Base of the (American) Pyramid in Financial Services

December 31, 2006

No, not that pyramid – I’m talking about the vast majority of people on this planet, the very poor, viewed mostly as non-persons by even their governments. And while very few in the United States live on less than a dollar a day, as several billion around the world do, many residents of this country face similar challenges. Especially among illegal (or semi-legal) immigrants, access to officially sanctioned identity – and thus access to the broad range of services most of us take for granted in our middle-class lives (bank accounts, cell phones, etc.) is difficult or impossible.

In many less-developed countries, this is changing, and it’s only logical that similar approaches would be adopted Stateside, especially in immigrant communities. The New York Times focuses on one such approach:

Since coming to this country eight years ago, Jose Dimas has bristled at the $8 fee he often must pay to cash his paycheck. He stews over the $10 charge he faces whenever he wires $150 home to his parents in Mexico.

Daunted by the requirements to open a bank account, Mr. Dimas had long kept his savings hidden in his apartment, and had worried that his money would be stolen.

But now Mr. Dimas, 32, a food preparer at a catering company, has a new tool that has eased his discomfort with all things financial. It is a special debit card, provided not by a bank but by a nonprofit worker center here, enabling hundreds of immigrants without checking accounts or credit cards to keep their cash somewhere safer than beneath their mattresses. The card also makes it easier to shop at stores as well as online.

“This card is better for me for a lot of situations,” Mr. Dimas said. “You don’t have to pay those big charges to send money back to Mexico. And it will be much safer. I don’t like keeping my money in my home. Someone could go steal the money.”

The worker center, called New Labor, normally focuses on preaching about worker solidarity and safety, but after seeing all the hassles that immigrants face with finances, it pioneered the new debit cards. In a survey of 480 immigrants who were members of New Labor and similar worker centers, 47 percent said they had no bank accounts.

Since November, New Labor has provided cards to 200 immigrant members, including some who are here illegally. Three other centers — in Hempstead, N.Y., Chicago and Los Angeles — have begun offering the cards as well, and organizers say they hope to make them available to tens of thousands of immigrants at 140 worker centers nationwide within the next few years.

Several financial experts said the new debit cards — named “Sigo,” combining the Spanish word for “yes” and the English “go” — are an ideal tool for 30 million workers, both foreign-born and native, who lack bank accounts and often face high check-cashing fees and frustrating obstacles in paying bills.

Sigo cards can also help so-called “unbanked” immigrants develop financial sophistication and eventually move into the banking system, these experts said, perhaps to obtain a mortgage or small business loan.

“It’s not just about reducing your financial costs and making your financial life easier, it also helps give you opportunities to get ahead,” said Jennifer Tescher, director of the Center for Financial Services Innovation in Chicago, which provided a grant to develop the program. “It saves you time and makes more products and services available to you.”

Like department store gift cards, the Sigo card has stored value, but unlike those cards, it is reloadable, meaning more money can be added. Users can reload the cards by having paychecks deposited directly into their accounts or by making cash deposits — for fees ranging from 50 cents to $5 — at a local pharmacy or worker center.

The Sigo card requires a PIN number and is affiliated with MasterCard, and can be used wherever MasterCard is accepted.

Cardholders face a maximum liability of $50 if their cards are stolen.

In essence, Sigo cards create a checkless checking account, allowing bills to be paid over the Internet or by having companies deduct directly from the accounts. That can save significant time among a population of workers who often take a day off from work each month to trek from office to office to pay electricity, phone and rent bills in cash.

While many American banks require two United States government documents to open an account, immigrants can obtain a Sigo card with just one form of identification, including birth certificates, passports or other records from their home country.

Cardholders can send a second card to relatives abroad, who can then make withdrawals at a local A.T.M. Several workers said it cost $15 to send $300 to Mexico through Western Union. But with the Sigo card, the card’s sponsors say, it will cost about $4.50 — the fee for using the A.T.M. in Mexico.

Companies like Western Union and Citibank already offer similar reloadable cards, but organizers at the worker centers say they believe they are better positioned to persuade immigrants to try their card. One of the biggest issuers of such cards is NetSpend, a Texas company that lets cardholders check their balances by cellphone.

One of the most interesting aspects of this kind of development is that – well, wouldn’t you like to be able to do this? To not have to deal with banks and absurd fees and constant demands to prove you are who you say you are; to do all your financial transactions via cell phone and online? And you will, of course – but such is the nature of the world today that some of the most innovative business practices and products come first to those groups who have been, until now, entirely unserved.

It makes sense: these are, after all, “high-risk” populations, or at least populations that the established players don’t know how to talk to. So NGOs and firms without the same capitalization  – but with knowledge of the populations they’re serving – fill the breach, and  start by offering terms they know that those populations can afford and understand. Meanwhile, the established markets slog along, more-or-less unchanged (because, of course, the established players are making a healthy profit the way things are now), until either their customers start noticing these other services and demanding them of their fancy “real” bank accounts and such – or until the previously-undercapitalized new players have gotten a solid hold on the previously-underserved markets, and start looking for
new pastures to plow.

Meanwhile, their previously-underserved customers have gained a degree of financial autonomy and savvy, and start looking further “upmarket” for additional services – which maybe these firms begin to provide, and start competing directly with established players, who in turn finally notice this great “new” market under their noses that they’d so carefully avoided for so long. And maybe then, with a new consciousness of the changing nature of the financial marketplace, they start thinking about ways they can hold onto their existing customers, and maybe, just maybe, dealing with banks and credit card companies will become something slightly nicer than emergency dental surgery.

I’m not holding my breath, of course – but hey, it could happen.