Alternative Financial Services December 2012
Table of Contents
Alternative Financial Services ................................................................................................. 3 Key Drivers of AFS in the US.................................................................................................. 5 Current Status of AFS ............................................................................................................ 7 Future of AFS ........................................................................................................................ 9
Table of Figures
Figure 1: Alternative Financial Service Providers ..................................................................... 3 Figure 2: Under-/Unbanked Population in the US .................................................................... 5 Figure 3: Unbanked and Under-banked Consumers Support a Range of Service Fees ............. 6 Figure 4: Change in Population Percentage by FICO Score ..................................................... 6 Figure 5: E-Commerce – Net Revenue (Total Revenue less Loan Loss Provision) (USD Mn) ... 7 Figure 6: Dollar Volume of AFS Transaction (USD Bn) ............................................................ 8 Figure 7: AFS Transaction Value (USD Bn)........................................................................... 10
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Alternative Financial Services Alternative Financial Services Overview Alternative Financial Services (AFS) are services offered by providers, outside the traditional banking space. Many times, the AFSs are actually not alternative to bank services, rather they are services delivered outside brick-and-mortar bank branches. The alternative financial industry is made up of non-bank check-cashing outlets, payday lenders, pawnshops, rent-toown stores, etc.
AFS Segments The alternative financial services can be divided into two segments: • •
Transaction Products and Services: These services are primarily used for financial transactions. For example, prepaid cards are used for point-of-sale (POS) transactions, while remittance could be one-transaction by an unbanked individual Credit Products and Services: Under this, credit services provided by any non-bank are covered. Interest rate charged by alternative financial service providers are generally higher than the banks
Figure 1: Alternative Financial Service Providers
Type Transactional
Products/ Services Check Cashing
Services Provided Check-cashing services convert checks such as payroll checks, personal checks, and government benefit checks into cash. Check-cashing services provide immediate cash conversion without holding funds and without a bank account.
Fees/Rate Per Transaction Fees range from 1%- 4% of the face value of payroll or government checks. For personal checks, it is up to15%
Remittance
Remittance services wire money from one location to another, typically from immigrants in the United States to their families abroad.
Fees USD 10 - 12
Money Order
Money orders are alternatives to personal checks, do not require a bank account, and are used to pay bills, such as rent or utility bills.
Fee for domestic money order USD 0.5-USD 1.5. Fee for international money order USD 3.85
Prepaid Cards
Prepaid cards refer to a variety of debit cards that store money electronically and can be used to make transactions with retailers that accept card payment networks (Visa,
Monthly maintenance fees on average about USD 5. ATM withdrawals – USD 2.50
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Type
Products/ Services
Services Provided etc).
Fees/Rate Per Transaction USD 3-USD 10 each time card is loaded with cash
Prepaid cards are generally similar in function to bank debit cards and can be used to make purchases, store money and withdraw cash at ATMs.
Credit
Walk-in Bill Pay
Walk-in bill pay allows customers to pay their utility, credit card, phone, internet bills at AFS provider locations.
USD 1-USD 2
Payday Loans
A payday loan, otherwise known as deferred deposit loan, is a small, short-term loan repaid on the borrower’s next payday.
The check (or bank access agreement) includes a fee, usually between USD 15 and USD 20 per USD 100 borrowed. Expressed as an annual percentage rate (APR), these fees range from 391% to 572%.
The loan sizes are typically between USD 100 and USD 500. The borrower visits a payday loan store with proof of income. He/she writes a post-dated check or grants the payday lender access to draw from a checking account. Auto Title Lending
Auto title loans are short-term loans issued with pledged collateral in the form of the auto title.
Interest rates range between 1.5% and 25% monthly
Borrowers keep physical possession of the automobile under the terms of the agreement, but pledge to turn over the title to the lender if the terms of the agreement are not met. Pawn Lending
Pawn loans are short-term loans issued with pledged collateral. This is a secured lending transaction in which the lender typically takes possession of an item securing the loan.
Interest rates range from about 1.5%- 25% monthly
Refund Anticipation Loan
Refund anticipation loans (RALs) are short-term loans, typically 2 weeks in term, offered by tax preparers and secured by the borrowers’ expected tax refund.
