Increase in Mobile Banking Services an Opportunity for Unbanked Consumers

This article is part of a continuing interview series that spotlights important views from experts in the community and economic development field.

With the increase in consumers' use of electronic technology and communications, there's a growing reliance on mobile banking and payments for financial management. A recent consumer survey by the Fed Board finds that the ubiquity of mobile phones among U.S. consumers is changing the way they access financial services and make payments. Despite the increase in the use of mobile channels, however, consumers are still balancing the convenience and timeliness of mobile networks with concerns about costs and security risks inherent to the transactions. As this trend affects the evolution of payments systems and banking options, it raises questions about consumer protection, financial regulation, and the future of the financial services industry.

A recent Pew Research Center survey notes that these trends are prompting a number of financial services and technology firms to set their sights on integrating mobile devices into the broader multitrillion-dollar retail economy. But while the focus has been on how to ensure that mobile transactions are safe and accurate, emphasis is shifting to the payment and money transfer efficiency afforded by mobile devices.

Kate Marshall Dole, an innovation and research analyst for the Center for Financial Services Innovation (CFSI), says that the Fed survey confirms CFSI's theories on the low- and moderate-income (LMI) population's access to mobile phones and their use for managing money. Ana Cruz-Taura, senior regional community development manager at the Miami Branch of the Atlanta Fed, spoke with Dole on the potential that mobile banking and payments represent for reaching the unbanked and underserved communities.

Ana Cruz-Taura: In general, CFSI promotes access to mainstream banking for underserved communities and focuses on the relevance of bank products and services to LMI communities. How does mobile banking fit into this goal?

Kate Marshall Dole: Across this population, access to mobile phones is broader than access to traditional banking and Internet banking. For the underserved population, mobile services are not substituting [for] the Internet—since these consumers are less likely to have consistent access to the Internet through a computer at home—but instead providing a new point of access. Many financial institutions have not seriously contemplated the LMI community when developing mobile services, instead targeting more affluent customers. For example, many mobile services provide personal money transfer but not bill pay or any type of stored value option. The Fed's research shows that there is a real opportunity inherent in targeting underserved populations.

Cruz-Taura: The growth in mobile phone usage undoubtedly has had an impact on consumer behavior. The Federal Reserve study concludes that mobile banking is a growing trend that is shifting into high gear. What are the trends you are seeing across LMI individuals and households? Do you observe changes in the ways they are accessing financial services through mobile technology?

Dole: Based on research of mobile device usage by income group (for example, through the Pew Internet & American Life Project) and trends among prepaid wireless carriers, we have seen a clear increase in the access to smartphones across the population, including lower-income segments. We are starting to see a small number of innovators focus on developing services targeted to the underserved community, and mobile services in the prepaid space are also increasing. In general, mobile devices allow individuals more timely and convenient access to information about their income and expenses, allowing for more effective money management practices.

Cruz-Taura: The study suggests that the traditionally underbanked are trending ahead of the rest of the population in terms of mobile banking usage. According to the study, in the past 12 months 29 percent of consumers who use check-cashing services and/or payday lenders used a form of mobile banking. What are your thoughts on this?

Dole: This finding is interesting, and it is consistent with CFSI's hypotheses on mobile banking and the underserved. Underbanked consumers tend to be younger, and mobile device usage and engagement also is heavier among younger consumers. It's not too much of a reach to suggest that underbanked consumers would be more likely to use mobile banking than the general population. In addition, as we discussed earlier, the fact that these consumers are more likely to access their accounts through mobile channels than through the nonmobile Internet (contrary to more affluent consumers, who may be regular users of online banking) suggests that they might be more likely than the population as a whole to use mobile banking.

That said, you can also infer that, unlike mainstream consumers for whom mobile services are merely a novelty, people with less time, less access to transportation, or fewer easily accessible brick-and-mortar options would genuinely benefit from the convenience of mobile services. For example, using a smartphone to reload cell phone minutes or utilizing prepaid cards to pay utilities through a mobile application offers significant advantages to LMI consumers.

Cruz-Taura: Are there any other future trends we might look to given the growth in popularity of using mobile devices for banking services and making payments? Any future opportunities for LMI individuals and households, or potential risks or future challenges we should be considering?

Dole: Continued growth in smartphone penetration is certainly promising, especially as it permits people to do more with a phone and to access more information relative to what can be done with nonsmart-feature phones. Being able to see the transfer of money in and out of an account in real time can be very helpful to those who are living paycheck to paycheck and who don't have a financial cushion. For example, being able to track account information in real time could help a consumer avoid triggering an overdraft charge. Additionally, being able to accept card-based payments through a mobile device is an important development for service sectors where there are likely a large number of underbanked individuals such as taxi drivers, nannies, and handymen. Mobile payment receipt devices can help people keep track of revenue and document their business transactions and allow them to process credit and check payments safely.

In addition to mobile payments and banking, we [CFSI] have been interested in the growth in virtual prepaid cards that also offer potential for meeting the financial needs of underserved market segments. Because virtual cards contain dynamic account numbers, they offer the benefit of higher fraud protection. Today these cards are used only for online payments, but if their use is expanded, they could be more meaningful for these consumers.

Our [CFSI] focus today is on informational services within mobile banking that help increase consumers' awareness about their day-to-day finances. We're interested in seeing the infrastructure to support mobile payments develop further, as well as the trends in usage of mobile platforms by underserved consumers. Mobile banking needs to provide safe and secure access to banking services, not just a new way to spend money.

For more information on the regulation of mobile payments, read the testimony of Stephanie Martin, associate general counsel at the Federal Reserve Board of Governors, before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, June 2012.