Turning cash into online payments for the unbanked

PayNearMe is one of many companies finding opportunity in services for millions of people who don't have bank accounts.

Debra Hopper does most of her banking during cigarette breaks at work.

“You can see that I have all of my transactions on my phone,” she says, holding her smartphone. “It’s not an app, it’s just texts.”

However, technically Hopper’s not checking a bank account. She gets her paychecks from the power company where she works  deposited directly onto a pre-paid debit card.

Hopper says she ruined her credit as a teenager and wants to rebuild it before she opens a bank account. So until recently, she paid her $550-a-month rent with money orders. That meant she had to go to Walmart or a check-cashing place and then mail the money order in and wait for it to clear.

But since December, Hopper’s used a service called PayNearMe. It allows her to swipe her debit card in a store to send money to her landlord.

“I know that my rent or my payment is getting processed immediately,” she explains. “So I don’t have to worry about slow mail or it getting rerouted. I know they’re going to get it by the time I leave the store.”

PayNearMe is one of a series of new companies and traditional banks developing products for the unbanked -- a good thing, says Jennifer Tescher, the president of the nonprofit Center for Financial Services Innovation. “We’re seeing a lot of innovation in this market because people are recognizing that there’s an opportunity.”

Over one in four U.S. households are either unbanked or underbanked, according to a recent study by the Federal Deposit Insurance Corporation. That means they don’t have access to a traditional bank account or turn to bank alternatives, like check cashers or payday lenders, for some of their financial transactions.

There are many reasons why someone might be without a bank account.

“Some people have had bank accounts and they’ve been hit by overdraft fees and have been blacklisted,” say Lauren Saunders, an attorney with the National Consumer Law Center. “They might not think they have enough money to make it worthwhile, and bank accounts are increasingly expensive.”

Still others might be undocumented or they simply might not trust banks with their money.

Historically, banking alternatives have charged high fees for their services, often because consumers had few alternatives. But companies like PayNearMe are hoping to fill this void and offer consumers increased convenience at a fair price. People can pay cash for things from car loans to Greyhound bus tickets at 9,000 different 7-Elevens or Ace Cash Express stores.

“It’s as though we lent the point of sale terminal at the 7-Eleven store to other businesses,” says Danny Shader is the company’s CEO. “So that those business suddenly had thousands and thousands of cash registers in the community where they could do business with consumers.”

PayNearMe’s business model is based on signing up companies -- landlords, lenders, and Greyhound, among others -- which in turn give their customers a bar code or a card with a magnetic strip they can use at select stores. There, the clerk scans the barcode or swipes the card and takes the customer’s money, as if they were buying soda or candy. However, the money actually goes to the company. PayNearMe charges a small fee for the service, which the company can  absorb or pass along to the customer. Shader says it’s usually not more than $4, which is typically less than walk-up bill payers or money orders.

The increasing number of companies interested in serving the unbanked market is positive delevopment, says Keith Ernst, an associate director with the FDIC.

But he also worries that some of these bank alternatives tend to be one-off products or services – a way to purchase things or pay bills or send money to family. This differs from traditional banks, where services can grow with the customer’s needs.

“An overriding question remains: what else comes from the relationships [consumers] strike up?” he says.

With a bank, a consumer might start with a savings account and eventually expand their relationship “to save for college, to save for short-term emergency needs, to get an affordable car loan and the like,” Ernst explains.

Another concern is that consumers typically need many of these one-off services to address all their financial needs.

“They’re having to knit them together and try to create a financial identity for themselves,” says Tescher, of the Center for Financial Services Innovation. “And hope that [identity is] recognized when they might find themselves needing more traditional credit or needing to interact with a more mainstream player.”

In other words, a whole slew of a la carte services might not help the unbanked get ahead in life long term.

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