Customer Activity Drives Profitability in Financial Services
By Saud Bangash, Intern, Innovation and Research, Center for Financial Services Innovation
Business managers in the financial services industry regularly face the complexities of optimizing customer acquisition costs, as they try and adopt smarter ways for signing-up loyal customers. Targeting the right consumer segments with customized services, using efficient access points, and effective sales practices for matching services to customers are some crucial considerations. Sensible customer acquisition which prioritizes customer loyalty and retention is especially key, since it enhances the likelihood of a customer using the service multiple times over a long duration, therefore increasing profitability. In this light, customer activity is a good measure for gauging a model’s sustainability. Tracking volume growth in isolation might indicate an expanding business, but not necessarily a profitable one. In fact, growing the service delivery footprint without prioritizing an intelligent customer acquisition strategy could soon lead to a cost overhang due to increasing sales costs and lean returns.
The prepaid card model provides a good practice example and illustrates this point well. While a provider of a prepaid card service would prefer to sell as many cards as possible, the net gain in profits would only show-up if the customer finds value in using the card, and makes repeated transactions for paying bills, money transfers, purchases etc. This is crucial since prepaid cards, like most financial services, operate on low margin and high volume models. A prepaid card customer must generate sufficient interchange and transfer revenues to justify the customer acquisition costs, which are significant given the expenses on sales commissions, backend processing, marketing and so on. Offering the right product features for a targeted market segment and relying on effective sales and marketing strategies to sell the service to loyal customers is critical for profitability in a financial services business.
Let’s look at Green Dot, which has done a great job in meeting the market demand for prepaid cards and continues to improve its sales and marketing strategy for targeting different market segments. Green Dot offers its branded and co-branded cards through a nationwide reload footprint of 59,000 retail locations. With time, we have seen more customization in Green Dot’s prepaid cards, as it tailors prepaid card features to customer needs and continues to enhance usage. Over the past few months, Green Dot and Walmart (Green Dot’s primary retail partner generating 61 percent of the company’s revenues) undertook a segmentation analysis and resultantly added customized cards in Walmart’s Moneycard suite, including a Visa Gold MoneyCard, a MasterCard Family Edition MoneyCard and a MasterCard Bill Pay MoneyCard. With tailored features for bill payments, family usage and general purchases, customer groups will find Green Dot’s prepaid cards a better fit to their specific needs and will increase their usage of prepaid card services.
I find it useful to think about product adaptation in the context of the Compass principles. The principles provide business managers a framework to think about customer acquisition priorities in a structured manner. They suggest incorporating specific values in a business model which help in attracting more customers and fostering customer loyalty. Among others, the values include improving knowledge about customer needs and preferences, offering variety and choice for catering to customer requirements and building healthy financial relationships with clients. Strategies inspired by these values lead to better product offerings with custom feature choices, usage convenience, full disclosure, customer protection and more, and result in better customer satisfaction, usage and retention. In my opinion, the Compass principles provide insightful guidelines for building a profitable and robust business model.
Fed Finds Underbanked Consumers to be Heavy Users of Mobile Financial Services
By Kate Marshall Dole, Analyst, Innovation, Research & Policy Team, CFSI
In new consumer research results released today, the Fed has found that a larger proportion of underbanked consumers in the U.S. own mobile phones and smartphones – and use mobile financial services – relative to the total U.S. population. The study, conducted by the Federal Reserve Board’s Division of Consumer and Community Affairs, is the first large-scale research study to examine the ways in which unbanked and underbanked consumers own and interact with mobile devices. The findings also include new insights about population-wide mobile phone access, mobile banking and payments usage and behaviors, and online banking usage and behaviors.
A big question on the minds of providers who serve, or seek to serve, the underbanked, has long been: how much do underbanked consumers use mobile phones, and how? The Fed has found that the underbanked actually have access to mobile phones and smartphones in greater numbers than the population overall: 91% of these consumers have a mobile phone and 57% have a smartphone. This compares to the 87% of the U.S. population who have access to a mobile phone, and 44% of all consumers who use internet-enabled phones.
