Noel Moran, founder and CEO of Prepaid Financial Services, examines how new entrants to the banking industry are offering prepaid bank accounts to service the UK’s unbanked population. Prepaid cards are offering a solution to a previously unsurmountable problem and there is no end to the positive results
The number of unbanked has fallen by 20% in recent years, partly thanks to innovation in technology; however, there are still approximately two billion people globally that lack access to basic financial services. This is not a problem that is exclusive to emerging and developing countries; in fact, almost two million adults in the UK do not have bank accounts.
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As well as those considered to be underbanked in the UK, according to the Financial Inclusion Commission (FIC), 13.1 million people are thought to have limited or no financial capability, leaving them vulnerable to unexpected or unplanned costs and bills that they may have not budgeted for. The FIC is looking to ensure that by 2020 every adult in the UK is connected to the banking system, with access to affordable financial services delivered to them via a channel that best meets their needs.
As it stands, options for the unbanked are limited with the major banks in the UK. Since January 2016, those who cannot open a current account may be offered a basic bank account, which allows the individual to make and receive payments with no monthly fees, penalty fees, or overdraft facilities.
This type of account is unappealing to banks, as the cost of setting up the account and producing a card and statements means that they make a loss on every account of this type that is opened.
Finally, an option
Fortunately, a number of new entrants are able to offer basic banking services in the form of prepaid bank accounts. Fintechs with an e-money license are able to issue cards and by developing mobile banking solutions which can provide a cost effective way of serving the underbanked. These prepaid bank accounts offer all of the benefits of a current account without the risks of overspending or fees, helping individuals to take control of their finances and budget more effectively.
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By GlobalDataBecause there are no credit checks required to open a prepaid bank account, some of the most vulnerable people in society – including those with no fixed abode or credit problems – may be able to get back on their feet more quickly by having better access to financial services. This is also hugely beneficial for those who previously had benefits paid in cash as it gives them a secure way of managing their money and a way to make and receive regular payments.
Individuals who did not have access to banking services often experienced delays in payments being made; prepaid cards and bank accounts eliminate these issues, and many local authorities across the UK are embracing prepaid solutions to ensure that claimants are able to access their benefits.
As these programmes are managed by a third party, this alleviates pressure on payments departments, and as well as cutting down on administrative costs, it also saves councils approximately 10% annually.
Previously ignored markets
Asylum seekers have also been given prepaid cards to reduce the risk of loss and theft of benefits payments as they travel across Europe. These accounts can be linked to mobile devices, providing crucial access to money on the go, and enabling contactless payments to be made.
By using cards rather than distributing cash, it is also easier for governments to track the movement of individuals, ensuring their safety and monitoring spend.
Mobile network operators are expanding their offering by providing prepaid cards. Lycamobile, which has over 14 million customers globally, is able to give its customers access to banking services via SMS, meaning that individuals do not even require a smartphone to use their services.
Prepaid cards are also available for the under-18s. In a recent scheme in Camden, young people in the care system, including those on free school meals and children with learning disabilities, had a monthly allowance loaded onto a prepaid card which they were then able to spend on leisure activities not previously accessible.
Banks would be wise to partner with e-money institutions that can offer an agile prepaid solution for young people, as it can provide a chance to begin building brand loyalty very early on.
Collaboration is key to service the unbanked without restrictions. The majority of fintechs need banks to be able to provide access to their networks, and banks need fintechs to deliver the agile technologies outside of the legacy banking infrastructure.
Although new technologies are already playing a huge part in improving financial inclusion in the UK, building partnerships between new entrants and traditional financial institutions will really unlock this opportunity and help the FIC to reach its target of financial inclusion for all before the next general election.
