______________________________________________________________________________
BANKING ON TECHNOLOGY:
EXPANDING FINANCIAL MARKETS AND
ECONOMIC OPPORTUNITY
Robert Weissbourd, RW Ventures
with Perpetual Motion, Inc.
A Report Prepared for
The Brookings Institution Center on Urban and Metropolitan Policy
The Financial Services Roundtable
and
The Ford Foundation
June 2002
______________________________________________________________________________
THE BROOKINGS INSTITUTION CENTER ON URBAN AND METROPOLITAN POLICY
SUMMARY OF RECENT PUBLICATIONS *
DISCUSSION PAPERS/RESEARCH BRIEFS
2002
Transportation Oriented Development: Moving from Rhetoric to Reality
Signs of Life: The Growth of the Biotechnology Centers in the U.S.
Transitional Jobs: A Next Step in Welfare to Work Policy
Valuing America’s First Suburbs: A Policy Agenda for Older Suburbs in the Midwest
Open Space Protection: Conservation Meets Growth Management
Housing Strategies to Strengthen Welfare Policy and Support Working Families
Creating a Scorecard for the CRA Service Test: Strengthening Banking Services Under the
Community Reinvestment Act
The Link Between Growth Management and Housing Affordability: The Academic Evidence
What Cities Need from Welfare Reform Reauthorization
Growth Without Growth: An Alternative Economic Development Goal for Metropolitan Areas
The Potential Impacts of Recession and Terrorism on U.S. Cities
2001
The State of Minority Access to Home Mortgage Lending: A Profile of the New York
Metropolitan Area
Do Federal Funds Better Support Cities or Suburbs? A Spatial Analysis of Federal
Spending in the Chicago Metropolis
What Cities Need from Welfare Reform Reauthorization
Tracking the Progress of Welfare Reform Quickly: A Model for Measuring Neighborhood
Health and Change
Expanding Affordable Housing Through Inclusionary Zoning: Lessons from the Washington
Metropolitan Area
Bigger, Faster. . . But Better? How Changes in the Financial Services Industry Affect Small
Business Lending in Urban Areas
Moving Up, Filtering Down: Metropolitan Housing Dynamics and Public Policy
Exposing Urban Legends: The Real Purchasing Power of Central City Neighborhoods
The Impact of Changes in Multifamily Housing Finance on Older Urban Areas
Dealing with Neighborhood Change: A Primer on Gentrification and Policy Choices
The Implications of Changing U.S. Demographics for Housing Choice and Location in Cities
Lost in the Balance: How State Policies Affect the Fiscal Health of Cities
Sprawl Hits the Wall: Confronting the Realities of Metropolitan Los Angeles
Growth at the Ballot Box: Electing the Shape of Communities in November 2000
2000
Ten Steps to a High Tech Future: The New Economy in Metropolitan Seattle
Who Should Run the Housing Voucher Program? A Reform Proposal (Working Paper)
Do Highways Matter? Evidence and Policy Implications of Highways’ Influence on
Metropolitan Development
Adding It Up: Growth Trends and Policies in North Carolina
Cautionary Notes for Competitive Cities (Working Paper)
Business Location Decision-Making and the Cities: Bringing Companies Back
(Working Paper)
Community Reinvestment and Cities: a Literatures Review of CRA’s Impact and Future
Moving Beyond Sprawl: The Challenge for Metropolitan Atlanta
TREND SURVEYS
2002
The Price of Paying Taxes: How Tax Preparation and Refund Loan Fees Erode the
Benefits of the EITC
The Importance of Housing Benefits to Housing Success
Left Behind in the Labor Market: Recent Employment Trends Among Young Black Men
City Families and Suburban Singles: An Emerging Household Story from Census 2000
2001
Suburbs and the Census: Patterns of Growth and Decline
Rewarding Work: The Impact of the Earned Income Tax Credit in Chicago
The “Segregation Tax”: The Cost of Racial Segregation to Black Homeowners
Place, Race and Work: The Dynamics of Welfare Reform in Metropolitan Detroit
Rewarding Work: The Impact of the Earned Income Tax Credit
Envisioning a Future Washington
Tech and Tolerance: The Importance of Diversity in the New Economy
Meeting the Demand: Hiring Patterns of Welfare Recipients in Four Metropolitan Areas
City Growth and the 2000 Census: Which Places Grew, and Why
Downtown Rebound
Racial Change in the Nation’s Largest Cities: Evidence from the 2000 Census
The World in a Zip Code: Greater Washington, D.C. as a New Region of Immigration
Racial Segregation in the 2000 Census: Promising News
High Tech Specialization: A Comparison of High Technology Centers
Vacant Land in Cities: An Urban Resource
2000
Office Sprawl: The Evolving Geography of Business
Unfinished Business: Why Cities Matter to Welfare Reform
Flexible Funding for Transit: Who Uses It?
FORTHCOMING
Demographic Change in Medium-Sized Cities: Evidence from the 2000 Census
Central Cities and Rural Areas: The Importance of Place in Welfare Reform
* Copies of these and previous Urban Center publications are available on the web site,
www.brookings.edu/urban, or by calling the Urban Center at (202) 797-6270.
ABOUT THE AUTHORS
Robert Weissbourd, president of RW Ventures, does economic development, particularly
focused on bringing regional and information economy business opportunities to inner city markets.
Weissbourd previously served as vice-president of Shorebank Corporation, executive vice-
president of Shorebank Chicago Companies, and managing director of Shorebank Advisory
Services. He continues to serve on retainer to Shorebank. He has been a frequent public speaker
and guest lecturer on a broad range of economic development issues, and has also testified on
these issues before federal, state and local legislatures.
Perpetual Motion, Inc is a financial services firm that specializes in technology and low-
income community-development finance, having worked with organizations ranging from investment
banks to community-development financial institutions. The firm has advised financial companies
on capital raising, strategy, and policy, and provided analytical and due-diligence services to both
conventional and community-development financial organizations. Through its assignments
Perpetual Motion works to connect financial markets and low-income communities.
Comments on this paper can be sent directly to the authors at [email protected].
The views expressed in this discussion paper are those of the authors and are not necessarily those of the trustees,
officers, or staff members of The Brookings Institution.
Copyright © 2002 The Brookings Institution
ACKNOWLEDGEMENTS
This report arises from a project conceived and undertaken by the Ford Foundation, which
seeks to better understand technology-driven changes in the financial services industry, and how
they might be leveraged by the Foundation to expand financial services to lower-income people.
The authors gratefully acknowledge the Ford Foundation for its initiative, intellectual insights, and
financial support. We are especially grateful to Michele Kahane, the program officer for this project.
The authors also gratefully acknowledge Steve Davidson as principal researcher and
contributor to the project. We are also particularly grateful for the many organizations and experts
who generously participated in interviews and meetings, and who otherwise assisted us in the
research. At its best, this report is primarily a reflection of their wisdom and experience.
Participating individuals and organizations are listed in the Appendix.
We could not have completed the work without the skilled editorial support of Lauri Giesen
early in the project. The authors are especially indebted also to Valjean McLenighan, whose
editorial touch greatly enhanced the quality and clarity of the final report.
Special thanks also go to Bruce Katz, Amy Liu, and Mark Muro of the Brookings Institution
Center on Urban and Metropolitan Policy for so enthusiastically and professionally completing and
presenting this report.
In addition, the Financial Services Roundtable contributed substantially to the final framing
and presentation of this project. We appreciate the roundtable’s deep interest in ensuring that
lower-income consumers become full participants in the financial services and larger economic
market.
Finally, while recognizing the assistance of the many contributors to the project, the authors
take full responsibility for the report’s contents. We hope that this work leads to further discussion
and exciting new initiatives using information technologies to make the financial services
marketplace work for lower-income consumers.
The Brookings Institution Center on Urban and Metropolitan Policy would like to separately
thank the Fannie Mae Foundation, the Ford Foundation, and the Annie E. Casey Foundation for
their ongoing support of the center’s work to examine how the changing market, economic, and
policy trends affect the opportunities of low-income households.
TABLE OF CONTENTS
I. OVERVIEW…………………………………………………………………………………1
II. FRAMING THE ISSUE……………………………………………………………………….3
III. THE LOWER-INCOME MARKET IS LARGE AND UNDERSERVED……………………………7
IV. INFORMATION AND ACCESS BARRIERS IMPEDE MARKET FUNCTIONING…………………11
V. THE NEW ECONOMY IS REORDERING THE FINANCIAL SERVICES INDUSTRY……………15
VI. THE NEW ECONOMY ALSO PRESENTS CHALLENGES……………………………………23
VII. WHAT ARE THE AREAS OF OPPORTUNITY?………………………………………………27
VIII. A STRATEGY FOR MAKING FINANCIAL MARKETS WORK FOR THE LOWER-INCOME
CONSUMER……………………………………………………………………………….32
IX. CONCLUSION……………………………………………………………………………..38
SELECTED BIBLIOGRAPHY…………………………………………………………………………39
APPENDIX: PARTICIPANTS…………………………………………………………………………41
Banking on Technology
1
BANKING ON TECHNOLOGY:
EXPANDING FINANCIAL MARKETS AND ECONOMIC OPPORTUNITY
I. OVERVIEW
No sector of the “old” economy has been more directly affected by information technology
than financial services. Money itself—the industry’s raw material—has gone digital, and so have
the products and services that support consumer finance, from debit cards to financial planning
software. Today it is hard to remember what life was like before ATMs. Technology has made it
easier for consumers to access financial services and cheaper for providers to develop and deliver
them. New partnerships are consequently forming between “old” economy and “new” economy
firms to broaden the range of offerings and create new distribution channels. The products,
providers, partnerships, delivery points and economics of the industry are all dramatically
changing.
This report examines these profound changes in the financial services industry and
identifies their implications for expanding economic opportunity for lower-income consumers. In
short, it finds that:
1. Technological change is creating profitable new opportunities for financial
services companies to bring lower-income consumers into the economic
mainstream by “making the market work.”
A number of factors are converging to make this a key moment for large-scale, market-
based delivery of financial services to lower-income consumers. First, advances in technology, the
restructuring of the financial services industry, and the new economics of financial services are
making it easier for all consumers to access financial services and the industry, in turn, to create
and distribute more customized products to new and conventional customers. Second, the
mainstream market is becoming saturated while the lower-income market is large and underserved,
with enormous pent up demand for financial services. Finally, the changes resulting from financial
industry restructuring—reduced costs, broadened product choices, increased access points, new
providers and partnerships—are exactly what are needed to address historical barriers to serving
lower-income consumers. These new economies, products, and players can now be applied to the
underserved market of lower-income consumers, making the economics of this market work for
both new providers and conventional financial institutions.
2. While financial restructuring and new technologies create exciting opportunities
to engage lower-income consumers, some challenges must be addressed to fully
develop the new market.
Information, access, policy, and other barriers make it difficult for the market to function
efficiently. For instance, a lack of reliable market information and segmentation products for the
lower-income population prevents traditional institutions from effectively developing customized
Banking on Technology
2
products for and reaching target lower-income segments. Furthermore, systems for capturing and
sharing market data on lower-income consumers remain underdeveloped. Also, antiquated
regulatory obstacles interfere with the deployment of new products, such as interest-bearing
“savings cards” that might particularly appeal to lower-income consumers. Service gaps like these
contribute to a product fragmentation that impedes the integration of low-income consumers into
the financial mainstream. The same innovation and market development process that has
restructured mainstream financial markets—employing specialized information gathering,
customized product development, deployment of new technologies, and the creation of new
partnerships—must go on for lower-income market segments.
3. There is an emerging market response to meet lower-income consumers’ demand
for comprehensive financial services; the opportunity now is to accelerate this
response and bring it to scale.
Across the nation, new financial providers as well as leading mainstream financial
institutions are recognizing the importance and viability of the lower-income market and creating
new partnerships, new products, and new delivery channels to meet the needs of such consumers.