These findings are exciting and validating of CFSI’s latest research on mobile financial services (MFS) usage among these consumers. In our latest white paper on MFS, we suggest that, for financially underserved consumers in the U.S., a mobile phone with internet access is often a substitute (and a cheaper, more accessible one at that) for online access through a computer. For that reason, we have argued, mobile devices are a priority expense item. Having hard data to back up that assertion is important for helping financial providers to see that serving underbanked consumers through the mobile channel is a viable business opportunity that can benefit consumers as well.
Underbanked consumers are also more actively engaged in MFS activities than the population at large. Among the underbanked, 29% of consumers have used mobile banking in the past 12 months, compared to 21% of all consumers. And 17% of the underbanked population have used mobile payments, versus 12% of the total. Looking at specific types of mobile banking behaviors, underbanked consumers generally use mobile banking services in similar ways to all consumers, with the top activities being checking an account balance, transferring money between two accounts, downloading a bank’s mobile application, and receiving a text alert. Underbanked consumers were slightly more likely than all consumers to use their mobile phones to locate an ATM and transfer money between accounts and slightly less likely to use bill pay through their bank’s online site or app.
The picture is different for unbanked consumers. A slightly smaller, though meaningful, proportion of this population owns mobile phones and smartphones – 64% have a mobile phone and 18% have a smartphone. Unbanked consumers are also less likely to use mobile banking (10%), though the same proportion of unbanked consumers have used mobile payments (12%) as the total population. Explaining the use of mobile banking by consumers who, by definition, don’t have bank accounts, the report notes that the survey used mobile banking to refer to “using a mobile phone to access your bank account, credit card account, or other financial account,” which could be interpreted as a payroll or other prepaid debit card. Also, the sample size of people who are unbanked and use MFS is very small (less than 20), so detailed analysis of their behaviors is not possible.
The Fed also uncovered some interesting information about budgeting and financial management using mobile phones. From the report:
One-third of mobile banking users indicate that they receive text message alerts from their bank and, out of this group, 66 percent receive “low-balance alerts.” Nearly all report taking some action in response to getting a low-balance text alert from their bank: transferring money into the account with the low balance (58 percent), reducing their spending (41 percent), or depositing additional money into the account (16 percent). Almost one-third of text message bankers (31 percent) indicate that they receive “payment due alerts,” and 3 percent indicate that they receive “savings alerts.”
Although this finding applies to all U.S. consumers, and not underbanked/unbanked consumers specifically, it’s eye-opening to see that, not only are mobile banking users taking advantage of the mobile channel to stay more in touch with their account balances, they are also taking pro-active steps toward remedying a low-balance account. As noted in CFSI’s white paper on MFS, one of the top opportunities the mobile channel creates for financially underserved consumers, who often manage their cash flow day-to-day, is the ability to have a stronger and more consistent awareness of their financial situation, and to take action where needed to prevent unnecessary fees (such as from overdraft).
There’s much more interesting data to dig through in the full study, which you can find here: http://www.federalreserve.gov/newsevents/press/other/20120314b.htm. Additionally, the Fed’s Jeanne Hogarth will present deeper findings on behaviors and mobile usage by underbanked and unbanked consumers at CFSI’s Underbanked Financial Services Forum, which will be held in San Francisco from June 13-15.
This study goes a long way toward closing the information gaps – and contradicting incorrect assumptions – about mobile access and MFS usage among the underserved. We hope this sparks even more interest among providers in using the mobile channel to profitably meet the needs of the financially underserved.
Can Personal Interaction and Technology Co-Exist?
By Tulsi Parida, Intern, Innovation and Research
In this new age of technology, in-person interactions are becoming less and less common. Many lament the loss of in-person contact and worry that personal interactions will become obsolete. But do personal interactions necessarily need to be in-person? Text messages, emails, and social media have transformed the definition of personal interaction. I believe personal interaction to simply be a one-on-one direct line of communication. Be it in-person, over the phone, or via email, as long as there is a direct line of communication between two individuals, it is personal interaction. Personal interactions help build trust among the parties involved and also result in greater overall satisfaction.
