Francesc Prior

The Use of Prepaid Cards for Banking the Poor

Prepaid products can become an effective instrument for banking the poor, as they can be used for collecting microdeposits and so operate as a low-cost account. Prepaid platforms have characteristics that make them especially useful for developing low-cost microfinance business models. Indeed, customers using prepaid systems do not need bank accounts or debit or credit cards. Prepaid issuers do not need to develop or invest in new technologies, as this mechanism can be used on a range of platforms, including PCs, mobile phones, hand-held and set-top boxes. Furthermore, prepaid products are specially designed for offering services demanded by the poor, such as micropayments, microdeposits and even microcredits. Lastly, they allow users to monitor their cash flow by receiving statements (some providers offer this feature online, others provide physical statements) or accessing balances through PCs, mobile phones, hand-held and set-top boxes. Besides collecting microdeposits, prepaid products (or SVCs as they are called in the United States) offer other services that can be very valuable for serving the unbanked population. As explained in this paper, prepaid products generally lack the identification and credit requirements that effectively bar millions of individuals from opening traditional bank accounts, especially in the United States. Moreover, prepaid products can be purchased and reloaded at a growing number of locations other than bank branches, such as check cashers, convenience stores and other retailers. Prepaid instruments can also provide immediate availability of funds at a cost that, in some cases, is lower than other alternatives for unbanked consumers. Also, prepaid products are difficult to overdraw, thus reducing the likelihood of unexpected fees. Lastly, many prepaid issuers offer some sort of bill pay option, especially branded cards that enable signature-based transactions, and a significant number of them offer remittances.

Banking the Unbanked Using Prepaid Platforms and Mobile Telephones in the United States

The rapid growth of mobile phone usage and the continuous rise in wireless coverage fuel the expectations that access to financial services trough mobile phones could transform the way financial services are provided. The emergence of new and more efficient business models, can potentially resolve supply inefficiencies that explain the large unbanked population that exists in the USA, much larger than in most developed countries. Nearly 40 million US households (approximately 73 million people) are financially underserved (CFSI, 2007), of which 15 million households (approximately 28 million people) are totally unbanked. This problem is explained by the non adequacy of the value proposals offered by financial institutions to the demands of the US customers. The areas of poor alignment refer mostly to the design of products and the marketing and distribution networks used. To resolve these misalignments, this paper will argue that business models based on prepaid cards as products and mobile phones as transactional and distribution channels could be used in order to close the supply gap. We will call the business model proposed based on prepaid products and mobile phones mobile banking, since these two elements are the basis of the business model used companies such as Smart Money and G-Cash in the Phillipines, Wizzit in South Africa and M-Pesa in Kenya.