Fee ranges between 2% and 5%
Rent-to-own
The rent-to-own product sells consumers goods including furniture, computers, appliances and electronics, through installment
Effective prices 2 to 3 times retail.
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Type
Products/ Services
Services Provided
Fees/Rate Per Transaction
payments. Under the rental-purchase agreement, consumers own the goods at the end of the agreement
Key Drivers of AFS in the US Growing Unbanked and Under-banked Population AFS is seen as a viable alternative to banks for the 26% of US households that are either under-banked or unbanked.1 These consumers, buffeted by both the economy and profit maximization strategies of retail banks, have been prime targets of non-traditional financial service providers offering transparent pricing, convenient retail locations and bespoke products that can be used according to the consumers’ needs and preferences.
Individuals (millions)
Figure 2: Under-/Unbanked Population in the US 180 160 140 120 100 80 60 40 20 0
>170.0
43.0 17.0
Unbanked
Under-Banked
<$70k Income
According to the Federal Deposit Insurance Corporation (FDIC), unbanked and under-banked consumers pay over USD 70 Bn in fees annually across a number of financial product categories.
1
http://www.packagedfacts.com/Underbanked-Unbanked-Consumers-2826947/ 5
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Figure 3: Unbanked and Under-banked Consumers Support a Range of Service Fees
Money orders
$2.0 $2.0
UnderBanked
Banked
$0.3 $1.0 $1.0 $2.0 $2.0
$2.0 $2.0 $6.0
Checking/Savings/CDs Credit scoring
7.0
Prepaid and payroll cards Auto title lending
$7.0
Remittances
Credit card fees Walk-in bill pay $38.00
Check cashing Pawn shop Rent-to-Own
Payday lending
Recession The recent subprime crisis and weak economic development have converted a large portion of population from bankable to unbankable and less-bankable. The populations with low FICO score are being ignored by banks and left to be served by only alternative financial service providers. Figure 4: Change in Population Percentage by FICO Score 30% 25% Less Bankable
20% 15%
More Unbankable
10% 5% 0% 300-499
500-549
550-599
600-649
Pre-Recession
6
650-699
700-749
Apr-10
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2011
750-799
800-859
Source: www.myfico.com / FICO Banking Analytic Blog / 2011 Fair Isaac Corporation
E-commerce The growth of e-commerce has been spectacular in the recent past. The higher adoption of ecommerce domestically and globally has been fueling the growth of online payment providers such as PayPal. 2
Figure 5: E-Commerce – Net Revenue (Total Revenue less Loan Loss Provision) (USD Mn)
$350
136% – Growth (2.75 Yrs)
$300
37% – CAGR
213.4
$200 145.8
114.4
53.3
20.9
$100 $50
278.6 165.3
$250
$150
344.6
124.9
160.1
164.2
2010 U.S.
2011 Foreign
179.3
$0 2009
LTM-09-12
Regulation The 2011 FDIC survey revealed surprising statistics on just how many Americans choose to have little or no financial relationships with traditional banking institutions, choosing instead to patronize AFS. Stricter regulations such as regulation on overdraft, interchange fee, etc. have made serving the low net-worth customers loss making. To overcome the lost revenue, banks have started charging either higher or newer fees such as overdraft fees of USD 35, maintaining monthly amounts, recurring card fees or ATM transaction fees among many others. This move by traditional banks has led to switching off hundreds of their customers to alternative financial services.
Current Status of AFS AFS Transaction Volume Volume of AFS transactions is estimated to be USD 320 Bn for 2009. This figure is likely to be understated, as estimates are not current or available for various AFS segments. According to Financial Service Centers of America (FiSCA), more than 13,000 non-bank financial services companies operate nationwide, providing a variety of financial services, primarily check cashing. 2
Cash America International, Inc. 7
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Figure 6: Dollar Volume of AFS Transaction (USD Bn) Buy-Here-PayHere Auto Loans 80
Check Cashing 58 Money Orders 17
Rent-to-Own Transactions 7
Payday Loans 48
Remittances 46 Refund Application Loans 26
Open Loop Prepaid Cards 39
Source: FDIC
Remittance In 2009, the US was a leading primary remittance sending country with 48% of remittances flowing from the US.3 Money remittance market for the US is estimated to be around USD 400 Bn in 2013.