Two of CFSI’s grantees, Consumer Credit Counseling Service of Delaware Valley (CCCS) and Co-Opportunity Inc, have acknowledged the importance of personal interaction. They utilize technology to assist in ongoing interaction with their customers in a cost-effective manner. Both these organizations effectively promote success for their customers by helping them make smart money choices through innovative service and product design.
CCCS’s Borrow Less Tomorrow program is currently piloting a program targeted primarily with individuals and families who are struggling with consumer debts that they are not able to pay off in a timely fashion. In addition to traditional one-on-one in person counseling sessions, CCCS also utilizes innovative communication tools to help promote financial capability for their customers. CCCS sends customers regular text message reminders about their tasks, plans, and end goals so that customers are always up to date regarding their financial situation. Personalized text messages allow ongoing communication with customers and push them to be financially responsible. Similarly, CCCS gives customers the option to have a social performance bond with peers. This peer support method offers customers personal interaction with their peers, an activity that encourages them to keep their debt in line.
Co-Opportunity Inc’s iCoach2Win pilot program also aims to bring common technology into the personal interaction equation. Co-Opportunity Inc will target low and moderate income individuals who are interested in reaching their financial goals. Their customers will participate in one of three programs. The first will be purely in-person counseling. In the second program, the first 6 months will be in-person counseling and the last 6 months will utilize technology to facilitate ongoing communication. In the second half, customers can use online financial coaching to help them maintain their budget, pay their bills on time, reduce debt, increase savings, etc. This online edition helps reduce costs both for Co-Opportunity Inc and their customers. The last program will be purely online counseling. iCoach2Win is meant to gage which type or combination is the most effective type of personal interaction with their customers.
As can be shown by these two grantees, technology and personal interaction can not only co-exist, but it is actually necessary to utilize technology to facilitate personal interaction in today’s tech-friendly world. The Compass Principle, “Promote Success” is about linking smart design with actionable guidance and CCCS and Co-Opportunity Inc’s programs do just that.
Aspiring to Achieve the Four Compass Principles: A Case Study on Mission Asset Fund
By Tulsi Parida, Intern, Innovation and Research
Before making a product, it is important to see who your customer base is. Seems like a basic first step, right? Yet, many providers of services for the underbanked have overlooked a large segment of the population: immigrants. Minorities and immigrants specifically, comprise a significant chunk of the underbanked population. Immigrants naturally face a lot of barriers to entry due to language and cultural differences. Products and services therefore for the underbanked must be culturally relevant for immigrants. Given the large number of unbanked immigrants, financial products and services designed to include immigrants are in large demand.
One of CFSI’s grantees, Mission Asset Fund, has begun to embrace inclusion, build trust, promote success, and create opportunity for Latino immigrants. Their target population is low income Spanish speaking immigrant adults. Mission Asset Fund responsibly expands access as the product strives to include traditionally underserved communities. The Cestas Populares (CP) Replication Project piloted by the Mission Asset Fund is meant to help low income Latino immigrants build credit histories, learn smart ways to use credit, and increase overall financial independence and financial capability. CP replicates lending circles that are common and historically successful in immigrant communities. In Mexico these lending circles are called tandas, cundinas, or cestas and are extremely common. By offering culturally relevant loan products, CP is able to build trust among its customers. Additionally, one of the prerequisites for building trust is to educate consumers on the best use of the product. In addition to the formal lending circles, CP requires all customers to open a bank account and undergo financial training that will help them learn how to use credit responsibly. Customers receive ongoing support from Mission Asset Fund and develop long term relationships with Mission Asset Fund.
