Underbanked: King is right but doesn't paint a full picture

US commentator Brett King is right in his claim that ‘the underbanked don’t need banks anymore’ (FinExtra blog, Dec’12) but, frankly speaking, his is only half the story.

King offers an overview of some alternative financial services that provide the utility of banking. First he cites low-value convenience purchase accounts from retailers like Starbucks and Apple as one example of how consumers are banking elsewhere. This facility, however, will only account for a tiny fraction of an unbanked individual’s day to day spending. Then he turns to P2P lending, which may well be expanding rapidly but, in my view, can’t (and shouldn’t) be cited as a service that supports the idea of not having a traditional current account.

For me, the key to King’s claim is that the underbanked do, in fact, need basic banking facilities; they just no longer need to get them from a bank.

Take a closer look at the breadth and sophistication of services that are available from European e-money providers and King’s claim strengthens considerably. Here, a traditional bank account is actually a rather poor choice for the underbanked consumer.

e-Money insititutions are tailoring financial solutions specifically to suit the underbanked market and are gaining real traction as bona fide alternatives to traditional bank accounts. The best of these are delivered with an online account facility complete with an account number and sort code. This enables users to check their balance and set up standing orders to manage benefit payments and other regular transfers, without requiring a visit to a bank branch or enduring a raft of unwelcome (and often pointless) credit checks. No bank in sight.

The reloadable prepaid card model (which traditional European banks have always struggled to deliver effectively) is exploding. In the UK, the model’s growth is, in large part, being driven by the government’s flagship Universal Credit state benefits initiative which, when it kicks off in April, will require all claimants, including those currently unbanked, to open an account in order to receive payments. Faced with this prospect, low income and underbanked individuals are fast realising they now have attractive alternative options. They need not live in fear of tipping over their limit and incurring extortionate bank charges because with a prepaid account, they can only ‘spend what they load’. Moreover, when obtained via a Credit Union, the best of these e-money solutions offer incentive reward and loyalty schemes linked to high street merchants, which help cardholders generate automatic rebates on everyday purchases.

2013 will be a year of change for the underbanked segment and it’s great to see King banging the drum for banking alternatives. Finally, this customer segment is starting to get the services support it both needs and deserves.