inancial institutions (FIs) throughout the world have only recently begun to take notice of the unbanked. Because the majority of the unbanked are typically low-wage earners with few assets, FIs didn't see much upside in pursuing their business. That attitude is changing, however, in some places more quickly than in others.

Absa Bank is taking banking to the streets. Mobile banks that resemble bookmobiles are driven to rural and outlying areas to reach South Africa's unbanked.

The United States is on the slow end of the curve, with change only beginning to take place, said Dave Grano, Founder, President and Chief Executive of Oregon-based VERO, a financial technology company that is developing check-cashing methods to help FIs and retailers reach unbanked customers through ATMs.

FIs have historically been leery of unbanked customers, Grano said, because "they assumed that the reason these people were unbanked was because no one wanted to know who they were." FIs also were concerned about fraud. "The banks were experiencing fraud based on cashing their checks," he said.

It took research and convincing for the paradigm shift to start, Grano said.

A Different Culture

VERO commissioned a study through the University of California, Los Angeles, Anderson School of Management to uncover the habits of the unbanked and identify who they are. While the study supported some suspicions, such as that the majority of the unbanked in the United States are foreign-born and predominantly Hispanic, it also changed some.

"The study was everything we hoped for, but there were lots of surprises, too," Grano said. As expected, "The unbanked are primarily from other ethnicities that don't trust banks, and they find other ways to handle their funds," Grano said. But at the same time, Hispanics, who make up the fastest growing unbanked population in the United States, tend "to stay in one place, work at the same job and are overall very stable."

VERO also learned that the unbanked population is an untapped market, which is a valuable segment. "Getting new incremental customers is very difficult for a bank because, typically, they're fighting for customers with another bank," Grano said.

"There's not a gain [when an FI gets a new customer] because the customer is just moving from a different bank to your bank."

By tapping into the unbanked market, all FIs can benefit. But reaching that market has been challenging. Most of the unbanked in the United States speak English only as a second language, and many don't understand how basic banking services work.

Basic banking services also don't meet their needs, so the unbanked typically utilize alternative financial service providers that offer check-cashing and prepaid options.

Those types of services, however, have not been appealing to FIs, and for good reason, Grano said. FIs paid, on average, between $6 and $10 for cashing a non-bank customer's check.

"They were incurring a very high cost for supporting this unbanked customer transaction," Grano said. "We knew the next step would be to materially reduce the cost to the bank, so that it's not expensive for them to serve the unbanked customer and to attract the customer by providing this value."

The South African Connection

The situation wasn't that different in South Africa 10 years ago. In 1994, when South Africa became a democracy, the majority of the population was unbanked. So the country's four largest banks, FirstRand Ltd., Nedcor Ltd. (Nedbank), ABSA Group Ltd. and Standard Bank of South Africa Ltd., initiated efforts to reach that segment.

But according to Pravesh Mahadeo, General Manager of Absa's self-service channel, about 17.5 million South Africans are still unbanked. What the banks learned during the 1990s was that they didn't really understand the unbanked, and the unbanked didn't understand them. And FIs needed government backing to make tapping the unbanked market worth their while.

Language and social barriers were two of the main factors, but geography also played a role. South African FIs, not unlike their U.S. counterparts, had focused their services on the needs of the upper class, leaving the needs of the lower to middle classes unmet.

And in South Africa, the FIs were missing the majority of the population, since 82% of South Africa's people fall into the low-income bracket, said Lincoln Mali, Director of Convenience Banking for Standard.

Similar to the United States, 90% of South Africa's unbanked segment uses prepaid services. In fact, that segment completes between 300,000 and 400,000 prepaid transactions a month, Mahadeo said. FIs had to figure out how to provide services the unbanked wanted.

Taking Banking to the People

Of South Africa's 40 million people, 17.5 million are unbanked, Mahadeo said. And of that 17.5 million, 5.7 million are "economically active individuals" who don't have bank accounts.

That's because using banks hasn't been convenient, he added. Thirty-five percent of the 5.7 million live in rural areas, 25% live in informal settlement or shacks and 24% live in townships, all outside the metropolitan area where FIs are located.