CP takes culturally relevant products one step further, by ensuring that they promote success and create opportunity for the customers. All customers have to sign a contractual agreement – this formalizes the lending circle concept and makes customers accountable, not just for themselves, but also for their peers. Each peer lending circle is given the freedom to determine the amount and frequency of the loan, but every customer is required to sign legal promissory notes in which they agree to make payments towards their peer loans. In addition, customers are given product centric financial education to help them successfully manage the product. Customers learn basic information about financial management and more specific information regarding their CP peer loans. Lastly, Mission Asset Fund has partnered with the Credit Builders Alliance. The partnerships allows Mission Asset Fund to report the customers’ payment activities to Experian and TransUnion. This helps their customers create and improve credit scores for long term financial satisfaction.
What good are financial products for the underbanked if they do not attend to the needs of a large segment of the population? For a product to be truly successful, it must cater to the needs of all potential customers and promote success and create opportunity in a culturally relevant manner. Mission Asset Fund truly aspires to all four of CFSI’s compass principles.
Using Behavioral Economics to Promote Success and Create Opportunity
By Tulsi Parida, Intern, Innovation and Research
“Behavioral economics” seems to be those buzz words that everyone uses when speaking of improving products for consumers. But what is behavioral economics and how is it different from traditional economics? Traditional economics is probably what you learned in any economics course you have taken. It is based on the principle that human beings are rational thinkers who always make the optimal choice. We are selfish individuals who maximize utility only for ourselves. If this were true, then we would have no gamblers in this world because no one in their right mind would gamble knowing that the odds of winning are so low. If this were true, you would actually have started your diet last week like you said you would. Behavioral economics explains irrational actions. This branch of economics relies on the assumption that there is something other than rationality that drives human behavior. Understanding why customers behave the way they do might explain why products and services that are similar to each other still have different success rates.
Barriers to action and self control are two behavioral economics concepts that are worth examining when analyzing a product. We constantly try to find short cuts in our daily lives. Unnecessary steps deter us from performing an action even if it is in our best interest to do so. Even something as simple as having one click on the website to get to the desired page rather than three really makes a difference in consumer behavior. These seemingly inconsequential features are important to keep in mind when creating a product. Furthermore, most of us are creatures of habit and it is hard to change a routine we are used to. While it is hard to change our habits internally, external incentives are often successful in changing habits. While you might not be in the habit of donating to charity, an external incentive, your office offering casual Fridays to anyone who donates that week, might cause you to donate more than you would have otherwise.
CFSI grantee, Filene Research Institute, is using behavioral economics principles to promote success and create opportunity for their consumers. Their LIFT project targets moderate to low income individuals with subprime credit. The program offers alternative low cost lending with rewards for on-time payments. Customers receive financial education and the program gives customers the incentive to pay their loans on time by rewarding them with lower interest rates if they do so. This incentive prompts those that might not already pay their loans on time to do so. Furthermore, the program encourages good behavior changes via online and direct mail communication and uses new web based tools that will automate the administration of the service. Customers do not have to take an extra step to receive the benefits of on time payments because the benefits are automated, thus reducing barriers to action.
The LIFT program therefore promotes success for customers because the program couples financial education with the automated rewards system, thereby linking smart design with actionable guidance. Furthermore, timely web and direct mail alerts keep the customer on track with loan payments. The alerts also work to ensure that customers get the most bang for their buck by reminding customers of the low interest rate reward for on time payment. Similarly, this program also creates opportunity for customers because on time loan payments will improve credit scores and overall financial satisfaction over time.
Behavioral economics can help guide you to promote success and create opportunity for your customers. What steps have you taken to improve your product with the help of behavioral economics?
Building Trust Beyond the Branch
By Ashvin Prakash, Consultant, Advisory Services, Center for Financial Services Innovation
Customer service has been a large part of a bank's strategy to build trust among consumers. Despite the bad press banks have been receiving, their ability to provide high level customer service at branches has been an integral part of their relationship building strategy. As a customer, I’m always suspiciously pleased by the exceptional friendliness of the tellers and their interest to make small talk while completing transactions. This strategy has been an effective way for banks to get consumers to trust them, and I often find myself leaving branches feeling somewhat more popular than I was before the transaction.
However, over the past few years, two things have been happening that have increased the need for banks to promote trust outside of their customer service strategy. Firstly, with the increase in ATM capabilities, and technological improvements with online and mobile banking, fewer customers want to make that trip to the branch to complete their daily interactions. This means that fewer customers are benefiting from the highly trained branch personnel and bonding with their bank on a weekly basis.