Pawn Stores Pawn stores in the US have increased at a CAGR of 10% over 2007-2011 to reach10, 000. Only three publicly-traded companies represent 13% of the pawn industry, while the remaining is dominated by the small independent players. 4
Payday lending According to the US Government Accountability Office, payday lending in the US is estimated to be an approximately USD 40 Bn a year industry.
Prepaid Card Prepaid card market in the US has evolved away from the basic gift cards (â&#x20AC;&#x153;closed-loopâ&#x20AC;?) towards general-purpose reloadable open-loop cards. Open-loop, network-branded (e.g., Visa and MasterCard) prepaid cards are driving industry growth as they are treated as regular debit cards by the payment industry players. Total Dollar load on Open Loop cards is expected to grow at 24.6% per annum to reach USD 353.8 Bn in 2014
3
http://www.prc.gov/%28S%28w1anpsztac1cjjils1ofbnr5%29%29/prcdocs/library/archived/Unbanked_Report.pdf 4 http://assets.nationalpawnbrokers.org/2010/10/NPA-IO-Interim.pdf 8
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Figure 5: Total Dollar Load on Open Loop Cards, 2007-2014 400
$353.8 CAGR: 24.6%
350
$281.7
300 $226.9
250 $183.1
200 150
$148.4
>170.0 $77.5
100
$52.4
50
0 2007 Load (Actual)
2008 Load (Actual)
2009 Load (Actual)
2010 Load (Actual)
2011 Load (e)
2012 Load (e)
2013 Load (e)
2014 Load (e)
Figure 6: Non-cash Payments
2006
Number
Number
75.74
796
109
72.2
663
13.8
-3.5
4.6
-1.6
30.5
41.6
1,363
24.5
31.6
1,292
-6.1
-10
-7.1
-8.8
Electronic payments
64.7
34.14
528
84.5
40.6
481
19.8
6.5
9.3
6
ACH
14.6
30.97
2,122
19.1
37.16
1,947
4.5
6.2
9.4
6.3
Credit card
21.7
2.12
98
21.6
1.92
89
-0.2
-0.2
-0.2
-3.4
95.2
Checks (paid)
Debit cards
Value
Average
Number
CAGR (%)
Average
Total non-cash payments
Value
Total change 2006 -2009
2009
Value
Number
Value
25
0.97
39
37.9
1.42
38
12.8
0.4
14.8
13.5
15.7
0.62
40
23.4
0.86
37
7.7
0.2
14.3
11.2
PIN (Online)
9.4
0.35
37
14.5
0.56
39
5.1
0.2
15.6
17.3
Prepaid card
3.3
0.08
23
6
0.14
24
2.6
0.1
21.5
22.9
General purpose
0.3
0.01
41
1.3
0.04
33
1
0
63.4
48.8
Private label
1.9
0.03
18
2.7
0.04
17
0.8
0
11.8
9.5
EBT
1.1
0.03
27
2
0.05
28
0.9
0
21.4
22.6
ATM cash withdrawals
5.8
0.58
100
6
0.65
108
0.2
0.1
0.9
3.8
33.1
42.3
1,278
27.8
32.35
1,165
-5.3
-9.9
-5.7
-8.6
2.6
0.7
272
3.3
0.75
227
0.7
0.1
8.7
2.4
Signature (Offline)a
Checks (written)b Checks converted to ACH
Numbers in billions and Values in trillions of USD. Figures may not add due to rounding. Source: FDIC
Future of AFS Transaction value of AFS is expected to grow 9% per annum to reach USD 520 Bn in 2015 from USD 338 Bn in 2010. AFS transaction products are considerably more widely used than AFS 9
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credit products. In 2011, 23.3% of the US households used transaction AFS, while 6% used AFS credit products. Figure 7: AFS Transaction Value (USD Bn) 600 CAGR: 9%
500 400 300 200
520 320
338
2009
2010
100 0 2015
AFS Transaction Value (USD Bn)
Demand for AFS is increasing among under-banked people in the age group of 18-34 years, and even among those with mid-high incomes mainly due to lack of financial literacy, mounting debt, depleted savings, and difficulty in obtaining credit.
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