Passwords have become a necessary evil and many users complain about the burden of coming up with complex passwords, and the even bigger challenge of remembering those passwords.
In this five part series, we have referred to gift cards and pre-paid cards interchangeably when traditionally there have been key differences – most notably that gift cards are generally one-time use, have no/few fees, and are not re-chargeable. But this reference was deliberate as emerging gift card solutions are empowering retailers to compete at the pre-paid card level. Which in turn enables retailers (many of whom already offer financial services) to become even more bank-like, but at lower cost and a more holistic view of the lifetime customer.
In this last post, we will look at two of the companies contributing to this shake-up – an emerging start-up featured as one of the 2015 Money20/20 Launchpad companies – Slide – and an established and rapidly growing alt fin services provider Cards.com.
Gift/Pre-paid Cards Will Permanently Replace Some Bank Accounts.
As previously discussed in this series, for Millennials and those entering the U.S. financial system for the first time, there is no really compelling reason to have a bank account. Even with rising interest rates, the return on holding your money in a bank is magnitudes lower than any number of alternative investment vehicles. Particularly for younger consumers who have low/no savings and high debt, using financial services that are low cost in absolute terms – not relatively speaking –are a priority. Dwolla and other low cost non-bank alternatives will likely see a spike in users in the coming years, particularly in the advent of a recession.
Slide: Gift Card Management for Consumers, A Platform for Retailers
Into this environment where many can “take or leave” the bank, there are increasingly viable, highly usable and even fun alternatives. Seed-funded Slide made its fintech industry debut at last year’s Money 20/20 conference, debuting at the show a suite of mobile gift card management features that presents the consumer user with the ability to manage their gift cards all in a single wallet app. As compelling from the retailer’s perspective, the company enables the consumer to buy – and reload – their gift cards in a theoretically infinite number of designs, adding a level of engagement with the brand not available on typical gift card sites, which tend to present brands in a mass market, commoditizing the value of the gift card itself and burying the brand in a sea of logos. The company’s plans include adding the ability to instantly trade and transfer gift cards, placing the start-up in the realm of P2P payments.
What’s interesting about Slide are its initial users, who are not so much the typical tech early adopter, but who are more representative of the general population, such as mothers. According to Slide co-founder and CEO Mike Morris (formerly with American Express), “Slide users come from pretty much every corner/pocket across the country who share such common pain as managing their gift cards.”
Retailers, some of whom have previously declined to have their gift cards sold online, are signing up with Slide. Morris observes that “The e-gift card industry is growing by 44% year-over-year, and merchants seem to be waking up to the fact that their gift card programs are generally underutilized and can be leveraged to engage and delight customers in new ways through digital experiences.”
Card.com: Branchless Bank with $450 Million in Deposits – and Counting
Last fall, CARD.COM announced $9 million in growth funding to expand its mobile tech offering and to move from word of mouth to marketing-driven customer acquisition. With over $450 million in deposits to date, CARD.com has clearly made in-roads into its goal of becoming a leading non-bank financial institution.
While CARD.com has no branches, 85% of their customers use their mobile app monthly, compared to the banking industry average of 30%. The remaining percentage use the service via the company’s website. Significantly, as a SaaS (software-as-a-service), the company can scale up quickly to meet demand. Where it has run into some issues, and where it plans to invest significantly, is in the area of real-time customer service. New service introductions can also be introduced relatively quickly as compared to the banks, with CARD.com set to launch sub accounts (for spouses, teens, domestic helpers, etc.). Much like Slide, CARD.com is seeing significantly traction amongst moms. And compared to non-card focused branchless banks GreenDot and NetSpend, CARD.com reports that over 85% of their deposits are direct deposits of paychecks (as compared to a 30-40% range) – and their number of deposits is significantly larger, despite having only launched three years ago. As a point of comparison — the mobile banking sector today represents only 2 million accounts out of a total 14 million (inclusive of those doing mobile banking via branched banks) according to the Digital Bank Report. CARD.com in comparison has more than 600,000 accounts.
The main driver behind this success? Customized cards and attention to serving the customer, even if that customer is unbanked. The service offers “Fair, Fashionable and Fun online prepaid card solutions” and treats its customer “as an individual who is cool like James Dean, sultry like Bettie Page or a cat-lover with a heart of gold. CARD.com lets you represent the things you care about, with awesome perks along the way.” Clearly not your average bank.