Secondly, and more importantly, to say consumer sentiment of banks has soured over the past few years is a huge understatement. While the blame for the financial crisis will always be thrown around among banks, regulators, and consumers, one fact is clear: customers have lost trust in financial institutions. A study earlier this year by PEW confirmed this sentiment by finding that 47% of American’s don’t trust banks, and this is a serious problem considering banks are often asking customers to trust them with their life’s savings and financial decisions.
In the wake of the financial crisis, banks and financial providers have some big hurdles to conquer if they want to continue to grow their customer base and keep them happy. They need to build consumer trust again and convince people they are on their side. And having friendly branch staff might not be enough to cut it anymore.
To build trust successfully, providers need to go beyond the frontline staff and think about providing products that build consumers trust. As the Compass Principles recommend, products and services should be designed to help consumers clearly understand and derive value from their financial products and services. The marketplace today is flooded by products that aim to take advantage of consumers by charging fees or setting consumers up for failure. By providing transparent and reliable products that consumers can depend on, financial providers have an opportunity to differentiate themselves among competitors and build consumer confidence and trust for long-term relationships.
There are some great examples of providers who have integrated a sense of trust into their products. Cardtronics, one of the largest ATM providers, aims to provide relevant support to customers before, during, and after every transaction by offering transactional advice in locating an ATM and suggesting ways to reduce fees. ZestCash, an online lender, differentiates itself from other small dollar short-term lenders by allowing customers the ability to design their own repayment plans and rewarding positive repayment through cheaper loans. NetSpend, a successful provider of reloadable prepaid cards, clearly outlines its fees on its website and promotes savings by offering competitive interest rates. These kinds of product designs help signal to consumers that providers are looking out for their best interest and providing a product that meets their needs without penalizing them inappropriately.
These are only a few of many providers in the marketplace today finding new and innovative ways to build trust among customers. I encourage readers to share their own experiences and best practices for how providers can continue to design products that customers can trust.
Adopting The Compass Principles
By Arjan Schütte, Managing Partner, Core Innovation Capital
Our venture fund, Core Innovation Capital, is singularly focused on investing in scalable financial technology companies that serve the American emerging market, the unbanked and underbanked. We have promised our investors (like Goldman Sachs) above market returns and we spend significant time analyzing the profit potential of each investment we make. That said, we also intend to invest in companies that will have a short- and long-term positive impact on the financial lives of the people they serve. We believe financial services have a significant role in anyone's upward mobility, and millions of responsible, hard working Americans are stuck in a vicious cycle where their financial tools erode, instead of enhance their net worth and financial capabilities.
CFSI's Compass Principles initiative is a bold and critical effort to set a standard for how financial services can and should function for people. It's critical because financial services are complicated. As we can see in the marketplace and Washington, D.C., the tug and pull of organizational priorities leaves both consumers and industry with unsatisfying results (mostly consumers, if you ask me). Our partners at CFSI established the Compass Principles to set an aspirational quality standard that serves both industry and people (also known as consumers).
This is not about concessions. This is about integrity. Given the apparent lack of clarity on what consumer finance with integrity means, it's high time to (re)establish some norms. CFSI's process for doing this is socratic, collaborative and inclusive. Ultimately, we believe the objective should be to settle on standards that are attainable and aspirational, and that consumer finance companies sign up, make commitments and elevate the industry to world-class best practices.
My partner, Mike Harris, and I are in. We're pre-committing (since there is no formal means by which to commit today). We're doing this not because we expect to agree with every last item, nor because we expect to already "comply" to all standards today, but because we agree with the vision and we trust CFSI and their approach. We're doing this because we exclusively invest in disruptive financial technology companies that we intend to set the new gold standard. Commitment isn't just saying so in a blog post. Starting in 2012, we commit to integrate the Compass Principles into our venture fund as follows:
- To participate in the dialogue to refine the meaning of the Principles
- To use the Principles in our underwriting of new potential investments
- To ask our portfolio companies to commit to the Principles
Our intent is to tighten the specificity of our Compass Principles commitment as the Principles become more specific and as we interact with our fund's stakeholders. And our hope is that our partnership and our portfolio companies will both lead the industry and be challenged to improve.
