can Become Banked?

Why Don’t Unbanked Have a Bank Account?

The Growing Ranks of the Unbanked

Who Are the Underbanked?

Spotting the Underbanked

Baby Boomers and Seniors Heavily Represented Among Underbanked

Alternative Financial Services Products Used by Underbanked

Banking Industry Trends Drove the Growth in the Number of Underbanked Households?

State of the Economy Is Growing the Ranks of the Underbanked

Economic Pressures on Working Americans Have Increased

Long-Term Unemployment

Health Insurance Costs Are Rising

Bankruptcy

Foreclosures

Declining Real Incomes

Number of Americans Living Paycheck-to-Paycheck Increases 53%

The Overall U.S. Economy - 2011 and Beyond

Banks Targeting the Underbanked/Unbanked

Products Banks Can Market to Underbanked and Unbanked Consumers

BB&T Links Its Physical Footprint With Prepaid Card

Large U.S. Retail Banks Offer More Locations than Retailers

Banks Tackle Small Dollar Loans

Even in Programs Targeting Underbanked or Unbanked, Bankers Determined to Build Traditional Banking Relationships with Participants

Serving Underbanked Consumer While Hitting Fee Income Generation Targets

Regulatory Changes Increase Banks’ Pressure on Fee Income

How Banks Became Dependent on Fee Income From Retail Customers

Overdraft Fee Income - Yesterday’s Cash Cow

Growth of Overdraft Fee Income Spurred Consumer Dissatisfaction With Banks and Banking Industry

Bank of America Adds High Checking Account Service Charges and Fees to Use Bank Tellers

Chase Bank Adds Service Charges for Low-Income Customers and Those Who Are Not Active Debit Card Users

Citibank Keeps Free Checking for Customers Who Perform 5 Types of Transactions a Month

Consumers Are Opting Out of Overdraft Protection

Debit Card Rewards Programs Are Vanishing

Savings Strategies of Underbanked

Prize-Linked Savings

Consumer Interest in PLS Accounts

Why Would PLS Accounts Be Attractive to Banks?

Barriers to Widespread Deployment of PLS

What If Consumer Savings Were Prioritized?

Michigan Credit Unions Partner to Offer PLS

How Successful Are the Michigan Programs in Growing Savings?

Can Banks Offer the Products Unbanked and Underbanked Consumers Want?

Cashing Payroll Checks Is Important to the 27% of Employees Not Using Direct Deposit

Bill Payment

Alternative Financial Services

Introduction

Check Cashing

Checks Still a Popular Choice on Payday

Ace Cash Express

Ace Cash’s New Partnerships and New Services

Dollar Financial

Chexar - Bring Check Cashing to Small Retailers

Wal-Mart - Transformer of Check Cashing Fees

Payday Lending

Profitability of Payday Lending Business

Payday Lending Legislation

Federal Payday Lending Legislation

Payday Lending Regulations at the State Level

Impact of Banning Payday Loans on Consumers’ Debt Management Behaviors

Payday Lending Regulations in Hawaii - A Contrasting Experience

Fragmented, Embattled Industry May Benefit From Turmoil in Banking Industry

Advance America

QC Holdings

Payments

Prepaid Cards

Challenges Facing the Prepaid Card Industry

Green Dot

Netspend

Remittances

Remitters Are Satisfied With Their Current Money Transfer Provider

Remittances and Emerging Technologies: Can Price Drive Channel Adoption?

How Much Are Individuals in the U.S. Sending Abroad?

Structural and Regulatory Challenge Hinder the Use of New Remittance Channels

Global Wire Transfer Trends

Global Remittance Volumes

Remittance Flows Are Critical to the Economies of Many Nations

Remittance Operators

MoneyGram

MoneyGram Bill Payment Services

Western Union

Western Union Takes on Wal-Mart

Western Union Experiments with Mobile Technology

Challenging the Spread

Remittance Channels

Hampering the Uptake of New Channels in the U.S

Western Union’s Account-to-Account Remittances

Western Hemisphere Banks Bypass U.S. MTOs to Facilitate Remittances

Money Orders

U.S. Postal Service Is Largest Seller of U.S. Money Orders

Where Are the Banks?