These initial efforts, however, are unlikely to reach scale without greater participation by
conventional institutions, catalytic support from philanthropic and other leadership organizations,
and appropriate government policies. The moment is ripe, then, to pursue a set of strategies to
accelerate technological and market changes and address barriers to the full financial engagement
of lower-income consumers. Such strategies include developing new points of access to financial
services, promoting new product innovations and partnerships, developing better information on
different segments of the lower-income market, and publicizing and replicating promising business
models.
Dramatic changes in the financial services industry give rise to a major opportunity to
provide better access to comprehensive financial services for lower-income consumers. Such
financial engagement will enable lower-income consumers to reduce their economic isolation, build
financial assets, and enhance their economic opportunities. In the ensuing pages, this report will
examine the lower-income financial services market and why it does not function well; discuss in
more detail the impact of technology-driven changes on the economy in general and the financial
services industry in particular; and identify the new opportunities that are being created to promote
fuller lower-income consumers’ engagement in the economy. The paper closes with a suggested
strategy for how best to maximize this opportunity.
Banking on Technology
3
II. FRAMING THE ISSUE
Technology is rapidly changing the financial services industry. These changes are
presenting significant new opportunities for financial service providers to serve lower-income
people—and to make money doing it. This report probes those opportunities by summarizing the
findings of a year-long examination of how changes in financial services might be leveraged to
enable lower-income people to
participate more fully in the mainstream
economy. In the course of that
examination, the relevant literature was
reviewed; stakeholders from around
the country were interviewed; and a
roundtable discussion was convened
among academics, financial services
industry executives,
telecommunications and technology
experts, and professionals in
community development finance.
What, Exactly, Are Financial Services?
The term financial services refers to products, services, and systems that enable
individuals to receive, store, and access funds; to pay bills and buy goods and services; to insure
against risk; to accumulate savings and build assets (for example, by investing in interest-earning
products); and to manage money (for example, through financial education, planning, and
budgeting products and services). This report focuses on consumer finance, and in particular on
non-credit products and services, though not to the exclusion of credit. A good deal of valuable
work is underway to improve access to credit for lower-income people. While credit and noncredit
financial services are interrelated, the lower-income market for non-credit products and services is
comparatively understudied and underdeveloped. Our purpose is to address this gap.
Traditional thinking about financial services for lower-income segments focuses on basic
check-cashing and payment services. We use the term more broadly, to include the full range of
services people need to engage fully in the new economy. Better access to comprehensive
financial services can help lower-income people to reduce their economic isolation, build financial
assets, and enhance their economic opportunities in three ways, by: (1) strengthening their
capacity to receive and make non-cash payments; (2) providing them with access to the full range
of financial products; and (3) linking them to the financial information and networks necessary for
full participation in the mainstream economy.
Connectedness
Isolation
Poverty Productivity
• Commerce
• Assets
• Engagement
Banking on Technology
4
Technology Is Changing the Underlying Economy
Over the past few decades, information technology has produced fundamental changes in
the underlying economy. Many labor-intensive functions have now been automated, from payroll to
order processing to product design and manufacturing, enabling businesses to operate more
efficiently and productively. These changes preceded the Internet and proceed independent of the
Internet, and they continue to drive wealth creation. Businesses, as well as mainstream and
affluent consumers, have a vastly greater capacity to collect, transmit, and manage information,
and the new economy places a premium on specialized market information and its flow.
Financial Services Are Reconfiguring
The same changes that have transformed the underlying economy have had a dramatic
impact on financial services. Money is digital, and the financial service business, at its core, is now
technology. Checking accounts, 401(k) plans, mortgages, insurance—fundamentally, these and
other financial products are all delivered electronically.
Within the broad category of information technology is a subset that we will call financial
technologies—applications that have particular utility for consumer financial services. Besides the
Internet, four technologies have reshaped the financial services landscape over the past couple of
decades: (1) automatic teller machines (ATMs); (2) credit and debit cards; (3) automated
clearinghouse, or ACH, technology, whereby funds can be wired through a network of financial
institutions for immediate debiting and crediting of accounts; and (4) data warehousing and data
mining, which allow a business to collect huge amounts of customer data and “slice and dice” data
in numerous ways.
These technologies and others have altered and improved consumer financial services
spectacularly over the past two decades. The new financial service system breaks up the old
banking structure
1
and replaces it with numerous partnerships, networks, and alliances.
Technology-enabled consumers can now access financial services seven days a week, around the
clock, and compare and select from an amazing array of custom products and services. The
average consumer has instant access to specialized information that once was available only to
bankers and brokers, and can execute trades and perform other financial functions that once
required an intermediary.
At the same time, technological developments—together with related industry competitive
trends such as competition, product diversification, and consolidation—have intensified the
competition to become the financial service provider of choice to lucrative higher-income
consumers, which has widened the gap between low-income consumers and the financial services
1
The concept of “breaking up the bank” is adapted from work by Gary Craft, founder of financialDNA.com
and a leading analyst of the financial-technology industry and its leading companies. The concept is well
described in his five-part series of reports “Breaking Up the Financial Intermediary” (1998-2000) for Deutsche
Banc Alex. Brown.
Banking on Technology
5
0
5
10
15
20
25
1997 1998 1999 2000 2001 2002 2003
Millions of Financial
Households
$75,000+ $50,000-$74,999
$35,000-$49,999 $15,000-$34,999
Under $15,000
mainstream. In addition, industry consolidation has caused banks to streamline and close
overlapping and unprofitable branches.
Internet Use Is Growing
Financial technologies are, meanwhile,
becoming increasingly integrated with the Internet.
Internet use and Internet commerce continue to
grow rapidly. A.C.Nielsen estimated that, in August
2001, 160 million people—close to 60 percent of
the U.S. population—were online. According to
comScore Networks, Internet penetration among
African American households rose by more than
a third between April, 2000 and April, 2001, and now
stands at 51 percent.
2
The digital divide remains a concern—lower-income households, rural
residents, and people of color have lower rates of Internet access than the rest of the population.
Still, households with annual incomes of $25,000 or less had the fastest growth rate of any income
segment, with 36 percent of them now online. (It is not known how many of these low-income
households are students and seniors, who may possess more assets than the population that
concerns us in this report.)
3
Nielsen/Netratings and Harris Interactive report that nearly half of all
Americans, more than 100 million people, have already shopped online.
4
The rise of the Internet,
and its integration with financial technologies, is not necessarily eliminating location- and paper-
based enterprises, but it is forcing the financial-service providers to rethink their strategies and
operations.
The Economics Are Changing
Technology is also changing the economics
of financial services. Electronic delivery is
considerably cheaper than paper- and place-based
transactions. The widely quoted industry standard
is that, excluding investments in legacy systems, it
costs roughly a dollar for a bank teller to cash a
check or accept a deposit, compared with a quarter
for the same transaction processed by ATM, and
pennies for an Internet transaction.
5
The costs to a
financial service provider of acquiring market
information and designing and delivering customized products are dropping dramatically. At the
2
See comscore.com.
3
Morgan Stanley Dean Witter, “Internet Financial Services” in Investment Research, September, 1999,
citing research by Forrester Research.
4
“More than half of USA have a web site,” USA Today, August 18, 2000; see also Nielsen-netratings.com
5
Booz Allen & Hamilton, Inc., “Customer Demand Internet Banking.” 1996.
$1.07
$0.54
$0.27
$0.015
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
Teller Telephone ATM PC
Banking
Full Service Banking
Cost Per Transaction
Morgan Stanley Dean Witter source: Forrester
Research
Source: Booz, Allen & Hamilton
Banking on Technology
6
same time, as supply side entry and access barriers dissolve, and as competition heats up for
moderate- and higher-income and certain niche markets, costs to consumers are dropping. Online
investors, for example, can now execute their own stock trades for well under $30.
A saturated traditional market for financial services, combined with lower costs for product
development and delivery, make the lower-income market much more appealing. Recent analyses
– such as John Caskey’s evaluation of data from the triennial Federal Reserve’s Survey of
Consumer Finances,
6
and a 2000 Dove Consulting study for the U.S. Department of the Treasury
7
- suggest that the lower-income market is larger, and potentially more lucrative for financial service
providers, than traditionally thought. The new economics make it possible to serve more lower-
income consumers profitably, to bring innovations developed in traditional markets to scale, and to
spur development of a broader range of custom technology-enabled products and services
targeted to lower-income people. Information technology is already beginning to attract new
providers to the market and creating new points of access to financial services for lower-income
consumers. (See Chapter 6 for examples.) At the same time, those who continue to rely on paper-
based and traditional face-to-face financial services will face higher costs and fewer options.
Technology Opportunities Have Yet to Reach the Lower-Income Market
Advances in technology, the rise of the Internet, the restructuring of the financial services
industry, and the new economics of financial services—all of these create exciting new
opportunities for serving lower-income consumers. Yet these opportunities have barely been
tapped. Financial technology innovations targeted to the lower-income market have focused
primarily on payment technologies and platforms and are relatively small scale. Little has been
done to provide lower-income people with the broader range of specialized financial information,
products and services necessary for full engagement in the economy. Our purpose here is to
describe these opportunities in more detail and suggest an approach to seizing them.
6
John B. Caskey, “Reaching Out to the Unbanked.” (Preliminary draft), August, 2000;
Arthur Kennickell, Martha Starr-McCluer and Brian Surrette, “Recent Changes in U.S. Family Finances.”
Federal Reserve Bulletin; January 2000; and Edward S. Prescott and Daniel D. Tatar, “Means of Payment:
the Unbanked and EFT99.” Federal Reserve Bank of Richmond Economic Quarterly, Fall 1999.
7
Dove Consulting, “Survey of Non-Bank Financial Institutions,” Final report for the Department of the
Treasury, April 4, 2000.
Banking on Technology
7
III. THE LOWER-INCOME MARKET IS LARGE AND UNDERSERVED
The traditional view of lower-income consumers understates their demand for financial
services. These consumers, who we define as individuals and households earning 80 percent or
less than the U.S. median (or $17,600 and $33,600 or less, respectively), represent a large and
underserved market for financial service products.
8
The Market Is Large and Growing
According to the 1998 Federal Reserve Survey of Consumer Finances, approximately 10
million households—about one-tenth of all U.S. households—operate outside the conventional
banking system. While these tend to be lower-income consumers, the unbanked are not exclusively
lower-income, nor are all households with banking relationships necessarily middle- or upper-
income.
Many lower-income consumers are marginally banked; that is, they own checking or
savings accounts, but maintain very low balances. Their banking relationship does not necessarily
satisfy their financial needs. This is a comparatively understudied group, and perhaps larger in
number than the unbanked. Research conducted by the Fannie Mae Foundation, John Caskey
and the Federal Reserve Bank of Richmond
9
indicates that the marginally banked often turn to a
check-cashing service when that is a lower-cost alternative.
Depending on how one defines lower-income, the
total lower-income market for financial services may be as
large as 35 million households out of slightly more than 100
million total households in the U.S. According to the 2000
Dove Consulting study, some experts place the combined
unbanked and subprime credit population at 30 to 40
million. Up to 40 percent of American households do not
have an unsecured credit card, reports the study.
10
Spending on Financial Services Is Substantial
Financial service providers that target lower-income consumers—frequently institutions
other than traditional banks and investment firms, such as check-cashing services, community
8
The median household income figures are based on U.S. Census estimates.
9
James H. Carr and Jenny Schuetz, “Financial Services in Distressed Communities: Framing the Issue,
Finding Solutions.” Fannie Mae Foundation, 2001; Caskey, 2000; and Prescott and Tatar,1999.
10
The 2000 Dove Consulting study also concluded that 24 percent of federal benefits check recipients lack
bank accounts based on its 1998 analysis of survey data gathered for the Department of Treasury’s
Financial Management Service by Shogull/Booz Allen.
0
5
10
15
20
25
30
35
Millions of
Households (est.)