Arjan Schütte is Managing Partner or Core Innovation Capital (www.corevc.com), the only venture fund to focus entirely on financial technology for American emerging market.
Crowdfunding – A Promising Innovation for Improving Access to Financial Services
By Saud Bangash, Intern, Innovation and Research, Center for Financial Services Innovation
Crowdsourcing is reshaping the way we think about the marketplace. Why? Because it simulates an open market environment very well. It allows providers to swarm into a market space and sell products and services to consumers, tailoring what they offer to consumer preferences. The swarm of consumers and providers grows, and affordability and quality improve as competition increases. All it takes is a well-designed technology platform which provides the necessary tools for products and services to be traded with reliable and sufficient information.
Peer-to-peer (p2p) solutions, enabled by web 2.0 and mobile technologies, are applying the crowdsourcing paradigm and setting the stage for a more efficient method for customer acquisition, service delivery and sourcing of funds. Some see crowdsourcing as a process of ‘disintermediation’, which is limiting reliance on sales agents, middlemen, brokers etc. and reducing transaction costs.
In the consumer lending sphere, ‘crowdfunding’ has emerged and has brought a fresh perspective on how we think about addressing some persistent issues of accessibility and affordability of financial services.
Two Bay Area based companies - Lending Club and Prosper – are the early birds. Both companies are offering crowdfunding services to borrowers and lenders, through which any individual or institution can lend to or borrow from each other, based on the borrower’s pre-assigned credit-risk rating and the lender’s preferences and risk tolerance. The uptake for the service has been strong - the two companies have reported that in 2011, monthly loan originations doubled to $30 million and tripled to $11 million through Lending Club and Prosper respectively. 24,000 new customers signed up on Lending Club and the platform originated a quarter billion dollars worth of new loans in 2011, more than doubling the previous four years combined. These loans were priced with net annualized interest rates ranging between 5.82% and 12.15%.
It is important to note that these two companies are not focusing on providing services which cater directly to the needs of underbanked consumers, who typically borrow in small amounts and have limited or no credit histories. Lending Club originates loans with an average size of $10,945 and rejects 90% of the loan applications it receives. The reason underbanked consumers are not a priority for these two companies is because of regulatory bottlenecks. The Securities and Exchange Commission regulates p2p loans like securities, with pricing based on assigned risk categories using borrower credit reports. This automatically creates a selection bias for consumers with established credit histories and eliminates most underbanked consumers from the pool of potential borrowers.
Structuring p2p lending platforms like auction markets, which allow market players to transact freely based on their preferences and risk tolerance, will help open-up the p2p lending market to underbanked consumers. As a first step, a regulatory framework for a true auction based loan products market needs to be developed and introduced.
Crowdfunding is a frontier market space, which has immense potential to be scaled to improve the availability of high-quality, low-cost credit options for underbanked consumers. Considering the high level of connectivity, visibility and traceability that p2p platforms offer, p2p lending could prove to be a promising solution, particularly for consumers with weak credit histories and limited access to affordable loans.
Gametime! The Power of Cross-Sector Partnerships
By Joshua Sledge, Analyst, Innovation and Research, Center for Financial Services Innovation
It’s June 13th, 1997 in Chicago, Illinois. Inside the United Center, the Chicago Bulls are battling the Utah Jazz in Game 6 of the NBA finals. Up three games to two, a win for the Bulls would give the team its third consecutive championship. With the score tied and only 28 seconds left in the game, the Bulls work the ball to NBA Legend Michael Jordan. Jordan gets a step on his man, drives the lane, rises into the air…and passes the ball to Steve Kerr, an unremarkable bench player, who knocks down a wide-open 15-foot jump shot, giving the Bulls a two-point lead with five seconds to go. The Jazz blow their final possession and the celebration begins as the Bulls are once again NBA champions.
