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Mobile payments could depend on the unbanked

Jun 13, 2013 Sean Albert

While many Americans couldn't imagine what it would be like to not use a traditional financial service provider, there is a large swath of the population for whom this is a daily reality. For some, using alternative banking methods is a choice and for others, it may be a requirement due to various circumstances.

The unbanked and underbanked, as they are often called, make up a significant portion of the country's consumers and as such, there are spheres in which they are becoming more influential than ever before. Though tools such as ACH cards are often useful to meet their money management needs, these groups may find that emerging solutions like mobile payments suit their requirements even better. And as developers and financial institutions begin to understand that these consumers make up a key demographic, mobile transaction technologies could truly begin to take hold.

The perfect fix?
In a recent article for GigaOM, Hamed Shabhazi, chairman and CEO of bill payment service TIO Networks Corporation, explained how the underbanked could be the secret to growth in the mobile payments industry. Shabhazi noted that today, one in every five American households can be categorized as underbanked, amounting to approximately 68 million people in 2013. And while these consumers may not have access to traditional financial services, they do have modern tools at their sides: cellphones. In fact, Shabhazi pointed out that research from the Federal Reserve Board found that the underbanked are actually more likely than the average American to own mobile and smartphones, while at the same time being less likely to have Internet access at home.

But what does this mean? Shabhazi explained that since the underbanked likely use their devices as their main portals to online resources, they need solutions that are optimized for this kind of use. Many are already using their phones as a way to pay bills and perform other money-related duties, so they are likely to be receptive to the idea of mobile payments.

Shabhazi wrote that while there are some risks to catering to the underbanked, such as their potentially unpredictable nature, these consumers are known to be "first movers" when it comes to digital wallets. Since some of their existing finance management options can become costly due to fees, they very well may jump at the chance to save time and money with these new electronic means.

The TIO CEO further projected that mobile payments solutions will be key for low-to-moderate income small business owners. Shabhazi pointed out that Square is already proving to be a strong tool for many of these companies. Developers could use this knowledge not only to further assist these enterprises, but their underbanked customers as well.

Why the underbanked need options
But what is the fuss? As the idea of mobile payments being of benefit to the underbanked takes hold, it is important for providers to understand exactly why Americans actually need access to financial institutions, whether they be traditional or alternative services.

According to a study from the Federal Reserve Bank of Boston, the unbanked and underbanked have to endure indirect costs of not having the same financial resources as some other Americans. One of the most significant is the fact that without a bank account, these people may miss out on many opportunities to build their credit, and without a strong consumer credit report, it can be difficult to get by. The source emphasized that not only are these indicators used in loan decisions, but they can also come into play in terms of gaining employment or housing.

If developers and alternative financial institutions play their cards right, they may be able to encourage the unbanked and underbanked to adopt mobile payments, especially if some of those solutions offer ways to build credit. This benefits consumers and in turn, businesses in all industries.