International Leaders Offer Roadmaps for U.S. Service Providers

U.S. Bankers Face Structurally Endemic Challenges as They Consider Future Customers

U.S. Bank Branch Network Build for Previous Generation of Banking Customers

Meeting Mass Market Financial Services Needs in Africa

Smart Phones and SMS Capability Fuel Growth of Retail Financial Transaction in Africa

Mobile Payments: The Intersection of Cards, Banks and the Unbanked

Cash + Mobile = Economic Growth

Mobile Remittances Threaten African Banks

Airtel / MasterCard and M-Pesa / Visa: Virtual Payment Cards

Central Bank Mobile Payments Platform May Increase Mobile Competition in Kenya

M-Pesa: Biography of a Market Leader

Mass Market Savings Strategies

British Premium Bonds - Mainstream Prize-Linked Savings

South African Million-a-Month PLS

Rethinking the Branch: Hub-and-Spokes Organization Should Be Considered

Capitec - Profits From the Previously Unbanked

The Shot Heard Round the Cape: Capitec Raises the Performance Bar for Its Competitors

First National Bank Uses Product-Branches Branches to Sell Specific Products

WIZZIT Uses Its Independent Sales Force and Door-to-Door Sales to Sign Up New Bank Customers

South African Regulators Create KYC and AML Exemptions to Allow Providers to Target Low-Balance Customers

Chapter 2: Characteristics of Underbanked and Unbanked Consumers

Table 2-1: Banked, Underbanked and Unbanked Status of U.S. Households, 2009

Who Are the Unbanked?

Table 2-2: Percentages of Major Racial and Ethnic Groups That Are Unbanked, 2010

Table 2-3: Race, Ethnicity, Income and Household Types of Unbanked, 2010

Which Unbanked Households Can Become Banked?

Table 2-4: Previously Banked Status of Unbanked Households, 2009

Figure 2-1: Number of Adults Living in Unbanked Households by Previously Banked Status, 2009

Why Don’t Unbanked Have a Bank Account?

Figure 2-2: Leading Reasons Cited For Not Owning A Checking Account, 1989-2007

The Growing Ranks of the Unbanked

Who Are the Underbanked?

Table 2-5: Percent of Households Underbanked, by Race/Ethnicity, 2009

Spotting the Underbanked

Table 2-6: Percent of Households Underbanked by Marital Status of Householder, 2009

Baby Boomers and Seniors Heavily Represented Among Underbanked

Figure 2-3: Oldest Americans Most Likely to Be Unbanked/Underbanked Than Baby Boomers

Baby Boomers Joining Ranks of Unbanked and Underbanked

Seniors Are More Likely To Be Underbanked and Unbanked Than Other Cohorts

Alternative Financial Services Products Used by Underbanked

Table 2-7: Alternative Financial Services Products Used by the Underbanked

Figure 2-4: AFS Products Used by Underbanked Households

Banking Industry Trends Drove the Growth on the Number of Underbanked Households?

Economy Is Growing the Ranks of the Underbanked

Since 2007, Economic Pressures on Working Americans Have Increased

Long-Term Unemployment

Figure 2-5: Slow Growth GDP Linked to High Rates of Unemployment, 2005-2015

Health Insurance Costs Are Rising

Figure 2-6: Rising Cost of Employee Participation in PPO Healthcare Plans, 2007-2011

Table 2-8: Employer and Employee Medical Costs Allocation, PPO Plans, 2007-2011

Bankruptcy

Figure 2-7: Personal Bankruptcy Filings Show CAGR of 25.6%, 2007-2010

Soaring Number of Senior Citizen Bankruptcies Fueled by Medical Expenses

Foreclosures

Figure 2-8: Foreclosure Filings, 2005-2010

Declining Real Incomes

Figure 2-9: Real Median Household Income, 1999-2009

More Americans Living Paycheck-to-Paycheck

Table 2-9: Since 2006, the Number of Americans Living Paycheck-to-Paycheck has Increased 53%

Household Strategies for Dealing With Financial Insecurity

Figure 2-10: Median Value of Transaction Accounts for Families with Holdings, 1989-2007

The Overall U.S. Economy - 2011 and Beyond

Conclusion

Chapter 3: Banks Targeting the Underbanked/Unbanked

Introduction

Table 3-1: Types of Payment Instruments Used by Banked, Unbanked and Underbanked Consumers

Bankers’ Messages About the Importance of Credit Increasingly Falling on Deaf Ears

Products Banks Can Market to Underbanked and Unbanked Consumers

BB&T Links Its Physical Footprint With Prepaid Card

Large U.S. Retail Banks Offer Many More Locations than Even the Largest Retailers

Table 3-2: Comparison of the Convenience of Bank Braches and ATM Locations versus the Location of Major U.S. Retail Locations

Banks Tackle Small Dollar Loans

Even in Programs Targeting Underbanked or Unbanked, Bankers Determined to Build Traditional Banking Relationships with Participants

Serving Underbanked Consumers While Hitting Fee Income Generation Targets

Table 3-3: Issues Retail Banking Executives are Focusing on in the Next 2 Years

Regulatory Changes Increase Banks’ Pressure on Fee Income

Table 3-4: Bankers’ Greatest Challenges in Serving or Targeting Underbanked and Unbanked Consumers

