Spotlight on Financial Services

Technology Aids the Unbanked

Wall Street Journal columnist David Wessel wrote a fascinating story recently that gives examples of how technology and globalization in financial services have helped rather than hurt the poor. The article focused on the 10 million American households that lack bank accounts. ATMs are often at the core of banks' strategies to offer services to unbanked customers. For example, Bank of America recently launched a service that allows people in the U.S. to use tellers, phone calls or the Internet to send money to relatives in Mexico. Recipients can access the cash from any of the 20,000 ATMs in Mexico. In another instance, Fleet Boston began offering a service in April that allows workers free and unlimited ATM access to their wages, which are deposited electronically by their employers. In essence, the bank offers "unbanked" workers a free, checkless bank account.

In both examples, technology allows the banks to offer services at relatively low cost and undercut other providers (e.g., check cashing outlets). It may also relieve the usage of high-cost bank teller services. In the Fleet example, a primary motivator to offer their service was the incentive to shorten lines at the teller windows that resulted from cashing 1.1 million checks each month issued by the bank's business customers to workers who don't have Fleet accounts.

The U.S. Treasury Department is encouraging banks to experiment with a variety of low-cost accounts that offer debit/ATM cards but no checks. Michael Barr, a former Treasury official, told the Wall Street Journal that these accounts are particularly promising because "they can reduce risk to banks and account holders by preventing accounts from being overdrawn, lower the cost of processing each transaction, expand availability much more cheaply than branches, and decrease the safety risk to low-income consumers who cash their regular checks and carry cash."

In addition, the added competition from the entry of major banks could save consumers hundreds of millions of dollars in fees. Approximately $18 billion flows each year from the U.S. to Latin America and the Caribbean, in transactions that average about $200 per transfer. Western Union has long dominated this market. However, Wessel reports that the typical fee for sending $300 from the U.S. to Mexico has fallen over the past two years from $25 to $15. A Western Union spokesman explained "there are a lot of factors, including competition in the market and efficiencies in service."

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