The working poor are moving away from traditional banks, according to a survey released by the Pew Health Group, a division of the Pew Charitable Trusts.

This report, “Slipping Behind: Low-Income Los Angeles Households Drift Further From the Financial Mainstream,” interviewed predominately Hispanic, low-income residents in the Greater Los Angeles area.

The numbers of unbanked families increased during the period 2009-2010.  32% or roughly one third of respondents reported closing their account as a result of hidden or unexpected fees; other reasons included lack of funds and employment, among others.

Alternative Financial Services

The Pew report also found (not so surprisingly) that banked customers continue to use Alternative Financial Services (AFS). Almost one-third of the banked respondents (crossover customers) continue to use check cashers and other non-bank financial services due to perceived transparency and liquidity concerns; despite having an active account.  Reasons include…

Source: Pew Trust

• Remittance (49 %)
• Money orders or cashier’s checks (34%)
• Check cashing (10 %)
• Bill Payment (38%)
  • 43% use AFS bill pay services because of posting times and cash liquidity
  • 37% claim bill payment is faster at store front check casher than at a bank

Banks win on Location

One thing that did surprise me was that bank location had the advantage; with 59% of respondents preferring banks over check cashers, due to their proximity to work or home.

I’d always perceived that check cashers won out on location, hours of operations and service offerings (not necessarily customer service!).  While location may no longer be a factor (at least in LA), providing multiple services is! 38% of crossover customers continue using check cashers because they can purchase several services at one time.

Conclusions

1. Alternative Financial Services are not going away. Traditional barriers to banking remain for the unbanked; including not enough money to open account, lack of proper ID, high fees, and difficulty understanding the banking system.  As a result the unbanked continue to need a place to perform their financial services.  Even some banked individuals use AFS providers for varied reasons as shown above.

2. Multiple service offerings are important.  The ability to handle all financial transactions in one place is often more important than getting the best deal on just one service (and having to travel to different locations to do it).

3. Remittance is big! 96% of unbanked individuals wire money using a money transfer shop; and 40% of banked do the same.  And they remit frequently!

Need help or advice on expanding your service offering?  Contact an AllTrust representative today at 1-877-280-1679 or email us.

The recent CFSI show in New Orleans was wonderful; focusing on innovation and serving the global underbanked population.  For instance, SAFARICOM presented its achievements in Kenya where they have great success with their M-PESA mobile payments network.  This network allows formerly unbanked consumers, 15-million users, to store funds and pay individuals or retailers via their mobile phones.

Retail Financial Trends in the US

In the United States, there is a growing trend to provide a broad range of financial services (e.g. check cashing, remittance, bill payment, prepaid cards, etc.), in mainstream retail.  Walmart® has led this trend and has achieved great success with its “Money Centers”. This year, Walmart expects to cash somewhere in the area of $40 billion in checks.  Jane Thompson, Walmart’s outgoing President of Financial Services, was the keynote speaker at CFSI and urged the industry to continue innovating and serving this market as Walmart has clearly done.

Other mainstream retailers like Sears® and Safeway are also recognizing the value in tailoring programs for this same demographic base.  These retailers are making strides to update their store’s financial service offerings making them more visually appealing to the customers.  In addition, they are investing in systems to enhance the transactional experience.

At AllTrust Networks we’ve been preaching these same messages for several years and believe that there are two technology-driven keys to success for alternative financial service providers.

• The first is employing technology that enables offering services to as many consumers as possible.  For our users, to effectively manage risk, this means focusing on true consumer identities through biometric identification rather than asking for SSN’s.  Requiring an SSN is unattractive for many potential consumers, and using a biometric ID means faster repeat transactions which are critical in retail.

• The second key is having a platform capable of combining all of the financial service offerings to allow for faster transactions, better compliance programs and more efficient operations within the retail setting.