How Banks Became Dependent on Fee Income From Retail Customers

Overdraft Fee Income - Yesterday’s Cash Cow

Growth of Overdraft Fee Income Spurred Consumer Dissatisfaction With Banks and Banking Industry

Table 3-5: How Check Clearing Order Affects the Number of Overdrafts For Items Received on the Same Day

Bank of America Adds High Checking Account Service Charges and Fees to Use Bank Tellers

Chase Bank Adds Service Charges for Low-Income Customers and Those Who are Not Active Debit Card Users

Citibank Keeps Free Checking for Customers Who Perform 5 Types of Transactions a Month

Consumers Are Opting Out of Overdraft Protection

Table 3-6: Number of Noncash Payments

Debit Card Rewards Programs Are Vanishing

Savings Strategies of Underbanked

Figure 3-1: Snapshot of Piggymojo App

Prize-Linked Savings

Consumer Interest in PLS Accounts

Why Would PLS Accounts Be Attractive to Banks?

Barriers to Widespread Deployment of PLS

What If Consumer Savings Were Prioritized?

Michigan Credit Unions Partner to Offer PLS

How Successful Are the Michigan Programs in Growing Savings?

Can Banks Offer the Products Unbanked and Underbanked Consumers Want? Check Cashing

Table 3-7: Banks Offering Products/Services to Unbanked/Underbanked Consumers

Most Banks Will Only Cash On-Us Checks or Payroll Checks for Their Own Customers

Cashing Payroll Checks Is Important to the 27% of Employees Not Using Direct Deposit

Table 3-8: Why Do You Choose Against Direct Deposit?

Bill Payment

Table 3-9: How Do Unbanked/Underbanked Consumers Pay Their Bills?

Chapter 4: Alternative Financial Services

Introduction

The Market for Alternative Financial Services Product, 2007-2015

Table 4-1: AFS Industry Revenues by Product Line, 2007-2015

Check Cashing

Checks Still a Popular Choice on Payday

Ace Cash Express

Ace Cash’s New Partnerships and New Services

Table 4-2: Ace Cash Express Store Growth, 2006-2011

Dollar Financial

Table 4-3: Dollar Financial’s Check Cashing Income, 2006-2010

Competitors in the Check Cashing Sector

Chexar - Bring Check Cashing to Small Retailers

How Chexar Works

Wal-Mart - Transformer of Check Cashing Fees

Payday Lending

Table 4-4: Use of Payday Loans by Banked Status, 2009

Table 4-5: Among Users of Payday Loans, Frequency of Use by Banked Status, 2009

Profitability of Payday Lending Business

Table 4-6: PDA Revenue, Cost and Profit (pre-tax basis), 2009

Payday Lending Legislation

Federal Payday Lending Legislation

Payday Lending Regulations at the State Level

Payday Lending Regulations in Mississippi

Payday Lending Regulations in Colorado

Impact of Banning Payday Loans on Consumers’ Debt Behaviors

Payday Lending Regulations in Washington State

Payday Lending Regulations in Hawaii - A Contrasting Experience

Figure 4-1: Revenues of Publicly-Traded Payday Lenders, 2006-2010

Table 4-7: Revenues of Publicly-Traded Payday Lenders, 2006-2010 ($ in Millions)

Fragmented, Embattled Industry May Benefit From Turmoil in Banking Industry

Table 4-8: Number of Retail Locations of Largest Payday Lenders, 2010

Advance America

QC Holdings

Figure 4-2: Payday Loan Industry Revenues, 2006-2015 (public companies)

Payments

Table 4-9: Number of Noncash Payments

Prepaid Cards

Figure 4-3: Prepaid Card Load Volumes, 2008-2012

Challenges Facing the Prepaid Card Industry

Entry Points Into Prepaid Market

Green Dot

Figure 4-4: Green Dot: Key Business Metrics, Quarterly, and 2010

Table 4-10: Green Dot: Quarterly Key Business Metrics, 2009 and 2010 (in millions)

Netspend

Table 4-11: Netspend, Total Revenues, 2006-2010 ($ in millions)

Remittances

International Remittances Originating in the U.S.— Who Is Sending Money and How Often?

Table 4-12: Number of Times Money Transferred to Relatives and Friends Outside the U.S. During the Previous 12 Months, by Nativity of Household

Table 4-13: Total Dollars Remitted to Relatives and Friends During Previous 12 Months

Table 4-14: How Immigrants in the U.S. Send Money Home

Remitters Are Satisfied With Their Current Money Transfer Provider

Table 4-15: Satisfaction Levels With Remittance Channels, 2010

Remittances and Emerging Technologies: Can Price Drive Channel Adoption?