Unbanked
Other Lower-
Income
180 Million
Checks
Value of
$60 billion
Source: Federal Reserve
Banking on Technology
8
Assets held by LICs with less than
$25,000 Annual Income
0
20
40
60
80
100
Billions of $
CDs Savings
Bonds
Stock Mutual
Funds
Retirement
Accounts
Life
Insurance
development financial institutions, Western Union and, increasingly, 7-Eleven and other
convenience stores—have found there is significant money to be made from serving this market.
The lower-income population, particularly people without a bank account, spends a significant
portion of its income on financial services. In 1997, the unbanked purchased $980 million in money
orders. In 1998 they cashed $60 billion worth of checks, generating annual fees of about $1.5
billion, excluding money order fees and interest paid on extension of credit.
11
The Dove Consulting study cites further research estimating that people with no bank
account spend about 2 percent of their income on basic financial services such as check-cashing
and bill-payment. Assuming an average yearly household income of $20,000 and a population of
10 million households, that translates into a $4 billion market. This figure is conservative—it
excludes the marginally banked, as well as the potential lower-income market for savings and
investment products. Research indicates that the annual cost to a household with a $20,000
income of basic financial services such as check-cashing and bill-payment ranges between $86
and $500.
12
Lower-Income People Have Substantial Aggregate Assets
Lower-income individuals also have substantial collective assets, even if they individually
often possess few assets or even negative net
worth. Calculating from data reported in the
1998 Federal Reserve Survey of Consumer
Finances, families earning $25,000 a year or
less have a collective total of $175 billion in
assets, including almost $90 billion in CDs and
more than $50 billion in mutual funds.
13
Source: 1998 Federal Reserve Survey of Consumer Finances, author’s calculations.
Multiple Market Segments Offer Distinct Opportunities
The lower-income market is often deemed monolithic (if it is viewed at all), but in fact it is
highly segmented like any other market. Different segments offer distinct opportunities to expand
product and service offerings based on variations in financial decision-making, attitudes, behavior,
and demand for products from one segment to another. Financial institutions that target lower-
income people, such as Union Bank of California and Banco Popular, headquartered in Puerto
Rico, are beginning to identify distinct segments and tailor products to them. So are leading
11
Dove Consulting, 2000.
12
Carr and Schuetz, 2001.
13
Authors’ estimate based on data from the 1998 Federal Reserve Survey of Consumer Finances. Again,
some of the families in this category may be seniors with low incomes, but considerable assets.
Banking on Technology
9
subprime credit card issuers, such as Providian Financial, based in San Francisco, and
CompuCredit in Atlanta. Here is a broad overview of key market segments:
The Working Poor
Individuals classified as “working poor” may earn as much as $25,000 to $35,000 annually.
This segment has more income available to save and invest than other lower-income segments.
The workplace may be a viable point of access to them.
People on Public Assistance
People who rely on the welfare system have lower incomes and fewer assets than the
working poor and are more firmly entrenched in poverty. Though they receive funds on a more or
less predictable schedule, their access to basic financial services—check-cashing and payment
vehicles—is more limited than that of the working poor. Still, and perhaps due to this very lack of
access, welfare-dependent people spend significant sums on financial services and are therefore a
potentially significant market.
People Impoverished by One-Time Events
Divorce, bankruptcy, health crises—these and other personal catastrophes can cut people
off from the economic mainstream, sometimes temporarily, sometimes permanently. This
population, though lower-income, is often employed, and many have a reasonably good chance of
returning to economic stability. Their potential for financial recovery makes them an attractive
market for financial services.
Immigrants
Perhaps the fastest-growing group of unbanked lower-income people, the immigrant
population often is less knowledgeable about the traditional banking system than other lower-
income segments. Immigrants are also heavy users of money-wiring services; people of Mexican
origin working in the United States wire approximately $8 billion to Mexico annually.
14
The
immigrant population has high potential for upward mobility and is thus considered attractive by
financial industry marketing analysts. In immigrant households with first-generation American
children, youngsters often interpret American language and culture for their parents. Financial
service providers need to keep this in mind when developing products and services for immigrants.
They also should keep in mind that growth in the immigrant population could double the unbanked
population in the next 20 years.
14
Ginger Thompson and Tim Weiner, “In State of Union, Fox Asks More Time to Keep Promises.” The New
York Times, 2 September 2001, sec. A, p. 4.
Banking on Technology
10
Racial and Ethnic Groups
Spending and saving patterns, financial decision-making, and other financial behavior can
vary greatly from one racial or ethnic group to the next. These distinctions need to be understood
to market financial services effectively. For instance, in African American communities, churches
might well function as points of access to financial services, whereas the school system may be a
preferable channel for reaching the younger Hispanic consumer population which often “interprets”
American culture and economic practices for their elders.
Urban Residents
Urban dwellers, including lower-income people, have more points of access to financial
services than rural people, including check-cashing services, convenience stores, and other
alternatives to banks than rural residents. Costs, though, are typically higher for lower-income
people than the more affluent customers of mainstream financial institutions. Urban residents also
tend to have higher rates of Internet access than rural residents.
Rural Residents
Rural communities have fewer choices of traditional and alternative financial service
providers and lower rates of Internet access. In especially poor communities, residents would
benefit from expanded points of access to financial services, such as through convenience stores
and other retail establishments, as well as expanded check-cashing and other service offerings.
Various Age Segments
Financial behavior and product demand vary from one age group to another. People
under 35 constitute the highest number of unbanked consumers, although lower-income seniors
over 75 are also likely to be unbanked. Younger people are heavier users of credit, and they also
have the highest rates of Internet access and literacy. Older people tend to have higher net worth,
as savings tend to grow with time. However, Financeware.com, the Virginia-based online financial
planning firm, notes that elderly citizens who lack accumulated savings risk falling into poverty.
15
Notwithstanding differences among various market segments, lower-income people are
rational consumers who are looking to purchase financial services and products for many of the
same reasons as higher-asset and higher-income financial consumers. Lower-income people have
fewer options, but they want a full range of financial services that are reasonably priced and easily
accessible. And the fact is that certain market segments, as well as lower-income consumers in the
aggregate, have considerable assets and spend substantial amounts on financial services.
15
Financeware.com, “Living Life on the Flip of a Coin: Will Americans Achieve Their Financial Goals?” 2000.
Banking on Technology
11
IV. INFORMATION AND ACCESS BARRIERS IMPEDE MARKET FUNCTIONING
If there is so much market potential among lower-income consumers, why isn’t this demand
being met? The market has failed for many reasons. Widely held stereotypes persist in the
absence of good market information about three broad types of market barriers: those of cost,
information and access. These barriers are in turn shaped by a variety of factors, including the
costs of serving lower-income consumers; inadequate understanding of those consumers’ needs;
some consumers’ limited financial literacy; their distrust of the financial system; their economic
isolation; regulatory constraints; and the paucity of links between potential partners.
Widely Held Stereotypes Discourage Innovation
To begin with, several misperceptions prevent the market from functioning efficiently.
1. Myth: Lower-Income People Don’t Want to Save or Invest
The prevailing wisdom has it that lower-income people need only basic financial services—
essentially, check-cashing and bill-payment capabilities, perhaps a checking account at most.
Lower-income people are not perceived to be interested in savings and investment products or to
have the capacity for broader financial engagement.
Research does not support this notion. Half of the regular users of alternative check-
cashing services surveyed in September 2000, by Eric Mower and Associates on behalf of
Financial Service Centers of America, said they would use a savings account.
16
Research by
Michael Sherraden at Washington University in St. Louis indicates that lower-income people save
more when they are offered a specialized savings product, such as an Individual Development
Account (IDA), than the general lower-income population that does not have access to such
specialized savings products.
17
Washington University’s Center for Social Development looked at
1,300 households participating in IDA programs with incomes ranging from less than 50 percent to
more than 150 percent of the poverty level. Participants showed savings rates from 2 to 8 percent.
By comparison, the nationwide savings rate for October 2001 was 0.2 percent, a record low.
18
16
Financial Service Centers of America, “Customer Satisfaction Research: Final Report.” Report by Eric
Mower and Associates: Marketing and Research Services Division, September 26, 2000.
17
Michael Sheraden, "Saving Patterns in IDA Programs." St. Louis: Center for Social Development,
Washington University, 2000. An IDA is a special matched savings account, similar to a 401(k). See
Chapter 7 for further details.
18
SavingsCentral.com Executive Summary (of a business plan), 2000.
Banking on Technology
12
2. Myth: Lower-Income Consumers Are Unsophisticated
It is widely thought that lower-income people do without
bank accounts and pay higher transaction fees because they
are unsophisticated consumers. While they may have limited
access to the cornucopia of financial information that more
affluent consumers take for granted, lower-income people make
rational financial decisions based on the information at their
disposal, and they are savvy consumers. Minimum balance
requirements, monthly maintenance charges, ATM charges,
and high insufficient funds (NSF) fees are off-putting for many
lower-income people. Both banked and unbanked customers
turn to check-cashing outlets when they need immediate access to funds—an important
consideration for people living from paycheck to paycheck—and many banked consumers use
check-cashing outlets to avoid NSF fees. Research shows that at least half of the unbanked did
have bank accounts at one time.
19
The decision to use alternative check cashers may be based in
part on a preference for transaction pricing. While the average fee for cashing a check at an
alternative institution is about 2.5 percent of the amount of the check, some establishments charge
as little as 1 percent. In any case, some lower-income consumers are willing to pay a fee for a
financial transaction, but less willing to pay a monthly fee for a bank account that is not perceived
to provide specific benefits.
3. Myth: Lower-Income Consumers Are Not Price-Sensitive
Experience shows that pricing does influence the financial behavior of lower-income
consumers. Union Bank of California has opened more than 100,000 new accounts in the Los
Angeles area through a lower-than-average check-cashing option, along with a broader menu of
financial products offered at its Cash & Save outlets. Banco Popular in Puerto Rico, in an effort to
move customers from high-cost bank tellers to electronic channels, offered an all-electronic
account with unlimited transactions for $2 per month. The strategy attracted 15 to 20 percent of
the bank’s mostly lower-income customers to the all-electronic account.
20
Banks Find It Costly to Serve Lower-Income Consumers
More than myths depress the lower-income financial services marketplace, however. So do
cost, information, and access issues.
Until recently, for example, banks have found it too costly to open and maintain the small-
volume accounts that are typical of lower-income consumers. The Tower Group, a leading
19
John Caskey, “Consumer Financial Services and the Poor.” Filene Institute, 1996; Prescott and
Tatar,1999.
20
Telephone interviews with James Laffargue of Union Bank (August, 2000) and Nestar Obie, Banco Popular
(August 2000)
0
1
2
3
4
5
6
7
8
9
10
Thousands
92 94 96 98 2000
Number of
Check Cashing
Outlets
Dove Consulting Source: InfoUSA Estimates
Banking on Technology
13
financial technology market research firm based in the Boston area, cites industry data indicating
that the cost to a financial institution of opening an account may run as high as $40. Other
research has found lower average account opening costs.
21
Service costs for accounts with low
average balances pose another barrier for the financial supplier. In addition, many lower-income
consumers lack a credit history. Banks have limited means to investigate customers with no
previous banking history. If the risk cannot be quantified, a mainstream provider will err on the side
of caution. For all these reasons, many banks believe it is unprofitable to target lower-income
consumers, and in many instances, it has been.
Information Barriers Contribute to a Dysfunctional Market
Inadequate information increases risk and transaction costs and so keeps markets from
functioning well; good information enables the market. Unfortunately, specialized market
intelligence is generally much less available for lower-income segments and poor communities.
Shorebank’s urban market intelligence division, for example, has found that even the best
conventional data and models dramatically underestimate the demand for financial products in
lower-income communities. With limited knowledge of lower-income market segments and limited
access to them, most conventional providers do not deem the lower-income market a particularly
attractive business opportunity. Indeed, under these circumstances, it may not be—because
without good market information and access, risk and transaction costs are higher, products are
poorly tailored, and the provider cannot access targeted segments efficiently. Many conventional
institutions have closed branches in poor communities. To the extent that traditional institutions do
target this market, they generally offer only basic services, not the broader range of savings and
investment products that many lower-income people want. Markets do not function well in the
absence of good intelligence—demand and offerings are out of sync.