For the underbanked consumer, this trend in retail financial services should deliver them better choices, new products and low prices.  Many national retailers have already followed Walmart’s lead; and we’re seeing a great rush to deliver the whole set of financial services in an attractive setting that drives repeat visits, and leads to a consumer relationship that extends beyond just financial services.  In many cases, the alternate financial services may be offered as a loss leader or breakeven proposition to bring more customers into the stores and drive more retail sales.  Mainstream retailers are smart to focus on these areas as this part of the population is expected to continue to grow, through immigration as well as continued increases in consumer banking fees.

Tell us what you think about this trend in retail financial services, in the comments.  For more on AllTrust’s new all-in-one platform, Retail Connect, contact us at 1-866-324-6729 or pcssales (at) alltrustnetworks.com.

I read an interesting story in USA Today about a new study conducted by The Investor Education Foundation of the Financial Industry Regulatory Authority (FINRA).  FINRA asked 28,000 people questions on five key issues and used the results to produce a state-by-state look at financial capability.  The results: people in New York, New Jersey and New Hampshire are the most fiscally responsible in the US.

So if NY, NJ and NH did well, how did other states fare?  According to FINRA, Oklahoma and South Dakota were on the bottom.  Looking at the national averages it’s kind of shocking.  Of those surveyed, one quarter use payday loans or auto-title loans; and 60% don’t have a rainy day fund (at least 3 months savings to cover illness, job loss, etc)!  I did a quick comparison of best and worst states against the states with large numbers of underbanked consumers.

Summary of US state's fiscal responsibility - best & worst in comparison to states with large numbers of underbanked

I can see why there have been so many reports recently indicating that people are more concerned about their personal finances.  Hopefully knowing about the problem will be the first step to fixing it.

For more on the FINRA study, go to http://usfinancialcapability.org/.

As a money services business you need to be aware of the federal government regulations surrounding money services. If you are not, you may be putting your business at risk by not fully complying with the law. Here are ten things that retailers should be aware of if they are cashing third party checks and/or providing wire transfer services.

1. Money Service Business (MSB) Registration Requirements (Check Casher permit) – Any business conducting money transactions in amounts over $1,000.00 must register with FinCEN. Also, any business doing wire transfers, regardless of the amount, is automatically considered an MSB and must also register with FinCEN (http://www.fincen.gov/).  See my previous Money Service Licensing 101 post for more on registering with FinCEN, as well as any state registration requirements for check cashers.

2. Anti-Money Laundering (AML) Program – This is a requirement of all MSBs. This program must be in writing and provide adequate training, testing and implementation to fight money-laundering and other financial crimes.

3. Bank Secrecy Act – Be aware of these regulations that require all Money Service Businesses to create paper trails by keeping records and filing the proper reports.

4. US Patriot Act – Enforces “know you customer” and requires maintaining a record to prove that these check cashers are not known terrorists.

5. Designation of Compliance Officer – Your business must have a designated compliance officer who is trained and familiar with AML compliance regulations.

6. Currency Transaction Reports (CTR) – Be familiar with these government reporting forms and ensure that you are reporting all applicable transactions.

7. Suspicious Act Reports (SAR) – As with the CTR, be familiar with these government reporting forms and ensure that you are reporting all applicable transactions.

8. Money Order & Money Transfer Logging/ID Requirements – This activity has its own separate set of identification requirements. Make sure you are complying with government regulations by filling them out as necessary.

9. Proper Filing & Proper Record Keeping Requirements – Your business should keep records on file for at least 5 years.

10. Office of Foreign Assets Control (OFAC) Specially Designated Nationals List – Provided by the Office of Homeland Security this list is updated regularly. You should always use the latest version when checking against your check cashing customers

For more on government compliance and implementing an AML program, visit the AllTrust website, or call our compliance hotline at 1-800-683-4214.

A customer walks into your store, hands over his check and matricula consular card and you tell him what?

1. Sorry, I won’t cash your check.
2. Great!  Let me process this for you.

If it’s option 1, you’re probably turning away a lot of customers.

A summary of March 2010 data from AllTrust Networks shows that customers with foreign IDs consisted about 17% of all check cashing transactions nationwide in March.