Going into 2016, the remaining stigmas against gift cards will be further chipped away as the sector matures beyond paycheck deposits and retail goods. In October 2015, Stockpile.com raised $15 million in a Series A round from superstar VC Sequoia Capital and rockstar actor Ashton Kutcher, amongst others. The service will enables consumers to buy company stock via gift cards at retail locations, helping to democratize and demystify investments (not good news for the few remaining retail Wall Street brokers).
Suffice it to say, gift cards are at the least hot. And on a relatively slow but steady trek towards true consumer financial revolution.
In part 3 of this gift card series, we looked at the business drivers behind increased consumer adoption. In this post we will further examine one of these drivers – the bundling of bank-like services into the pre-paid card relationship as an emerging consumer financial paradigm. This courting of the un-banked and under-banked by retailers and other non-bank entities represents an arguably permanent shift away from the traditional retail bank as consumers’ primary financial resource.
In the past, the “un-banked” and “underbanked” have referred to new country arrivals and those otherwise disadvantaged in the U.S. financial system – minors too young to have a checking account, young adults with no credit history, people unable to maintain the minimum balance requirements for a checking account, and so on. People alternatively have treated this issue as a problem for charity, or as a way to take further advantage of a group with few financial choices (i.e. predatory financial services — payday lenders and other consumer “subprime” credit providers with double-digit interest rates, low limits and high fees). But as bank fees rise (without the needed longer bank branch hours and other services/features needed by many people – underbanked or no), alternative banking is becoming a smart choice for the informed consumer across demographic and economic segments.
In this environment of disillusionment with the banking system (alt financial services users say that there are issues with the lack of “service,” “trust,” and “respect” from traditional institutions), more people are turning to alternative financial service products – and the market for these services is growing. A 2011 Federal Deposit Insurance Corporation (FDIC) survey revealed that 25% of all U.S. households used an alternative financial product between June 2010 and June 2011. The study also found that non-bank transaction services (i.e. non-bank money orders, check cashing and remittances), were used by 39% of U.S. households.
Fast forward to 2015, and the percentage of alternative financial service users amongst the low and middle classes has grown to 39%. While new payment models have been introduced to serve the involuntarily underbanked, companies like PayNearMe, which enables users to pay for goods and services online and in-store with a card backed by cash paid to a physical outlet – have experienced issues with a fractured market for its services as well as logistical, even store security issues when dealing with larger cash transactions. As such, those solutions that court consumers who are voluntarily opting out of the bank and credit card system – such as bitcoin and other cryptocurrency exchange services and emerging high-service, high usability gift and other pre-paid card products are gaining ground as they begin to capture multiple segments of the diverse un—and under-banked market.
Interestingly as banks move towards pushing the consumer into a self-serve model via ATM’s, email inquiries and fees for in-bank visits, pre-paid card issuers are increasing the levels of service that have traditionally been out of reach to the under-banked and other users of pre-paid value vehicles. As such, being a pre-paid cardholder – particularly at the platinum levels – is an attractive alt fin consumer choice. At the least, pre-paid cards can be seen as a way to augment a bank account.
Millennials: The First Wave for Alt Finance
More importantly, choosing to be un-banked is now a viable financial lifestyle choice. Whether as a result of people’s disillusionment with traditional banks, a desire to share less personal information with institutions, or because XXX, people who are able to participate in the larger banked population are choosing to instead to become at least partially unbanked, with their financial assets divided across multiple financial accounts. As significant, some users are skipping the banks altogether for more lucrative products like loans and going directly to alt finance specialty services such as SoFi, a lender focused on the millennial market.
Increasingly post-Millennials are choosing to eschew traditional banks altogether with the rise of alternatives such as Robinhood. And while the Millennials do have bank accounts with the majors, their money and perhaps more importantly, their transactions, are split amongst several institutions — as a hedge against another financial crisis, if unconsciously. While Millennials need – and value – financial advisement as much as other segments, they are getting their information from like-minded peer sources versus a bank expert – and they are likely to get their advice from multiple sources as well.