Low Financial Literacy Levels Are a Barrier for Some Segments
Some, but by no means all, segments of the lower-income market are poorly educated
about financial basics. Most don’t know as much about available products and services as more
affluent consumers. This is partly because mainstream providers are not developing specialty
products to serve this market, nor widely advertising the products they do have to this market.
Many Poor People Don’t Trust Banks
Trust and cultural issues are factors in the preference of many lower-income consumers for
alternatives to the banking system. Research shows that many unbanked people, especially
immigrants, find banks intimidating and distrust the financial system. They desire to keep financial
21
Interview with the Tower Group (July 2000). The $40 figure includes all customer acquisition costs
(including marketing and advertising expenses) of a typical bank customer and is used as a standard or
typical banking industry estimate. The $13 estimate provided by Dove Consulting’s “ETA Conjoint Research
Final Report and Market Model of Unbanked Federal Check Respondents (US Treasury Department, May
26, 1999) includes only direct expenses.
Banking on Technology
14
information confidential.
22
They are more comfortable with a neighborhood check-cashing facility
or convenience store, and many spread transactions among two or more institutions to protect their
privacy.
Access Is a Problem for Lower-Income Consumers
In many poor communities, bank branches are few and far between, and they often operate
under restricted hours. This makes it difficult for lower-income people to establish a banking
relationship. ATMs can compensate to some extent, but one cannot open an account or pay a bill
at most first-generation ATMs, and besides, lower-income communities tend to have fewer ATMs
than wealthier neighborhoods.
The Regulatory Environment Impedes Specialized Product Development
The current regulatory system was built on the assumption that only traditional financial
institutions would be providing financial services. That means that check-cashing companies,
Western Union, and convenience stores face major legal constraints on offering savings and other
financial products tailored to lower-income people, because these institutions are not insured
depositories. If a community center or check casher such as ACE Express, the largest chain of
check-cashing outlets, wanted to offer a savings product, it would have to become a regulated
depository institution.
Links Between Potential Partners Are Poorly Developed
With advances in financial technology, many of the information, access, and cost barriers
we have discussed could be addressed through partnerships between traditional and specialty
financial service providers, with community institutions (churches and community technology
centers, for example) and between specialty providers and information technology developers.
These entities seldom interact in today’s environment, and a mechanism is needed to bring them
together.
22
Prescott and Tatar,1999; Caskey,1996; and Jeanne Hogarth and Kevin O’Donnell, “Banking Relationships
of Lower-Income Families and the Governmental Trend toward Electronic Payment.” Federal Reserve
Bulletin, July, 1999.
Banking on Technology
15
V. THE NEW ECONOMY IS REORDERING THE FINANCIAL SERVICES INDUSTRY
The changes wrought by information technology, meanwhile, are deep and fundamental.
Information technology is radically reordering the economy– and with it the financial services
marketplace.
New technologies allow efficient, rapid collection and analysis of enormous amounts of
information. They make possible far less expensive and more sophisticated market knowledge,
access, and response. And they enable increasingly nimble companies to target the narrowest of
market niches, and to deliver highly tailored products quickly and easily through diverse media and
delivery strategies.
Right in the middle of these changes is the financial services industry. Money is now digital.
Fundamentally, the financial service industry is information embedded in information technology.
That means that technology is changing where and how financial transactions take place and how
traditional providers do business. Institutional relationships are changing, the traditional bank
model is breaking up, and that is enabling new providers and products to enter the market and
catalyze the use of new distribution channels and new partnerships to provide financial services.
At the same time, all of this is significantly altering how consumers at every income level go about
their business—not only how they process day-to-day financial transactions, but also what options
are available to them to build assets and make a better life for themselves. The development and
delivery of nearly all financial products has been affected.
The Payments System Is Transforming
Innovations in technology, especially the Internet, have had a major impact on how people
receive funds and pay bills. For instance, a 2001 survey commissioned by the Federal Reserve,
the first such study in 20 years, found that the number of checks have remained at the same level
while other payment media have grown significantly. In the current study, about 62 percent of
transactions were completed by check compared to 85 percent the last time such a survey was
done, in 1979. While checks increased 55 percent over that period, noncheck payments more
POS
Consumer
ATM
ACH
Bank Branch
Internet
Debit/Stored
Value Card
Employer
Banking on Technology
16
than doubled.
23
Location- and paper-based transactions are decreasing relative to electronic
media, and electronic transactions are now commonplace.
1. Automatic Teller Machines (ATMs) Are Growing in Number and Function
Between 1983 and 1995, ATMs tripled in number to 120,000, and transactions increased
five-fold, to 10 million. By comparison, bank branches grew by only 10 percent during the same
period to a total of 40,000 (and declined in many poor communities). In 1995, electronic funds
transfer networks lifted bans on fees for using machines not owned by the consumer’s bank. Since
1996, the number of ATMs has nearly doubled again to more than 270,000. IDC, a global market
intelligence and advisory firm specializing in technology and e-business trends, forecasts that by
2003, ATMs will surpass bank branches as the highest-volume U.S. banking channel, with more
than 13 billion annual transactions. Today, non-bank institutions can own and administer ATMs,
providing an alternative to traditional banking access points. During 2000, 85 percent of new
ATMs were located off of bank premises.
24
Not only are there more ATMs in the market; today these machines can do more than
accept deposits and dispense funds. Some machines can cash checks, issue money orders, and
accept loan payments. Enhanced, web-enabled ATMs are essentially electronic kiosks, providing
access to a bank’s Internet site and information about services ranging from financial planning to
investment products. Some financial service providers have installed machines that enable
consumers to apply for loans. These automated loan machines issue quick decisions and, upon
approval, issue a check or prepaid card.
25
Offerings available through “souped up” ATMs have
moved beyond financial products—for example, First Union ATMs issue prepaid phone cards while
Chevy Chase Bank ATMs in the Washington, D.C. area sell postage stamps.
26
(Further examples
of applications directed at the lower-income consumer market place may be found in Chapter 6.)
The Southland Corporation, through its 7-Eleven convenience stores, also has a strategy
to use kiosks as financial service outlets. Through a strategy it calls “Vcom,” or virtual commerce,
the company offers basic ATM and money wiring services through machines owned by American
Express. Southland is working in partnership with NCR, the technology company and ATM
manufacturer, and plans to add interactive touch-screen kiosks to the program.
27
23
Federal Reserve Bank of Boston, “Fed Announces Results of Study of the Payments System, First
Authoritative study in 20 Years.” Press release, November 14, 2001; Dove Consulting, “Electronic Payment
Instruments Study Summary Report Prepared for the Federal Reserve System’s Payments Office,”
December 5, 2001.
24
Bank Network News, “ATM Growth Not Forever.” August 25, 2000.
25
Research interview with Triton Systems.
26
David Breitkopf, “On Next-Generation ATM Menus, Cash Will Just Be an Appetizer.” The American
Banker, February 6, 2001; David Beutkoff, “Next Generation ATM’s Dispense More than Cash.” The
American Banker, December 6, 2000; Megan Ptacek, “Web Bank Plans ATMs for Subsidized Housing.”
The American Banker, June 20, 2000.
27
David Breitkopf, “7-Eleven Has the Kiosks, Wants Partners.” The American Banker, May 9, 2001.
Banking on Technology
17
2. Card-Based Products Are Exploding
More than 90 percent of consumers hold some type of plastic payment card, according to a
survey by Standard Register based in Dayton, Ohio.
28
Point-of-sale transactions using magnetic-
strip debit and stored-value cards are rapidly replacing ATM transactions. Synergistics, a financial
services research firm in Atlanta, Georgia, reported in February 2000, that nearly half of all
consumers who earn more than $15,000 annually have a debit card. In 1998, the Bank for
International Settlements reported that there were 240 million debit cards in circulation in selected
developed countries, including the United States. Debit-card transactions increased from slightly
more than 1 billion in 1994 to 5.7 billion in 1999; and debit-card terminals grew more than tenfold,
to 1.7 million, during that period.
29
The types and capacities of card-based products are also expanding and promise to
continue to do so. There are two types of debit cards, online and offline. Online cards require a
personal identification number (PIN) at the point of sale and are “real time”—that is, they instantly
debit a user’s bank account, just like a withdrawal from an ATM. Offline cards function like
electronic checks; they use credit card interchanges for transaction processing and take a certain
amount of time to “clear.”
So-called smart cards, widely used in Europe and Asia, contain computer chips to store
unique information about the cardholder so as to improve security. One example is the American
Express “blue card,” which provides a temporary transaction number for online purchases instead
of an actual card number. Smart cards have yet to take hold in the United States, due at least
partly to the enormous American investment in terminals that read magnetic-strip cards. Full
emergence of smart-card technology is expected to take about five years in the American market,
fueled by further expansion of Internet-enabled commerce.
Because card-based technologies have become and will remain a primary vehicle for
accessing consumer financial services, card-based products in particular offer significant
opportunities to link lower-income people to the economic mainstream.
3. Automated Clearinghouse (ACH) Transactions Are Seeing Double-Digit Growth
Automated clearinghouse technology wires funds directly between institutions and
individuals for immediate debiting and crediting of accounts through an electronic network of
financial institutions. During the 1990s, ACH transactions grew fourfold, including direct deposits,
government payments, and scheduled automated payments. The ACH system is used for relatively
small denominations and large transaction volumes. Per-transaction fees have fallen by half over
28
Standard Register, “National Consumer Survey of Plastic Card Usage.” August 28, 2000
29
Bank for International Settlements, “Statistics on Payments in the Group of 10 Countries.” February,
2000.
Banking on Technology
18
the past five years. According to the Federal Reserve, ACH transactions number nearly 5 billion
per year and average around $60 billion per day in dollar volume.
30
4. Even Paper Checks Are Going Digital
While the check is still an important means of payment in the United States, about a quarter
of all checks are now presented electronically. “Check truncation” enables checks to be handled
electronically rather than transferred physically. By 2005, according to
M One, a financial technology firm based in Phoenix, Arizona, electronically presented checks are
expected to outnumber physically presented checks by about three to one.
31
Source: M ONE, Nilson Report Forecast, Carreker-Antonori
Customers Have More Access Points, Greater Convenience
Technology lets people access financial services in entirely new ways, around the clock,
seven days a week. Consumers can bank from home and office, through the Internet, at ATMs, at
point-of-sale terminals in retail stores, over the phone, and through mobile telecommunications.
Costs Are Dropping
Technology lowers the cost of delivering financial services. As we have seen, processing a
transaction at a teller’s window costs roughly a dollar. Excluding fixed investment costs, the same
transaction costs about 50 cents to process over the phone, about a quarter through an ATM, and
less than a penny over the Internet. Cost savings are not limited to the provider-consumer
interaction. Business-to-business costs are dropping, too. Clearing a check through ACH
technology is much cheaper than sending a paper check from one location to another. As more
30
Louise Roseman, “The Federal Reserve and the Payments System.” (PowerPoint presentation; April,
2001).
31
M One, “It’sOver.com: An E-Commerce Survival Guide for the Banking Industry.” 1999.
89 Billion Transactions
59 Billion Check
121 Billion Transactions
60 Billion Checks
Wire
ACH
Credit
Card
Debit
Card
ATM
Checks
1995
Wir
ACH
Credit
Card
Debit
Card
ATM
Paper Checks
Electronic
Checks
Projected 2005
Banking on Technology
19
organizations provide financial services across geographic boundaries, and as price competition
increases, the cost to consumers of switching financial providers also comes down.