How Much Are Individuals in the U.S. Sending Abroad?

Table 4-16: Remittance Sizing Estimates Significantly Vary From One U.S. Government Agency and NGO to Another

Structural and Regulatory Challenge Hinder the Use of New Remittance Channels

Global Wire Transfer Trends

Table 4-17: Global Remittance Volumes to Developing Countries, 2005-2015 ($ billion)

Figure 4-5: Remittance Inflows to Developing Countries, 2005-2015

Where Does the Money Flow?

Table 4-18: Countries Receiving Most Remittances, 2010

Remittance Flows Are Critical to the Economies of Many Nations

Remittance Operators

MoneyGram

Table 4-19: MoneyGram, Total Revenue and Gross Profits, 2006-2010 ($ in millions)

Cash-to-Visa

MoneyGram Bill Payment Services

Western Union

Table 4-20: Western Union, Total Revenue and Gross Profits, 2006-2010 ($ in millions)

Western Union Takes on Wal-Mart

Table 4-21: Comparison of Fees Charged by Wal-Mart Money Card and Western Union MoneyWise Card

Western Union Experiments with Mobile Technology

Challenging the Spread

Remittance Channels

Hampering the Uptake of New Channels in the U.S.

Western Union’s Account-to-Account Remittances

Figure 4-6: Western Union Remains Preferred Remitter for U.S. Hispanics

Western Hemisphere Banks Bypass U.S. MTOs to Facilitate Remittances

Money Orders

U.S. Postal Service Is Largest Seller of U.S. Money Orders

Table 4-22: U.S. Postal Service Money Orders, 2000-2010 (Processed by the Federal Reserve)

Table 4-23: Size of Non-Bank U.S. Money Order Market, 2007-2015

Western Union’s Money Order Business Adversely Effected by End of IPS Partnership

Table 4-24: Financials of Western Union’s Money Order Business Unit, 2008-2010 ($Millions)

Where Are the Banks?

Conclusion

Chapter 5: International Leaders Offer Roadmaps for U.S. Financial Services Providers

Introduction

Table 5-1: Income Equality in Selected Countries (Gini Coefficient)

U.S. Bankers Face Structurally Endemic Challenges as They Consider Future Customers

U.S. Bank Branch Network Build for Previous Generation of Banking Customers

Meeting Mass Market Financial Services Needs in Africa

Figure 5-1: African Banking Industry, Changing Revenue Structure, 2009-2020

Smart Phones and SMS Capability Fuel Growth of Retail Financial Transaction in Africa

Mobile Payments: The Intersection of Cards, Banks and the Unbanked

Figure 5-2: Number of African Countries with Mobile Penetration Rates Above 50%

Table 5-2: Number of African Countries with Mobile Penetration Rates Above 50%, 2005-2012

Cash + Mobile = Economic Growth

Figure 5-3: African Money Vendors’ Employment Advertising

Mobile Remittances Threaten African Banks

Airtel / MasterCard and M-Pesa / Visa: Virtual Payment Cards

Central Bank Mobile Payments Platform May Increase Mobile Competition in Kenya

Table 5-3: Market Share of Mobile Operators in Kenya, 2011

Figure 5-4: Number of African Countries with Mobile Penetration Rates Above 50%, 2005-2012

Table 5-4: Number of African Countries with Mobile Penetration Rates Above 50%, 2005-2012

M-Pesa: Biography of a Market Leader

Mass Market Savings Strategies

British Premium Bonds - Mainstream Prize-Linked Savings

South African Million-a-Month PLS

Rethinking the Branch: Hub-and-Spokes Organization Should Be Considered

Capitec - Profits From the Previously Unbanked

Table 5-5: Total Consumer Unsecured Lending, Capitec and South African Banking Industry, 2007 and 2011

Figure 5-5: Capitec’s Unsecured Load Portfolio Has Grown Almost Four Times Faster Than That of Its Peers

The Shot Heard Round the Cape: Capitec Raises the Performance Bar for Its Competitors

First National Bank Uses Product-Branches Branches to Sell Specific Products

Table 5-6: Financial Inclusion Rates Are Slowly Increasing in South Africa, 2008-2010

Figure 5-6: Financial Inclusion in Africa

WIZZIT Uses Its Independent Sales Force and Door-to-Door Sales to Sign Up New Bank Customers

Figure 5-7: WIZZkids’ Method for Marketing the Bank’s Services in the Community and Workplace

Conclusion

Figure 5-8: South African Regulators Create KYC and AML Exemptions to Allow Providers to Target Low-Balance Customers

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