But several trends indicate that the ranks of the underbanked are growing as the un-banked and underbanked are presented with ever more “banking-like” options and with the emergence of innovative new offerings that provide consumers with options that the banks have been slow to offer, or which have previously only been available to those with stellar credit and/or large deposit accounts. In comparison with fee-laden bank accounts, pre-paid cards are highly attractive. American Express offers:
- No credit check
- No minimum balance
- No hidden fees
- Value-add services such as online bill pay, tools to manage your money
- Cash-back on premier tier (with minimum loads)
- Free direct deposit
- Large scale cash re-load networks (45,000+) and ATM access
- Mobile capabilities
- Connected to your checking/savings account
In addition, the American Express-Walmart Bluebird offers:
- Dedicated customer service
- Transfer funds between Bluebird and checking/savings accounts
While the pre-paid business currently represents a relatively small 2% of the business, it may figure importantly as American Express struggles to keep its high net worth customers, and in the wake of such losses at the Costco co-brand account. The pre-paid business is experiencing triple year-over-year growth as a result of these attractive features, though in the scope of AmEx’s overall business, pre-paid is not contributing significantly to the company’s profitablity.
But that’s not the point. AmEx is developing consumer relationships — building brand, goodwill and a customer pipeline for higher margin products. In this manner, American Express is able to tap into consumer segments that had previously been unable to them, and to potentially retain the customer relationship if and when a pre-paid card user is able to, or decides to become banked.
In the final part of this five-part series on gift cards, we will look at two companies in particular – one a recently launched start-up and the other an established and fast-growing force in the pre-paid cards business – that are focusing on usability and merchant/brand relationships to capitalize on the rising use of stored value cards as non-bank financial account vehicles.
At the Plug and Play Retail and FinTech Expo on October 22nd, I had the opportunity to interview Dominic Venturo, CIO of U.S. Bank, on his views of the future of fintech and the role of the traditional bank in the new age cloud and increasingly mobile-first landscape. While its invigorating to cover the fintech newcos, they hardly have the monopoly on innovation. And, in the words of the legendary and enduring Grandmaster Flash, “You have to know where you came from to understand where you are going.” Partnering with the banking establishment can provide insight (and resources) that may save newcos time and iterations later.
Why choose to spotlight U.S. Bank? First, it has what Venturo calls a “wide lens” or breadth of business in that it runs a large payments business, is both an issuer and an acquirer, and also has a large retail bank. But mostly I find the U.S.’s fifth largest commercial bank interesting in that it makes innovation a core component of its culture. Aside from the sending of a C-level executive to speak at an accelerator/incubator micro-conference despite not having a venture wing, the company strives to support and to work with innovative partners including start-ups. States Andy Cecere, chief operating officer for U.S. Bancorp, “Innovation is part of our culture and it is how we view the development of new products and services. By anticipating what our customers will want or need in the future, we can better prepare our customers and company for whatever is ahead, capturing opportunities and avoiding pitfalls along the way.” Recent examples of innovation from U.S. Bank include advances in mobile payments, voice biometrics, tokenization and integrated mobile and web commerce solutions.
But what I really like about U.S. Bank is that it is willing to be a banking industry contrarian — and successfully so. One notable example is that while the majority of banks have cut back on small business lending (sub $1 million) over the past few years, U.S. Bank has increased its commitment to SMBs. In its fiscal year ended September 30th, the bank stepped up the overall dollar value of its SMB lending by 15.4% over 2014, while spreading its lending over an 18% greater number of loan recipients. The bank lent $776 million via 3977 loans in its fiscal year 2015 — a modest size loan average of $195,122 per business. Yet U.S. Bank reported an overall full year record performance in 2014 with net income of $5.85 billion.
But back to my interview with Dominic Venturo. Pardon the video quality — impromptu interviews necessitate the occasional shaky frame whilst one adjusts her grip on the cell phone… Thankfully the post-production team has added a little more pizzazz by posting each of my questions on-screen prior to Dominic’s answer.
Some interesting takeaways:
- It’s not so much the cloud now, it’s mobile.
- He sees the greatest fintech innovation happening in the minutiae of the payment life cycle — making in-app payments seamless, simplifying mobile payments.
- Passwords are going away for both internal use as well as consumer multi-factor authentication, with mobile phone-based biometrics being an area that U.S. Bank is focused on.
- Hardward tokens are not necessarily making a full-out comeback (for authentication) but there is a marked increase in their use — U.S. Bank uses them internally.