More Information Is Available to Consumers and Providers Alike
Technology has changed the balance of power between the producer and the technology-
enabled consumer. On the consumer side of the equation, information technology makes it
possible for bank-users to research, compare, and interact with providers of financial services with
fewer limits than ever before. Data warehousing and mining technologies, meanwhile, enable
providers to gather and analyze enormous amounts of information on consumer behavior and
preferences—and lower the costs of storing and recalling customer information. As Walter
Wriston, former CEO of Citicorp, observed: “Information about money has become almost as
important as money itself.” Marilyn Seyman, President and CEO of M One, puts it another way: “In
the new culture, a bank is defined almost solely by its ability to add value to the customer
relationship, which breaks down into acquiring, analyzing, integrating and leveraging information
about, from and for the benefit of each individual consumer.”
32
Information technology has enabled businesses to gather, capture, interpret and analyze
great volumes of customer data. The result is an enhanced ability to develop and market products
tailored to the needs of specific customer segments and even individual customers. The collection
and analysis of data is known as “data warehousing” and “data mining.” By data warehousing, we
refer to capturing customer data in large proprietary and commercial databases. By data mining,
we refer to the analysis and interpretation of information in the databases. The data mining
process includes using the warehoused data to develop models about financial product preference
and usage of customers. For instance, these techniques can be used to determine which
customers are likely to be interested in home equity loans or financial planning software. The data-
driven answers may be quite different than the customer stereotypes many of us carry around with
us.
Niche Marketing Is on the Rise
The economy as a whole is moving from mass marketing to customized production and
marketing, and financial services are no exception. Providers now have precision tools to develop
and market products to meet the needs of specific customer segments. With the rise of highly
specialized products and providers, the market is becoming increasingly fragmented. Online
securities trading firms, for example, do not necessarily offer financial planning and education.
With growing numbers of specialized providers, consumers have to keep track of more and more
accounts—perhaps several credit cards, bank accounts, savings accounts, investment accounts,
and relationships with insurers.
32
Marilyn Seyman, Managing the New Bank Technology: An Executive Blueprint for the Future. Chicago:
Glenlake Publishing Company, 1998; Thomas Wurster and Philip Evans, Blown to Bits: How the Economics
of Information Technology Transforms Strategy. Cambridge: Harvard Business School Press, 2000.
Banking on Technology
20
Consolidators Gain a Strategic Advantage
Technology provides financial service firms with a strategic response to market
fragmentation and has given rise to a new type of business—aggregators, also known as
consolidators or integrators. If a financial provider can consolidate all of a consumer’s financial
information in one place, the consolidator can
create value for the consumer and at the same
time control—and profit from—the consumer’s
interactions with various specialty providers. The
Quicken set of products is an example of a
strategic response in the race to become the
consumer’s primary financial service provider.
Technology gathers information from all of a
customer’s accounts and presents it to the consumer as an integrated statement. Schwab,
E*Trade, and American Express are also in the race to become the primary point of access to a
range of financial services. Though thousands of banks now provide financial services over the
Internet, far fewer are currently account consolidators. It should be noted that consolidation
services typically target affluent consumers with many account relationships.
More Players Are Entering the Game
In the old order, a limited range of providers offered financial services: banks, credit unions,
savings institutions, brokerages, insurance companies, plus a subgroup of institutions targeting
lower-income people—community development financial institutions, currency exchanges, and
check-cashing outlets, as well as a range of “fringe lenders.” (Remember that our focus is on
noncredit products and services.) In the new order, any organization can be a financial services
access point. Retail and convenience stores are now routinely cashing checks and writing money
orders. Affinity organizations,
33
such as the AARP, are marketing insurance products and financial
planning services. More and more employers are offering 401(k) plans and related products and
services. Employers could become a critical new access point for delivering financial services to
the working poor.
Besides these non-traditional access points, three types of Internet businesses are now
providing financial services. The first category is online firms, such as Internet banks, trading firms,
and consolidators. The second is Internet portals. A portal is an electronic gateway, a point of
entry to the Internet that links a visitor to information, products and services of interest. Mass-
market portals, such as AOL, search and link to a huge range of products, including financial
services. Vertical portals, such as American Express or many bank Internet sites, link only to
financial services. A third category is the electronic marketplace, which not only links to financial
33
Bill Stoneman, “AAA Wants People to Bank on It.” The American Banker, November 22, 2000.
Aggregator:
• Integrates finances
• Assists with purchases
• Provides planning
• Controls access and info
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Banking on Technology
21
products from a number of providers, but allows the customer to compare and select offers.
Quotesmith.com and LendingTree.com are electronic marketplaces.
New Combinations of Players Are Giving Consumers “Channel Choice”
While it is easy to view each new technology and provider in isolation, it should be
remembered that they typically work together. New partnerships are forming among all of these
players. Internet portals now offer banking, lending and investment services from traditional firms.
Electronic marketplaces provide content from traditional and Internet financial businesses.
Partnerships are opening up new marketing and distribution channels that give consumers a range
of delivery options. Many online firms have found that an Internet-only strategy is limiting. The
financial services industry increasingly views the Internet as one component of an integrated, multi-
channel “clicks and bricks” retail strategy that includes branch offices, enhanced ATMs and other
electronic media, and card-based technologies. IDC, a leading industry analyst, reports: “The
availability of web-enabled ATMs signifies an opportunity to cross-pollinate online banking and
ATM services, which can have significant implications on banking products, customer relationship
management, and customer acquisition.”
Branding Is Key
The proliferation of products, providers, and access points gives new importance to
branding. Customers want their financial services from an entity they know and trust. Some
financial institutions could become best-of-breed distributors, selling their own products and
services, those of specialized producers, or a combination under a trusted brand. A study by the
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EEnnaabblleerrss
Source: Friedman, Billings & Ramsey
Note: Some firms listed in this graphic have since merged with other companies or closed, often replaced by new and emerging entrants in the
marketplace
Banking on Technology
22
Corporate Executive Board, a leading financial and corporate information research firm, suggested
a potential opportunity to brand services for lower-income consumers.
34
Product Function Is More Important than Form
Technology enables savvy providers to think about financial products and services more in
terms of function than form. The checking account, for instance, essentially performs two
functions. It is a credit product and a transaction vehicle for paying bills and purchasing goods and
services. Consumers need an efficient payment vehicle, but it does not have to be a checking
account. A savings account with a payments function—say, a debit card or money-order
capability—would enable consumers to pay bills and at the same time eliminate credit exposure
(the risk to the financial services provider that checks might bounce). Strategies for engaging
lower-income people more fully in the economy need not be limited to traditional products. The
technology is available today to create and support a variety of hybrids and new products.
34
Corporate Executive Board Council on Financial Competition, “Mixed Messages: Consumers’ Views on
Financial Consolidation,” 2000.
Banking on Technology
23
VI. THE NEW ECONOMY ALSO PRESENTS CHALLENGES
Technology creates many exciting opportunities to engage lower-income consumers more
broadly in the mainstream economy. But it also presents new challenges. These include product
fragmentation, poor data-sharing infrastructure, problems of authentication and scale, public policy
issues, and Internet access barriers. None of these challenges is insurmountable. But if they are
not met, consumers left behind in the digital migration will be forced to pay more for paper and
face-to-face transactions and thus will be further marginalized.
Product Fragmentation Can Discourage Full Financial Engagement
Technology-enabled payments vehicles for the lower-income market will not ensure access
to the broader set of asset-building and financial information tools necessary for full engagement in
the economy. Check-cashing machines and payroll debit cards enable lower-income consumers to
receive payments, for example, but most do not store idle funds, nor do they offer an interest-
yielding savings vehicle. Service gaps like these contribute to a product fragmentation that
impedes the financial integration of some low-income consumers.
Systems Are Undeveloped for Capturing and Sharing Market Data
While mechanisms and systems are well developed for capturing data on mainstream
financial market activity, this is not so true for alternative financial markets. Systems comparable to
those developed to collect data for higher-income, higher-asset and mainstream customers are
needed to capture both aggregate and individual lower-income financial activity in alternative
financial markets, such as check cashers, and to integrate alternative financial market data with
mainstream databases.
Authentication Is an Issue
Another challenge is how to verify that consumers are who they say they are as technology
moves financial services away from face-to-face transactions to remote delivery channels. A
related issue is how to prevent identity theft. Authentication is a concern for consumers and
providers alike and is particularly problematic for lower-income consumers, who do not always have
a fixed address, driver’s license or credit card. Biometrics and computer-chip card-based
technologies are available to address this problem, but solutions developed to date are far from
scale.
Current Models Are Small-Scale
We have seen that technology and related developments in the financial services industry
can address many of the perceived barriers to the profitable service of lower-income market
segments. However, while a number of pilot projects have demonstrated the feasibility and
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profitability of serving lower-income consumers (see the next chapter), these have remained small-
scale, and have not been well publicized. One way for innovations to reach scale is if they are
adopted by full-service or larger capacity providers and incorporated into conventional distribution
systems. More business models, and at a larger scale, need to be developed and shared with
conventional institutions to encourage mainstream adoption.
Market Changes Have Outpaced Public Policy
Neither currently available savings incentives nor regulations governing depository
institutions, securities investments, and privacy have kept pace with changes in the marketplace.
1. Savings Incentives Are Limited for Lower-Income Consumers
Recent tax incentives to encourage savings through “Roth” Individual Retirement Accounts
(IRAs) and increased contribution limits to IRAs in general have benefited the mainstream and
upper-income financial consumer. Broadly speaking, incentives such as 401(k) and IRA plans have
been intended to encourage mainstream consumers to save and invest. Two-thirds of pension tax
benefits accrue to the highest-earning fifth of American households, while only 12 percent go to
families in the bottom 60 percent.
35
Vehicles to encourage people outside the mainstream to build
assets remain limited.
Only recently have policy initiatives begun to target lower-income families. Individual
Development Accounts (IDAs), modeled after the 401(k) program, provide specialized accounts
that encourage lower-income people to save for medium-term goals like a mortgage downpayment,
tuition, or small business capitalization by matching their deposits with public and private funds.
Several organizations, such as the Community Action Project of Tulsa County, Oklahoma, have
paired recipients of the Earned Income Tax Credit (EITC) with access to an IDA in order to enable
them to save larger amounts.
36
These programs, however, have been too small in scale to date to
make much of an impact.
2. The Regulatory Environment Does Not Reflect Market Realities
The regulatory environment, meanwhile, is geared to a location-based industry, not the
electronic delivery of financial services, even despite recent “financial modernization” legislation
(the Gramm-Leach-Bliley Act of 1999). The market definition and service parameters under the
Community Reinvestment Act also warrant a re-examination. By redefining what constitutes a
deposit in light of new card-based technologies, banking laws that today limit deposits to traditional
depository institution locations (for instance, to the exclusion of certain check-cashing outlets and
electronic media) might be redesigned to create new savings instruments for lower-income
35
“Helping America to Save More,” Remarks by Treasury Secretary Lawrence H. Summers, Choose to Save
Forum, Washington, D.C. April 4, 2000.
36
The Earned Income Tax Credit (EITC) is a refundable credit available to families with children who earn
less than roughly double the poverty line.
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25
consumers. Securities laws, while providing protection against unethical and unscrupulous
practices, can also stifle innovation. Some changes will be needed, for example, to accommodate
such new ideas as card-based mutual fund investment vehicles. Finally, privacy regulations must
be thought through carefully to protect the privacy and integrity of financial transactions in the new
environment without restricting the information-sharing that is essential to new partnerships serving
lower-income consumers.
Internet Access Barriers Remain
The digital divide also remains a factor. While cost, literacy and content barriers to the
Internet are starting to come down, more work is needed to ensure that lower-income consumers
have the same opportunities to benefit from web-enabled technologies as more affluent market
segments.
1. Access Can Be Costly
Internet access is expensive for poor people, although costs are coming down to the point
where at least some segments of the lower-income market are finding the Internet affordable.
Recently The New York Times reported that the number of home Web users with annual incomes
less than $25,000 rose 46 percent, to 6.34 million, from February, 2000, to February, 2001.
37
While these figures confirm that web access is spreading rapidly, they also suggest that it is as yet
limited among the lower-income segments that concern us here, especially since the 2001 numbers
include students and seniors as well as the low-asset population.
