Missing the Mark: Loyalty and the Unbanked

Some 9.1 percent of families in the U.S. do not have a deposit account of any type, according to a recent household survey from the Federal Reserve. This market segment lives check to check and typically avoids opening bank accounts because of a lack of funds combined with a deep distrust of banks.

For the unbanked, even a simple transaction — such as getting a cell phone or a cable line installed — can be a daunting task because the individual has no credit history and no credit card.

Prepaid Debit Products

This consumer pain has been the catalyst for a number of prepaid debit products, such as Green Dot by Next Estate Communications and Fastcard by InComm.

Both of these products are prepaid debit cards that give the user the benefits of a “real” credit card without a credit check or bank account. At first glance, this seems like a great deal for the unbanked, with such features as universal acceptance everywhere MasterCard is accepted, reloading stations at thousands of locations nationwide and ATM access.

Intrigued by the value proposition, I took a field trip to CVS earlier this year for some intensive market research — I went to buy a Green Dot card.

I spotted the card on the shelf near the cash register and asked the teenage cashier to active my card and load on US$50, which I paid in cash. I paid the $9.95 activation fee and left the store ($40 remaining).

I used that card for another $10 purchase ($30 remaining) and forgot about it for two months, while unknowingly paying the $4.95 monthly card maintenance fee ($20 remaining).

After checking my balance online, I became frustrated and went to the ATM to withdraw my remaining funds, where I encountered a $2.50 ATM fee and a $10.00 card liquidation fee. The ATM dispensed the remaining $7.50 and I shook my head. After starting with $50, all I got was a $10 purchase and $7.50 in cash.

Green Dot made about $32.50 on my $50 and I’m a little bit poorer than when I started. If I was an unbanked individual and that was my last $50, I’d be outraged.

Important Rules of Loyalty Marketing

With great pain, however, comes great opportunity (and a great case study). Green Dot is guilty of violating at least three important rules of loyalty marketing:

1. Don’t trade loyalty for short-term financial gains. It’s not worth it. Green Dot’s fees are so egregious that they actually encourage switching to a competitor. Considering how little consumer loyalty exists for a commodity product in the first place, this is the wrong play here. The right move is to develop some sort of a personal relationship with the consumer and reward him/her for putting more money on the card and keeping the card longer.
2. Respect the consumer. Unreasonable and hidden fees are an insult to the consumer’s intelligence. Good consumer marketing sells products, but viral marketing within a community really sells products — especially those that are directed to immigrants.
3. Pay attention to demographic changes. This basically translates to “Think Latino.” The vast majority of the unbanked identify as Latinos. Given the influx of Latino immigrants into the U.S., this population is only going to get larger. It is imperative for banks and non-bank financial services providers to earn the trust of this community. As mentioned above, trading loyalty for short-term gains prevents any provider from leveraging loyalty at some point in the future to cross-sell other financial services, like remittance products, to what will eventually become the most important ethnic group in all of banking.

Know Your Customer

So where’s the opportunity with the unbanked? Two places — prepaid debit cards and remittance products. For those of you who aren’t in the industry, remittances are payments sent home by immigrant workers. In 2003, Latin America received $38 billion of those payments, up from $32 billion in 2002. Of that sum, immigrants in the United States sent about 75 percent, according to the Inter-American Development Bank.

Interestingly enough, many of the largest players in prepaid debit cards and remittance products aren’t banking titans like Citigroup and Chase, but are instead third parties like Next Estate Communications and myriad of more nimble and entrepreneurial companies.

So, what does this mean for the loyalty industry?

It’s time to expand from just thinking about the 35-year-old suburban white mom who drives a minivan and uses Upromise to shop for her groceries. The industry needs to take best practices from the credit cards rewards business and create rewards programs specifically targeted at various immigrant groups and the financial services products like prepaid debit cards and remittance products, that are absolutely essential to this demographic.

For those of us in the loyalty marketing industry, it’s time to step into the shoes of the unbanked and walk around for awhile. Hopefully, your market research won’t be that much more expensive than mine.