Bill and Melinda Gates’ to-do list will probably put yours to shame. This year, in the Gates Foundation annual letter, the duo outlined their long-term, 15-year roadmap for the challenges that they want to solve. Their four main goals:
- Health: Reducing the number of children who die before the age of five and the number of women who die in childbirth while eradicating diseases like polio.
- Farming: Educating farmers and advancing farming techniques to curb malnutrition and reduce poverty levels.
- Finance: Bringing mobile banking to developing countries to help people secure and make spending and sharing money easy.
- Education: Using smartphones and tablets to bring online education to the poor while empowering women and teachers.
Ambitious is an understatement for the list, but it doesn’t mean it’s unachievable. Whether its drinking purified poop water to draw attention to sanitation problems or helping India eradicate polio, the Gateses have always had a way of putting the spotlight on a few of the world’s problem and bringing government, media and philanthropical attention to it.
This year, though, Bill and Melinda are shifting from backing micro-finance organizations that empower small entrepreneurs to bringing banking to all — from the farmer who keeps his value in livestock to the family that keeps their money stuffed under a mattress. And it won’t be done by installing a Wells Fargo in every corner of Africa.
As they wrote:
[blockquote person=”” attribution=””]”The key to this will be mobile phones. Already, in the developing countries with the right regulatory framework, people are storing money digitally on their phones and using their phones to make purchases, as if they were debit cards. By 2030, 2 billion people who don’t have a bank account today will be storing money and making payment with their phones. And by then, mobile money providers will be offering the full range of financial services, from interest-bearing savings accounts to credit to insurance.”[/blockquote]
And while bitcoin believers have long been touting the power the digital currency could have in transforming remittances and payments in developing countries, that’s not the solution Bill Gates has in mind — although it is a starting place. “We need things that draw on the revolution of Bitcoin, but Bitcoin alone is not good enough,” Bill Gates told Backchannel.
Specifically, he cited bitcoin’s inability to reverse or recall transactions — you can only send bitcoin back to someone if you complete another transaction — and the lack of attribution, which many proponents view as a plus. Gates also seemed wary of bitcoin’s price fluctuations, which 2015 has already shown can plunge bitcoin down 20 percent one day to only have it spike the next.
That brings Gates to mobile phones as the key for bringing banking to frontier markets across the globe. His foundation already invested to expand M-Pesa, the Kenya-based mobile money success story, and bKash, a Bangladesh-based up-and-comer. But those two investments are just the tip of the iceberg for what needs to happen to bring banking, and most importantly, monetary security, to the rest of the world.
Here’s how Bill Gates summarizes his mobile banking goal:
That doesn’t mean it’s going to be easy to get everyone who owns a phone to be banking on it.
Gates acknowledged that regulators can pose a problem, and that his long-term view of bringing banking to developed countries relies on the ubiquity of the cell phone. And even if mobile phones spread, there’s still a challenge of getting one in the hands of everyone, regardless of gender. In Uganda, for instance, 73 percent of males own a phone compared to 52 percent of females in 2013, according to Financial Inclusion Insights. (That also reflects who owns the bank accounts as well, where only 18 percent of Ugandan males have a bank account compared to 6.8 percent of females.)
And then there’s the whole problem of if it’s not bitcoin, then what is the solution? Gates didn’t pinpoint a company or a technology to take this forward — M-Pesa and bKash are just the start. But he has hinted at what he expects the future to look like before. Check out his speech at the SIBOS financial conference in October 2014 and at the 33-minute mark, Gates debuts a video example of how he sees mobile payments working a few years down the road:
Four years since its launch, Kik is positioning itself as America’s version of WeChat, the messaging behemoth of China. It believes it has the right product (text messaging, the old-fashioned kind) and the right audience (almost half of U.S. youth) to become a proper mobile first platform.
Fresh off a recent $40 million funding round, cloud darling Docker just bought a small startup that the company feels fits in nicely with its focus on making application development easier with containers.
Circle, one of the giants of the bitcoin world, is finally allowing the general public to try out the service. Its offering is tailored to the global market.
As Myanmar opens up to the outside world and will soon get 3G cellular networks, how is the use of money and savings changing? A new report from a group that spent months studying what’s happening.
After an initial pilot program, Square is taking the wraps off its new lending program. Square is offering money upfront and deducting repayments directly from merchants’ credit card transactions.