2. Computer Literacy Levels Are Low
Research indicates that low levels of computer literacy can prevent lower-income people
from benefiting from the Internet. Youngsters tend to be more Internet-savvy than older
consumers, and as the current generation of youth grows into adulthood, the technical competence
barrier should start to dissolve. The rise of passive technologies such as biometrics and touch-
screen interfaces will also help. So will the growth in wireless communications. As Internet use
becomes less dependent on PCs, computer literacy barriers should become less important.
3. Specialized Content for Lower-Income Consumers Is Limited
Much of the content currently found on the Internet has limited appeal to lower-income
consumers. Research by The Children’s Partnership (a research and advocacy organization
based in Los Angeles and Washington, D.C. )
38
and others shows that lower-income consumers
are finding little relevant, practical, and local content targeted to their interests and needs. In
37
“Low-Income Web Users Proliferate.” The New York Times, March 14, 2001.
38
The Children’s Partnership, “Online Content for Low-income and Underserved Americans.” See
http://childrenspartnership.org.
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addition, Internet content is often written and presented at college-educated literacy levels. Web-
based financial services targeted to lower-income consumers are relatively young and have not yet
reached scale, but it is expected that as better content attracts more users, that growing interest
will evoke even more relevant content development.
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VII. WHAT ARE THE AREAS OF OPPORTUNITY?
The new economics of financial services create an historic opportunity to make access to
expanded products and services as ubiquitous for lower-income people as for the rest of the
nation. As the financial service industry deconstructs and reconstructs, four unfolding dynamics
offer special promise for better connecting lower-income customers to the financial services
marketplace. These center on: (1) the new attractiveness of the lower-income market to
mainstream providers; (2) the proliferation of new channels available for serving them; (3) the
recent explosion of product choices; and (4) the onset of numerous new partnerships
experimenting with innovation.
The Lower-Income Market Is Becoming More Attractive to Mainstream Providers
The first auspicious development is the fact that mainstream providers are getting
interested. Historically, the lower-income market has offered marginal opportunity at best for
conventional financial institutions. However, the barriers are coming down. For example, the lower-
income market is characterized by large volumes of small transactions—precisely the type of
market where ACH technology can reduce costs significantly, and where payments technologies,
from check-cashing machines to payroll debit cards for the unbanked, can be adapted to unmet
needs. Research also suggests that lower-income consumers have higher brand loyalty and are
less likely to move accounts than middle- and upper-income people. These conditions create a
value proposition in which technology providers and financial service firms can realize attractive
profit margins. Lower-income consumers are emerging as a viable market as technology drives
down costs and enhances market information.
Access for Lower-Income Consumers Is Improving
The proliferation of new providers and points of sale also offers tremendous potential for
enabling access to financial services for lower-income people. Market segments that do not trust
banks don’t have to use them anymore, and people working two or more jobs need not be
constrained by banking hours. From the provider’s standpoint, any business that wants to target
lower-income consumers—whether specialist, traditional provider, or new market entrant—has
many more channels potentially available. One can imagine enhanced ATM networks in churches
serving African American populations, or in schools serving Hispanic communities. Card-based
products issued by employers could provide savings options for the working poor. Community
centers could offer financial literacy and planning packages tailored to immigrant market segments;
crisis centers could offer products and services tailored to people who have been impoverished by
a one-time event.
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Product Choices Are Broadening
The new economics of technology-enabled financial services, what is more, can lead to
broader product choice for lower-income consumers, and to products tailored specifically for them.
To date, most product innovation for lower-income consumers has focused on sending and
receiving payments. This, in turn, has produced a trend toward fragmentation in the lower-income
marketplace, where access to one product—say, check cashing—does not as readily lead to a full
menu of financial offerings. But there is much untapped potential to apply technology to profitably
deliver more comprehensive bundles of services. What follows are just a few examples:
1. Micro-Investing
SaveDaily.com’s original model focused on lower
net worth investors, enabling them to invest as little as $5
at a time in mutual funds. Customers paid no
commissions, but SaveDaily.com charged a small annual
fee. Technology enabled SaveDaily.com to pool many
small accounts to make the economics work for mutual
fund partners. The firm has since changed its strategy,
and now “private labels” its technology, enabling other
institutions to offer the mutual fund service to a broad array of income groups, rather than offering
the service directly to the public.
2. Micro-Rebates
When a customer makes a purchase from one of SaveDaily.com’s Internet retail partners,
the partner contributes to the customer’s investment account. This is a variation on “frequent flyer”
rebate programs for affluent consumers. The concept could easily be adapted for off-line as well
as online application, using card-based technology. A credit or debit card could make an
automatic contribution to a savings or investment account for each purchase made with the card.
3. “Structured Savings” Programs
The same technology that enables taxes to be deducted regularly from a worker’s
paycheck could support regular savings deductions for the working poor. Through alliances
among payroll processors, employers, and affinity groups, “structured savings” programs could be
set up for seasonal workers or workers who hold several jobs.
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4. Individual Development Accounts
IDAs for the working poor represent another area of opportunity.
Already, the American Dream Demonstration, an IDA initiative managed by the Corporation
for Enterprise Development and funded by several large foundations, has reached some 250
communities and more than 5,000 participants, although the aggregate dollar volume is still small.
The IDA program includes a financial literacy component that provides the working poor with
improved access to financial education and information. The rate of savings among IDA program
participants is dramatically higher than the savings rate for the lower-income population overall.
39
Of course, administrative costs and the lack of a real investment product have inhibited
program growth. However, financial technology can solve both these problems by enhancing and
expanding a product specifically designed for lower-income people and enabling the program to
reach scale. Harvard Business School professor Peter Tufano’s Doorways to Dreams (D2D)
project, for example, is attempting to address both issues through the design of an “online IDA” that
would expand customer access to the accounts and reduce administrative overhead by lowering
transaction and data management costs.
40
In addition, passage of the Savings for Working Families Act, likely to be introduced in
2002, shows great promise of helping to bring the IDA program to scale. The SWFA would expand
the reach of IDAs by providing financial institutions a dollar-for-dollar tax credit up to $500 per
person per year for matching IDA savings and an annual $50 per account credit to maintain the
account and provide financial education.
41
New Partnerships Are Spurring Innovation
There is no limit to the potential of technology-enabled partnerships to create both new
delivery channels and entirely new products geared for lower-income consumers. The first
collaborations are already up and running, as the following examples indicate:
1. Key Bank, N.A., and U.S. Postal Service
A pilot program in Baltimore and Florida is placing no-cost ATMs in post offices in lower-
income communities to provide safe, convenient access to banking services. Government officials
39
Ray Boshara, Building Assets: A Report on Asset Development in the IDA Field and Building Assets for
Stronger Families, Better Neighborhoods and Realizing the American Dream. Washington, D.C.:
Corporation for Enterprise Development, which can both be found on the organization’s web site
http://cfed.org/
40
Jeff Zinsmeyer, “If You Build It, They Will Come: IDA Delivery That Overcomes Hurdles to Program
Participation” in Assets: A Quarterly Update, Winter 2002 (Published by Corporation for Enterprise
Development).
41
See http://cfed.org/
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will study the potential for distributing federal payments through the ATMs. While the jury is out as
to whether this is a financially sustainable model, it does provide an example of how the postal
system can be a delivery and distribution channel for basic financial services for lower-income
neighborhoods in the U.S. Postal banking systems are common in a number of developing
economies around the world.
42
2. Umbrella Bank and Low-Income Housing Developers
Established in 2000 as a subsidiary of an Illinois savings bank, Umbrella Bank has plans to
offer financial services through ATMs and PCs in lower-income housing developments. Bank
representatives are available to teach residents how to use the machines and encourage them to
open savings accounts and engage in financial planning. The bank’s business strategy is to
develop loyal customers and to add products, including investment vehicles, as residents become
more affluent.
43
3. Fleet Bank, NetKey, and Boston Community Organizations
CityKi is a start-up company deploying web-enabled kiosks in inner cities to serve as
gateways to shopping, financial services, and information for lower-income consumers who are
largely unbanked. CityKi launched its first kiosk in the Upham Corners area of Boston in July,
2001. Supported by Fleet Bank, a technology company called NetKey, and community
organizations in and around Boston, CityKi is developing a stored-value card that can serve as
both an Internet payment card and a basic electronic bank account. Merchants providing sites for
CityKi kiosks will sell cards in pre-determined amounts that unbanked consumers can use to pay
for online purchases made through the kiosks. Cardholders can add funds to the account by
purchasing additional cards and linking them to the account at the kiosk. Consumers maintaining
sufficient funds will be migrated to an electronic demand deposit account with an ATM debit card
and a savings option. As customer relationships mature, additional services might include secured
or unsecured credit cards, a full banking account, IDAs, loans and insurance products. CityKi's
first kiosk has a customer-friendly touch-screen interface. In addition to financial services, the
kiosk provides free e-mail as well as bus and community information.
4. Rite Check Financial Services, Bethex Federal Credit Union, and
Chase Manhattan Bank
An innovative partnership between a check casher and a credit union enables customers of
the Bethex Federal Credit Union to make deposits at the Rite Check cashing chain in New York.
Any Rite Check customer is eligible to join the credit union. Credit union members may access
accounts and make deposits through “point of banking” terminals. Point of banking technology was
originally sponsored by Chase Manhattan Bank and developed by the NYCE network. Point of
42
Office of the Comptroller of the Currency, Community Developments (newsletter). Fall, 2000.
43
Megan Ptacek, “Web Bank Plans ATMs for Subsidized Housing.” The American Banker, June 20, 2000.
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31
banking machines combine high-tech and high-touch features for people wary of using an
unmanned machine to receive and deposit funds or who desire immediate access to funds.
Several other banks and credit unions use the technology. Because only insured financial
institutions may receive deposits, consumers must have a bank or credit union account, which is
accessed through a host card. The consumer "swipes" a card in a POS-type terminal and inputs
information similar to that required at an ATM. For customers depositing checks, the funds are
available immediately, either to pay bills through Rite Check or as cash in hand.
This partnership provides the credit union with additional offices or branches throughout
the community (through the relationship with the check casher) and the check casher gains access
to a deposit product through the credit union. Viewed within this strategic prism, this may be a
constructive model for financial institution-check casher relationships. However, more research is
needed to determine whether this type of account-based relationship can be profitable for both
banks and check cashers, while still providing lower-income consumers access to a reasonably
priced product.
44
5. One-Economy.com
One-Economy.com is another model for providing online financial services by connecting
the lower-income residents of housing developments. The organization is working with builders of
subsidized housing projects to ensure that the proper wiring is provided in these units to give
residents Internet access. One-Economy.com’s “Beehive” web portal provides lower-income
consumers with access to specialized content on health, jobs, education and financial services.
The financial services content covers topics such as checking accounts, investing, budgeting,
using an ATM, and filing for the EITC.
45
44
Bethex Federal Credit Union, a community development credit union with a mission of serving low-income
individuals in the Bronx, provides a per-transaction fee directly to Rite Check to minimize the costs to its
consumers.
45
See http://www.thebeehive.org/money. Note also that Allied Communications,a minority-owned
telecommunications company, is developing a strategy and products for providing online access to financial
services for residents of low-income housing projects.
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VIII. A STRATEGY FOR MAKING FINANCIAL MARKETS WORK FOR THE LOWER-INCOME
Technological and market change is already
beginning to expand the services available to lower-income
consumers. The opportunity now is to accelerate and
enhance the market’s response. To that end, an effective
strategy for expediting change should seek to harvest the
opportunities created by technology and address barriers to
full financial engagement. Five recommendations for
accomplishing these objectives follow. They range from (1)
providing new points of access to financial services and (2)
promoting new product and marketing partnerships to (3)
developing better market information, (4) adapting and publicizing successful business models, and
(5) addressing public policy issues. While these recommendations are discussed separately, in
practice they are interrelated.
