BOSTON – There's no question that serving the unbanked can be lucrative -that's been proven by the success of check cashers. The question is how do CUs get at this often tough to reach segment? The answer may be ATMs and check cashers themselves. Contrary to popular opinion, most people who do not have relationships with financial institutions do not cite the absence of those institutions in their neighborhoods as the reason, according to ATMs: Self-service for the unbanked, a recent report issued by Celent Communications, a noted research and advisory firm on banking issues. "Because major banks have tended to reduce their branch presence in deep urban markets, it is often assumed that the urban unbanked do not use banks because they are too far from the areas in which they live and work," wrote report author Neil Katkov. "In fact, location has less to do with the unbanked's reluctance to patronize. This is a significant finding for banks weighing whether to target this market, for it suggests that banks can serve the unbanked market without extending their current branch network in urban areas." According to Katkov's report, people who lack relationships with financial institutions have repeatedly told surveyors from the Federal Reserve and other organizations that they don't have bank accounts because they haven't enough money or do enough transactions to make the accounts worthwhile. They have also cited financial institutions' lack of convenience, their own lack of knowledge about financial products and their mistrust of financial institutions, as well as concerns about privacy. "Alternative financial services are perceived as allowing persons to obtain funds without leaving a trail and, due to the relatively lax regulation of these services, there is some truth in this," Katkov wrote. "There are a number of reasons an individual may wish to keep their finances private, both legitimate and otherwise: to avoid reporting income to the IRS, to avoid reporting income over the limit allowed by welfare programs, to avoid creditors, to avoid scrutiny by other household members, etc." The very reasons some people eschew deposit accounts make them hard targets for financial institutions to serve, Katkov wrote, but serving the unbanked is also a steadily more lucrative sector, he added. For example, Katkov noted that check cashers have seen an annual growth rate of 12.5% since 1996, which has resulted in the nation having an estimated 9,900 check cashing stores nationwide. Because the market is likely saturated, but still profitable, there has been increasing consolidation in the check cashing industry with larger chains of firms buying up the smaller store-front operations that have traditionally dominated the market. Katkov reported that the seven largest check cashing chains have now consolidated about 2,280, or 23%, of the 9,900 stores nationwide (see chart on page 1) and that this consolidation has led them to be able to compete efficiently with financial institutions. "Consolidation makes the check cashers more resistant to competition from banks, because the major chains are able to realize efficiencies of scale (one of the main competitive advantages a large bank may have against check cashers), more finely hone their operations, and begin to engage in more sophisticated marketing activities," he wrote. Financial institutions seeking to serve this market can do so using ATM and ATM-related technology in a variety of ways, Katkov argued. For example, financial institutions could partner with the check casher to allow check-cashing customers to set up "stripped down" depository accounts through the check casher, Katkov explained. These accounts would remain with the financial institution and would exist primarily as a location that could be used to receive electronic funds transferred from the government. The check casher could dispense the funds to the account holder in cash, or as is increasingly the case, through a kind of cash card which the customer could use at the financial institutions' ATMs. "These arrangements provide banks with fee income (from participating check cashers) and a means for check cashers to lock in repeat customers. The unbanked customer, however, remains essentially unbanked, paying traditional check cashing fees and receiving no additional banking services such as a savings account," Katkov wrote. Similarly, financial institutions have a lot of room to move into the market of providing paychecks or payroll cards. Katkov reported that 18 million workers without bank accounts are paid by paper checks currently and that 27% of them have their checks cashed at a check casher. Financial institutions will have to market the idea of paying employees by payroll card to employers since it is the employer's desire for cash saving which has led most employers to offer direct deposit already to their employees with bank accounts and to be interested in offering a paperless option to employees without bank accounts as well, he added. Financial institutions can also take more advantage of the growing proficiency in offering check cashing services at ATMs, Katkov reported. He described the ATM development of a firm called Cashworks, a subsidiary of the Cash American check cashing chain. The Cashworks solution involves less expensive, POS-style check-reading terminals linked to a back-end system that delivers a decision to accept or deny the check in a few minutes. The terminal then prints a voucher for the amount of the check, imprinted with a number. The customer inputs the number into an ATM loaded with Cashworks software, and the ATM dispenses the cash. Small bills and change are dispensed manually from the firm which houses the ATM. Katkov reported that Cashworks is providing its technology to several operators of ATMs, including Cardtronics (7,500 ATMs) and FIT (4,000 ATMs), who in turn will offer it as an option to the retailers who host their machines. -

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