To reach those areas, Absa deployed portable banks, which are set up and run on generators. Mobile libraries, which resemble bookmobiles, also have been deployed. They're driven into poor and rural areas, and they're equipped with satellites so residents can open bank accounts from anywhere.

The bank also has cellular network phone booths, where the unbanked can open accounts remotely. Since about 18 million South Africans regularly use cell phones, Mahadeo said, Absa saw cellular connection as a viable option.

Absa now has the largest ATM and POS network in South Africa, and the FI is continually expanding into previously disadvantaged areas. ATMs and 24-hour banking services provide options in five languages, Mahadeo said, and 3.4 million of the unbanked segment now hold services through Absa.

Standard Bank made strides to reach the unbanked as well. It began placing portable banks called "banks in a box," which are prefabricated structures that take about two weeks to construct, making them ideal for outlying and rural areas, Mali said.

In 2004, Standard placed 90 ATMs and 20 banks in a box that use broadband technology to provide network connectivity in areas where little or no infrastructure exists. The bank expects to extend its broadband sites to 300 throughout South Africa in 2005, Maili added.

In 2004, the bank installed 278 new ATMs throughout the country. Standard also sent its employees out to the tracks to talk with members of the unbanked segment about banking opportunities.

Through a program called "Train Talk," members of Standard's staff jump on trains and talk with people about financial services. The bank also hosts Q-and-A sessions about banking in rural and outlying areas, Mali added. "It's not that these people don't trust banks," Mali said. "They just don't understand them, and we must approach them and use terminology they understand."

FIs also have worked to target students and "pensioners," people over the age of 65. In South Africa, more than 2 million students and about 1.9 million pensioners are unbanked, Mahadeo said. FIs are working to educate those groups about everything from insurance to funeral policies, to gain their trust and get them comfortable with banks.

Banks Joined Forces

In 2003, FIs in South Africa joined forces to establish the Financial Sector Charter. The charter's goal: transform the country's banking and financial services industry to reach the unbanked.

According to Mike Lee, the ATM Industry Association's (ATMIA) Chief Executive, the charter was the catalyst for change. "[South African] banks are required by the Financial Services [Sector] Charter to take financial services to the masses so that lower income groups can save money and use ATMs to manage their finances better and more securely."

The Mzansi Account

In October 2004 the Mzansi account was launched. Its aim: meet the needs of the unbanked, namely students and pensioners. The pricing of the account is based on what an unbanked customer deems affordable on a pay-as-you-go basis.

There is no fee for opening the account, and the opening deposit must only be R (rand) 20 (about U.S. $3). Mzansi account holders also can make deposits and cash withdrawals at ATMs and the POS. The account is offered through eight banks in South Africa, including Standard, Absa and Nedbank.

At Standard Bank, Mali said, the Mzansi account is an additional service offered through Standard's EBank division, which launched in 1996. Through EBank, previously unbanked residents could open transaction and savings accounts and receive ATM cards for R 10 (U.S. $1.65). By 2004, Standard had signed about 3 million South Africans for services through EBank.

What That Means for the United States

During ATMIA's [second] "ATMs in Africa" conference in February 2005, Mahadeo and Mali talked about their institutions' efforts to reach the unbanked.

Lee said ATMIA is exploring what role it can play in encouraging other countries to follow South Africa's lead, as the number of unbanked segments across the world continues to grow.

ATMIA is seeking additional funding to develop joint customer education programs and campaigns that will help the ATM industry bring FIs and other ATM deployers together in a non-competitive space.

"Western countries have their own larger-than-expected unbanked and underbanked population segments, so what happens in South Africa, with major banks putting serious resources into resolving this issue, could provide a model for other countries," Lee said.

"This is good news for the ATM industry, because it brings a whole new set of ATM users and cardholders.

"The interest around the world is growing because of the increases in migrant labor and the need these laborers have to transfer money back from the host country to the country of origin," Lee added. "The worldwide ATM network can make these transfers safe and easy."

Original article: www.atmmarketplace.com/futurearticles.htm?article_id=22917&pavilion=112&step=story