Expand Points of Access to Financial Services
As we have seen, new technologies, industry reconfiguration, and partnerships hold great
potential for delivering expanded financial services through new access points, particularly more
convenient and trusted locations in lower-income communities. Illustrative strategies for expanding
access include the following:
1. Develop Workplace-Based Strategies and Products
For middle- and upper-income consumers, the workplace is an important resource and
location for financial engagement. This is where many people access 401(k) plans, insurance, and
other financial products and services. For the segments of the lower-income consumer population
with stable employment (for instance, “the working poor”), the workplace holds equal promise for
the delivery of financial services.
A number of large commercial banks, including Citibank and Bank of America, offer
electronic accounts for direct deposit of payroll checks for lower-income and unbanked employees
of their customers. Directo, a financial technology company, partners with Cardinal Bank in Virginia
to offer a product that allows unbanked employees to open accounts with direct-deposit features.
Employees can have their paychecks deposited electronically to a debit card, then use the card to
access funds through ATMs and point-of-sale terminals. The service also provides bill-payment,
low-cost international money wiring, and a savings account.
46
46
Steven Marjanovic, “Citizens of Ga. In Deal to Help the Unbanked.” The American Banker, June 2, 2000
and Texas Capital Bank (press release), “Texas Capital Bank Launches New Payroll Platform.” November
15, 1999
Ford Foundation
Opportunities and Next StepsOpportunities and Next Steps
Opportunities
- New Access Points
- Partnerships
- Specialized Products
- New Markets for Financial Service Providers
Next Steps
- Investment in R&D/Pilot Projects
- Catalyst for Relationship Building
- Research – Best Practices
- Thought Leadership in Public Policy
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Many employers of conventional customers now offer online financial and retirement
planning assistance in conjunction with their 401(k) plans. Online delivery lowers the cost of
serving middle-market customers and could just as easily do so for lower-income consumers.
Financeware.com provides precision financial planning, education, and budgeting tools for
individuals and financial planners alike. It includes sophisticated web-enabled software and allows
financial planners and customers to communicate online. Programs such as Financeware.com,
based in Richmond, Virginia, or Citipro, Citibank’s financial software for middle-market customers,
could be adapted to serve lower-income consumers.
2. Expand Neighborhood Access Points
While ATMs are growing in number and function, “souped up” ATM technology with
expanded functionality is not widely available in poor communities. Incentives may be needed to
bring pilot projects to scale and to adapt this technology to lower-income markets. Electronic
kiosks could distribute a wide range of products and services in convenient neighborhood
locations, such as check-cashing establishments, movie theaters, credit unions, retail outlets,
social service agencies, community based organizations, and low-income housing projects. Kiosks
should be designed for ease of use, employing biometrics, touch-screen, voice response, and
other passive technologies. CityKi provides a model for how such a strategy could work. (See
Chapter 6).
Financial technology can also lower the cost of providing personal service, which is what a
survey by Maritz Research, Inc., a market research firm based in Fenton, Missouri, suggests almost
half of Americans prefer.
47
Along these lines, a “clicks and bricks” strategy that combines high-tech
and high-touch has been extremely successful for Washington Mutual, the eighth largest bank in
the nation. The bank’s strategy is to focus on customers who keep $1,000 or less in a checking
account and who do not get personalized service from other big banks. Washington Mutual’s
“Occasio” branches look more like Starbucks than bank branches. (Occasio means “favorable
opportunity” in Latin). Customer islands and clusters of comfortable chairs replace teller windows.
Some branches offer play areas and Game Boys to entertain children, as well as interactive touch-
screen computers that tell customers what kinds of home or consumer loans they qualify for. A
concierge greets customers at the door. At the customer islands, khaki-clad bank employees
handle routine tasks, and machines dispense cash. Automating traditional teller functions makes
the islands more efficient than a teller window and gives bank representatives a chance to tell
consumers about the bank’s array of products, from insurance to investment services.
The first Occasio branches opened in Las Vegas in 2000; 18 branches now serve 5
percent of the household market in that city. The Las Vegas branches broke even in a year,
compared to an industry standard of three to five years. By August 2001, almost 90 Occasio
branches had opened in Texas, Washington, Nevada and California, and plans were on the
47
Noelle Knox, “Online brokerages go from clicks to bricks.” USA Today, November 1, 2000.
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drawing board to expand into Atlanta.
48
Now that the Occasio branch design has proven popular
with middle-income financial customers, the strategy could very well be adaptable to the lower-
income marketplace.
3. Address Internet Content Barriers
As costs drop, and Internet use and wireless telecommunications expand, market forces will
improve the Internet’s viability as a distribution channel for some lower-income market segments, if
not for all. Online networks targeted to lower-income consumers should be created, supported,
and encouraged to develop specialized financial product offerings. Vertical portals, such as One-
Economy.com, focusing on lower-income products and services can also help to overcome product
fragmentation concerns.
Promote New Product and Marketing Partnerships
We have seen a variety of new players entering the market as the financial services
industry reconfigures. More partnerships between traditional and specialty providers (who
understand lower-income consumer behavior and product demand), and between specialty
providers and information technology developers, could help to create the full range of targeted
products, services, and marketing channels needed to promote broader financial engagement
among lower-income consumers.
1. Create a Forum for Innovation
A few market leaders have begun to collaborate on product and marketing innovations for
the lower-income market, but in the normal course of business, conventional financial institutions
and technology firms seldom interact with specialty providers. A forum is needed to bring them
together to explore opportunities for creating win-win collaborations. The following discussion
sketches some possible combinations of partners.
2. Create a Fund for Innovation
Much innovation has already taken place, and more will emerge as key players become
better acquainted. Nevertheless, it remains uncertain whether there will be enough investment in
research and development to develop scalable products for lower-income consumers in a timely
manner. Conventional institutions tend to be cautious, and financial technology developers and
specialty providers do not always have the resources to take a product through all the phases of
R&D and on to market-testing. Given that, the creation of a financial technology innovations fund
to share or offset risk could prove a powerful catalyst. The sections that follow sketch some
possible combinations of partners and products that merit examination by such a fund and others.
48
Julie Monahan, “Consumers like using branches along the ‘web.’” The American Banker, October 12,
2000.
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3. Encourage Product and Service Partnerships
There are two approaches to tailoring new offerings for the lower-income market. One is to
adapt mainstream products for lower-income consumers, and the other is to create new,
specialized products. Conceptually, these are distinct categories, but in practice, boundaries are
blurred.
Examples of adapting mainstream products include partnerships between community
development financial institutions and financial planning software developers, or between Internet
banks and community organizations, to create user-friendly interfaces for lower-income consumers.
Similar partnerships could add savings products to electronic check cashers and ATMs, add
literacy modules to neighborhood kiosks, and provide hands-on help to lower-income customers
who may be unfamiliar with ATMs. The Umbrella Bank’s partnership with low-income housing
developers, discussed in Chapter 6, might serve as a model.
Additional partnerships to create new, specialized products might include a “structured
savings” program developed jointly by a bank and its commercial customers that employ lower-
income workers. The technology exists, as the growth of the 401(k) program demonstrates. The
challenge is to attract a major payroll processor to adopt it, to persuade sufficient numbers of
employers to promote the service to their workers, and to do the focused market research needed
for employee acceptance. Another example might be a partnership between a search engine and
specialty financial service provider to develop an online comparative pricing service geared to
lower-income people. “Electronic signature” technology, being developed for such purposes as
online mortgage origination, could be adapted for broader use by lower-income people through a
partnership between a technology developer and a financial services provider.
4. Encourage New Marketing and Distribution Partnerships
Any number of partnerships might be formed to improve Internet, workplace, and
neighborhood access to financial services. The potential combinations of partners are limited only
by our ability to imagine them. A mainstream provider could partner with a community technology
center, retail establishments, credit counseling center or others to put financial kiosks in central
locations that are convenient for lower-income consumers.
Affinity marketing also affords opportunities to reach lower-income consumers. For some
lower-income segments, in particular the African American community, churches make a lot of
sense as a point of distribution. In Memphis, for example, people who can’t get a bank checking
account, due either to bad credit or to the absence of a bank branch in their neighborhood, can
now get a prepaid debit card through a consortium of African American churches, MasterCard,
Western Union, and an African American-owned bank. The product lets cardholders withdraw
money from ATMs, pay bills, and purchase goods on the Internet or from stores that accept
Banking on Technology
36
MasterCard. While the product provides greater access to the unbanked, it is not inexpensive.
49
Over time, consortia such as these will need to find a way to lower costs to the consumer in order
to attract considerable numbers of the unbanked.
Affinity organizations and specialty providers such as community development credit unions
could also partner with mainstream financial companies to offer financial education and technology
literacy training. Many different players could unite to create an Internet financial portal geared to
lower-income people.
Develop Better Information on Lower-Income Market Segments
As a rule, specialized market intelligence is neither widely available nor accurate for poor
communities. Shorebank, various credit card companies, and others have developed specialized
data sets and models that address deficiencies of conventional market research. Some market
research firms have developed localized data on lower-income markets. But more work needs to
be done to create specialized databases on lower-income financial consumers, as well as to
develop data, market research, and analysis on particular segments and localities, to identify
trends and promising market opportunities. In particular, more research is needed to develop a
much fuller lower-income market segmentation, and to understand various segments’ proclivity to
use technology-driven financial services.
Equally critical is the need to develop better systems and mechanisms for gathering lower-
income market data. Data mining technology is a powerful tool for understanding consumer
behavior, but it is much more widely used to analyze middle- and upper-income consumers than
lower-income brackets. Once gathered, lower-income market data needs to be better integrated
with mainstream databases. Lower-income market potential goes unrecognized by conventional
financial institutions, not only due to the dearth of market information, but also due to poor
channels for sharing it. In particular, a mechanism is needed to feed information from check
cashers and other outlets serving lower-income people to consumer credit rating bureaus. Check
cashers do maintain customer databases and thus have a record of check-cashing and bill-
payment patterns. Incorporating such data into a formal credit history may enable unbanked
customers to obtain conventional bank accounts and broader financial services.
Adapt and Publicize Business Models
Financial innovation in the United States frequently has been driven by organizations other
than traditional financial institutions. Banks often move more slowly and cautiously until they find
business models that have worked. Once the evidence is in, they will respond to market
opportunities. The development of consumer loans is an instructive example. Household Finance
49
At the product’s inception, the customer paid a $50 annual fee, plus $5.50 a month; there may have been
additional per-transaction charges, or charges for loading money onto the card. W.A. Lee, “First Data
Offering Card for the Unbanked.” The American Banker, August 10, 2000.
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pioneered consumer lending in the 1950s. Once the finance company proved that the product was
profitable, Bank of America entered the market, followed by the rest of the banking industry.
Technology-led initiatives around the country are creating new products, services, and
distribution channels, including some for lower-income consumers. Further work needs to be done
to identify the most promising new technologies and products in the industry at large, and to adapt
them to lower-income markets. In addition, case studies of the most successful or instructive
attempted innovations—for example, Banco Popular, Union Bank of California, Umbrella Bank, and
CityKi—if widely publicized, should help to interest mainstream providers in expanding offerings for
lower-income consumers. Current initiatives should be studied thoroughly to discover what works
and what doesn’t, to see which are profitable, and to enhance, publicize, and replicate the models
that prove most promising.
Address Public Policy Issues
At this early stage of market and product development, private-sector initiatives are likely to
advance the agenda of broader financial engagement more significantly than public-sector
reforms. Nonetheless, several policy issues merit attention. Public policy has an important impact
on the landscape in which financial services are provided. As we have seen, several policy
challenges need to be addressed to remove barriers to innovation and promote broader
participation of lower-income people in the economic mainstream. Policy work should strive to put
in place additional savings incentives targeted to lower-income people (such as expansion of the
IDA program) and determine what regulatory changes are needed to maximize technology’s
potential to serve and expand the lower-income market. The Community Reinvestment Act’s
service parameters and market definition also warrant re-examination, as do banking laws that limit
deposit products for some financial service providers. Securities laws should be analyzed to
determine whether investment product registration and other requirements create unnecessary
impediments to development of wealth-creating technology products. Privacy laws may create
barriers to new product and marketing partnerships by restricting the timely exchange of necessary
market data.