You’d expect states like California to have a high percentage, and you’d be right, as they clocked in at about 25% of transactions.

States with surprisingly high percentages were Colorado, Utah, and South Carolina, all with about 35% of transactions driven by foreign IDs.

Overall, about 2/3 of foreign ID transactions are driven by Mexican identifications, typically a matricula consular card.

So. . .if you’re cashing checks, do you accept foreign IDs?  Does your check cashing software handle foreign IDs?

Expansion of the Bank On initiatives for the unbanked has really picked up recently!  San Francisco was the first to launch a program back in 2006 to work with financial institutions to make it easier for the unbanked to get into mainstream banking; providing consumers with financial education and starter accounts. And it has been very successful at bringing a large part of the 50,000 unbanked residents into the financial mainstream.

Other cities around the country are looking to San Francisco’s success.  Recently Bank On initiatives have been announced in DC, Memphis and Dallas.  Programs also exist in six other California cities,  Seattle, Boston, Indianapolis and New York City.

These programs are a great means for consumers to get a better understanding of the banking system and establish a relationship with a bank; but its not an answer for everyone.  Not all unbanked individuals are going to go to a bank; for a variety of reasons outlined in my previous Check Cashing 101 post.

While the SF program has been successful; there are still check cashing establishments and other retailers that do a lot of check cashing in the city.  Just Google ‘check cashing san francisco’.  I’m sure these businesses have seen some drop in volume, but is that the economy, or Bank On.

Are you a check casher in a city with a Bank On program?  Tell us in the comments, how you are being affected by these initiatives in your city.

Photo by Daniel Y. Go

The Denver Post had an interesting article last week on the slow down of the Latino grocery market, “Latino-grocery boom likely to slow as second-generation shoppers surge”.  Latino grocers have been a traditional go-to location for the unbanked and underbanked; where they can get alternative financial services (check cashing, money transfer, etc), and in their own language.

If we can presume to equate grocery shopping preferences with banking preferences; does this mean that second generation Latinos are entering main stream banking?  Or that they will be doing so in larger numbers in next few years?  If so, this is not such good news for businesses who’ve been offering these services.

Are you seeing differences in second-generation preferences?  Let us know in the comments.

The FDIC released a report documenting in incredible detail the underbanked and unbanked populations in the US.  I’ll do a series of articles on various aspects of the report, but here are a few teasers. . .

• Approximately 9 million households (7.7%) are unbanked (no bank relationship) and 21 million (17.9%) are underbanked (have a bank, but use alternative financial services)

• 54% of black households and 43% of Hispanic households are unbanked/underbanked.

• Not having enough money is the top reason given for unbanked households not holding an account.   See also: Why are check cashing stores necessary?

Executive Summary available here

Full report available here

Unbanked? Underbanked? (by msr)

The terms unbanked and underbanked are often used interchangeably, without a clear explanation of the differences between the two markets; but there is a difference. So here’s a quick overview:

Unbanked refers to individuals who have no relationship with traditional financial institutions – meaning they do not have a bank account or credit cards; and transact primarily via cash, money orders and wire transfers. This group varies from teenagers who have little to no income to new immigrants who have language barriers, thin credit files or an inherent distrust of banks stemming from their native country.

Underbanked applies to individual who are considered underserved by financial institutions. They have some connection with traditional banking; but are either inactive for any number of reasons or have closed accounts as a result of credit problems.

A few facts on the underbanked population from the Center for Financial Services Innovation (CFSI)

• 40 million households (or 106 million individuals) are classified as underbanked. With an almost 50/50 split, 21.6 million underbanked and 18.5 million unbanked.
• 60% are white (non-Hispanic); only 19% are Hispanic and another 16% are black; with the remaining 5% being other.
• 47% are employed full-time; 11 percent have part-time jobs
• 41% are not employed (but 52% of these individuals are retired or homemakers).

For more on this market and the financial services they chose to use, read post Check Cashing 101: Why are check cashing stores necessary?