I’m not a Bulls fan (Go Pistons!), but this sequence has always been one of my favorite moments in NBA history. Why? Because it provides a perfect example of a team achieving success by playing to the specific strengths of its members. By this point in his career, Jordan had established a reputation as perhaps the greatest “closer” in NBA history by making countless big shots in big moments. When he headed toward the basket, the Jazz just knew he was taking the final shot…which is why the player guarding Kerr went to help defend him. Now, on the flipside, Kerr was never regarded as an elite player but, man, could he shoot the lights out! For him, that wide-open jump shot was as routine as they come. On that final play, the Bulls relied on Jordan’s knack for late-game heroics and Kerr’s shooting range – their respective strengths – to bring another championship to Chicago.
Leveraging the respective strengths of different parties to achieve success - not only does it make a great NBA team, but it is also the underlying premise that makes cross-sector partnerships a powerful means of meeting the financial services needs of the underserved. We at CFSI work with a variety of stakeholders – nonprofits, financial institutions, nonbank providers, and more – all of whom are working to better serve the unbanked and underbanked. Just like Jordan and Kerr, each of these groups has certain strengths that can help them achieve their goal. Nonprofits are often able to form deep and trusting relationships with their clients, enabling them to provide the type of ongoing support and advice that leads to asset-building and positive changes in financial behavior. Financial institutions and nonbank providers have expertise and experience in offering the products underserved consumers need to take steps toward greater financial health. Working together allows these organizations to play to their strengths while still providing holistic solutions that help the underserved use products successfully and create opportunities for increased financial prosperity.
The Kindergarten-to-College (K2C) program provides an excellent example of the power of cross-sector partnerships. Under the program, children entering kindergarten in San Francisco Public Schools have a college savings account automatically opened for them, pre-funded with an initial $50 deposit. The program was made possible by a collaboration of government agencies (San Francisco’s Office of Financial Empowerment), nonprofit groups (EARN, CFED, the New America Foundation) and financial institutions (Citibank). By working together, these parties have created a citywide program that will not only encourage San Francisco citizens to plan for college, but also gives them the savings account and ongoing support they need to do so.
So, how about you? Have you considered how a cross-sector partnership could bolster your efforts to responsibly serve the unbanked and underbanked? If not, give it some thought. You never know, the Steve Kerr to your Michael Jordan may be out there, waiting for you to pass them the ball so that, together, you can be Compass Principles Champions.
Real Stories of the Underbanked
By Rachel Schneider, Vice President, Innovation and Research
Over the summer, I blogged about a woman I’d met. I called her Joanna. Her story really stuck with me, so I’m going to repeat it here. Joanna puts $2-3 worth of gas in her car at a time. Why doesn’t she fill up her gas tank? Because she’s too worried that she might need the money she’d spent to fill up her gas tank later in the week for some unexpected expense. She can’t afford to leave that value just sitting in her car.
But this creates a major loss of value for her in other ways. First, there is the loss of time: who has time to go to the gas station a few times a week? Second, there is the anxiety: will she run out of gas on her way to work today?
Seems to me that a loss of value like this should be something you can build a business out of fixing. Imagine the long-term customer loyalty (and genuine appreciation) that a business could inspire if it fixed Joanna’s problem.
Perhaps the answer lies in a new, yet-to-be-designed, small dollar revolving credit product. Or maybe Joanna’s employer could adjust her payment schedule so that the timing of her incoming cash better matches her spending needs… start-upFlexWage is developing a payroll-based credit product that could potentially accomplish this goal. Or, a planning-based approach might work: another early stage start-up, Juntos Finanzas, is developing a real-time, cell-phone powered cash budgeting system that might give Joanna enough visibility into her finances to allow her to spend $15 rather than $3 at once.
In all likelihood, there is no one right answer. Multiple business opportunities probably exist in trying to serve Joanna’s need. But it is certainly the case that generating the right insight, the right creative idea, requires deep consumer knowledge.