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IX. CONCLUSION
Consumer finance has seen unprecedented technological innovation in the past two
decades. It has never been easier for mainstream consumers to access financial services, or
cheaper for providers to create and distribute customized products for even the narrowest of
market niches. And, of course, the primary beneficiaries of all this innovation have been the
“haves” of our society—people with living-wage jobs, bank accounts, credit cards, and easy
Internet access—who now enjoy more opportunities to build assets than ever in history.
Now, though, the mainstream market is becoming saturated—and the tens of millions of
lower-income consumers who were left behind by the first wave of financial innovation are starting
to look much more attractive. What is more, this lower-income market is large and under-served,
with enormous pent-up demand for financial services. This means a tremendous opportunity now
beckons to use financial technology to reduce the cost of meeting that demand and in doing so to
better connect lower-income citizens to the mainstream financial services narketplace.
To be sure, specialty providers have understood this for some time, as have market
leaders in financial technology and some leading conventional financial institutions. In fact, exciting
partnerships have started to form to create innovative technology-enabled products, services, and
delivery channels tailored to the needs of lower-income consumers. Still, specialty providers often
lack the resources and connections to respond at sufficient scale to make a real impact. Too
often, conventional financial service organizations and financial technology firms are deterred by
poor connections to specialty providers, market information barriers to accessing lower-income
communities and consumers, and public policy disincentives.
None of these barriers need be insurmountable, however. The market is poised to put
technology-enabled savings, asset-building, risk management, financial education, and planning
tools into the hands of the people who need them most. Leadership institutions and astute service
providers should recognize the opportunity, and move now to put the new financial services market
to work for lower-income consumers.
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SELECTED BIBLIOGRAPHY
Advisory Board Company, Community Banking Board, The Great Journey Begins: Migration
Beyond Branch Dependence, 1993. See especially chapters on “Mobile Branches” and
“Electronic Payroll.”
John B. Caskey
• “Consumer Financial Services and the Poor,” Filene Institute, 1996
• “Reaching Out to the Unbanked.” (Preliminary draft); August, 2000
Corporate Executive Board Council on Financial Competition, “Mixed Messages: Consumers’
Views on Financial Consolidation.” 2000
Gary Craft, “Breaking Up the Financial Intermediary.” Five-part series of reports published by
Deutsche Banc Alex. Brown, 1998-2000.
Dove Consulting
• “ETA Conjoint Research Final Report and Market Model, Unbanked Federal Check
Respondents.” May 26, 1999.
• “Survey of Non-Bank Financial Institutions.” Final report for the Department of the
Treasury, April 4, 2000.
Fannie Mae Foundation, “Financial Services in Distressed Communities: Framing the Issue,
Finding Solutions.” Report by James H. Carr and Jenny Schuetz; 2001.
Fast Company, “I Have Cards in My Wallet.” November, 2000.
Federal Reserve Bulletin
• “Banking Relationships, Lower-Income Families, and Governmental Trends Toward
Electronic Payment.” Jeanne M. Hogarth and Kevin O’Donnell; July, 1999.
• “Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer
Finances.” Report by Arthur B. Kennickell, Martha Starr-McCluer and and Brian J. Surette;
January, 2000.
Financeware.com, “Living Life on the Flip of a Coin: Will Americans Achieve Their Financial
Goals?” 2000.
Financial Service Centers of America, “Customer Satisfaction Research: Final Report.” Report by
Eric Mower and Associates: Marketing and Research Services Division, September 26, 2000.
Banking on Technology
40
Larry Foundation, Peter Tufano, and Patricia Walker, “Collaborating with Congregations:
Opportunities for Financial Services in the Inner City.” Harvard Business Review, July/August,
1999.
Friedman, Billings Ramsey & Co., Inc., FBR E-Finance Overview; March 13, 2000.
Karen Furst, William H. Lang, and Daniel E. Nolte, “Who Offers Internet Banking?” Special Studies
on Technology, Office of the Comptroller of the Currency; June, 2000.
M One, “It’s Over.Com: An E-Commerce Survival Guide for the Banking Industry.” 1999.
New York Times, “Low-Income Web Users Proliferate.” March 14, 2001.
The Nilson Report, “Virtual Prepaid Cards.” July, 2000.
Office of the Comptroller of the Currency, Community Developments (newsletter). Fall, 2000.
SavingsCentral.com, Executive Summary (of a business plan), 2000.
Marilyn Seyman, “Managing the New Bank Technology: An Executive Blueprint for the Future.”
Chicago: Glenlake Publishing Company, 1998.
Standard Register, “National Consumer Survey of Plastic Card Usage.” August 28, 2000
Glen Thrush, “Saving Your Way into Debt.” The New York Times Magazine; November 5, 2000.
Tower Group, “New Tower Group Research Shows 92% Of American Consumers Continue To Use
Bank Branches.” Press release, April 18, 2001.
Marva Williams, “Issues Paper on ‘Tools for Survival.’ Woodstock Institute; June 22, 2000.
Thomas Wuster and Philip Evans, Blown to Bits: How the Economics of Information Technology
Transforms Strategy. Cambridge: Harvard Business School Press, 2000.
Jeff Zinsmeyer, “If You Build It They Will Come: IDA Delivery That Overcomes Hurdles to Program
Participation” in Assets: A Quarterly Update, Winter 2002 (Published by the Corporation for
Enterprise Development).
Banking on Technology
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APPENDIX: PARTICIPANTS
The following individuals were interviewed for this report. Those that participated in a
roundtable discussion are indicated with an asterisk (*).
Organization City, State Name
ACE Cash Express* Irving, TX Eric Norrington
ACORN Brooklyn, NY Steve Kest
Allied Communications* Washington, DC Curtis White
Alternatives Federal Credit Union Ithaca, NY Bill Meyers
AOL-Time Warner* Dulles, VA B. Keith Fulton
American Express New York, NY Tom Sclafani
American Express Washington, DC Peggy Haney
American Express Washington, DC Anna Flores
APS Hamden, CT Corey Stone
Banco Popular San Juan, PR Nester Obie
Bank of America Jacksonville, FL Kathy Weise
Bank of America Charlotte, NC Pattie Mathews
Bank of America Washington, DC Vicki Tassen
Bank of Internet* San Diego, CA Gary Evans
Bank One Columbus, OH Kathleen Houck
Bank One Chicago, IL Mary Laraia
Bethex Federal Credit Union Bronx, NY Joy Cousminer
Blackplanet.com New York, NY Omar Was
Broadway Federal Savings Bank Los Angeles Eric Jognson/Paul Hudson
Business for Social Responsibility San Francisco Bill Boler
Business for Social Responsibility San Francisco Alexis Morris
CAEL Chicago Sam Leiken
CA Foundation for the Environment and the Economy Oakland, CA Don Viol/Norman Jayo
Canadian Imperial Bank Toronto, ONT Phyllis Howell
CDIII Chicago, IL Kirsten Moy
Center for Law and Human Resources Chicago, IL David Marzahl
CFED Chicago, IL Bob Friedman
CFED* Washington, DC Andrea Levere
Citibank Chicago, IL Dan Nemek
Community Bank of the Bay Oakland, CA George McDaniel
Community Development Finance San Francisco, CA Dan Leibsohn
CompuCredit Atlanta, GA Dennis James
Conference Board New York, NY Thomas Cavanaugh
Consultant Missoula, MT Alan Okagaki
Consumer Federation of America Washington, DC Steve Brobeck
Consumer Federation of America Roanoke, VA Jean Ann Fox
Corporate Executive Board Washington, DC John Benevides
CorePROFIT* West Chester, PA Joe Prunty
Credit Union Foundation Washington, DC Pat Brownell
CS First Boston Philadelphia, PA Jim Marks
Digital Insight Calabasas, CA Steven Reich
Digital Partners Seattle, WA Justin Thumler
Fannie Mae Foundation Washington, DC Issac Megbolugbe
Fannie Mae Foundation Washington, DC Patrick Simmons
Financeware.com* Richmond, VA David Loeper
First of America Bank Chicago, IL David Boss
FirsTel USA Atlanta, GA John Cahill
Fleet Boston* Boston, MA Sean Stanton
Fleet Boston Boston, MA Elizabeth Wadsworth
Ford Motor Company Detroit, MI Eric Siegel
Genpass Technologies* Dallas, TX Charles Sapp
Gomez Advisers* Lincoln, MA Paul Jamieson
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APPENDIX: PARTICIPANTS (CONTINUED)
Organization City, State Name
Harvard Business School* Cambridge, MA Peter Tufano
Household Financial Chicago, IL Dana Funk
Independent Author Falls Church, VA Mary Gotschall
InnoVentry Fort Worth, TX Jason Griffin
Joint Center for Housing Studies, Harvard University Cambridge, NY Nick Retsinas
KPMG Peat Marwick Vienna, VA Linda H. Gallagher
KPMG Peat Marwick Vienna, VA Janet Gordon
MacArthur Foundation Chicago, IL Elsbeth Revere
Microsoft Financial Network New York, NY James Kinsella
National Assoc. of Financial Service Centers/Rite Check Brooklyn, NY Joe Coleman
National Center on Poverty Law Chicago, IL Rita McClennon
National Council of La Raza* Washington, DC Charles Kamasaki
National Council of La Raza San Juan, Puerto RicoSonia Perez
National Foundation for Credit Counseling Silver Spring, MD Kathleen McNally
National Fed. of Community Development Credit Unions* New York, NY Cliff Rosenthal
National Partners for Financial Empowerment Washington, DC Dino DeConcini
National Partners of Financial Empowerment Washington, DC Natasha Bilmoria
National Community Capital Association Philadelphia, PA Mark Pinsky
NCR/Southland Irving, TX Walter Matan
North Carolina Support Center Chapel Hill, NC L. Cox/Bethany Chaney
Office of the Comptroller of the Currency Washington, DC Greg Golembe
Office of the Comptroller of the Currency Chicago, IL Ralph Delease
Office of the Comptroller of the Currency Washington, DC Connie Dunham
Office of Thrift Supervision Washington, DC Teresa Stark
One-economy.com Washington, DC Ben Hecht
Paymybills.com Santa Clara, CA Karsha Chang
PNC Bank Louisville, KY Leonard Watkins
PNC Financial* Pittsburgh, PA Tom Whitford
Progressive Neighborhood Federal Credit Union* Rochester, NY Melissa Marquez
Providian Financial San Francisco, CA Chris Lewis
Quotesmith.com Fort Worth, TX Harvey Popilow
SaveDaily.com Irvine, CA Mark Maruyama
SaveDaily.com* Irvine, CA Eric Solis
Schwab San Francisco, CA Lois Allen
Self-Help Credit Union Durham, NC Mary Munson
Shorebank* Chicago, IL Jennifer Tescher
Shorebank Chicago, IL Mary Houghton
Swarthmore College* Swarthmore, PA John Caskey
TD Waterhouse New York, NY Richard Neiman
The Reinvestment Fund Philadelphia, PA Jeremy Nowak
Tower Group Waltham, MA Richard Bell
Triton Systems Long Beach, MS Ernest Burdette
Triton Systems Long Beach, MS Doug Scholer
Union Bank of California* Los Angeles, CA James Laffargue
United Airlines FCU Chicago, IL Bob Bream
Universal Pensions Brainerd, MN Cindy Roggenkamp
University of North Carolina at Chapel Hill Chapel Hill, NC Michael A. Stegman
U.S. Department of the Treasury Washington, DC Michael Barr
U.S. Department of the Treasury Washington, DC Dino DeConcini
U.S. Department of the Treasury Washington, DC Cliff Kellogg
Washington University St. Louis, MO Michael Sherraden
Wells Fargo San Francisco, CA Michael Gallagher
Wellspring Consulting* Glen Cove, NY Jim Wells
Western Union Denver, CO Tom Norton
Woodstock Institute Chicago, IL Marva Williams
World Bank Washington, DC Thyra Riley
