It’s an interesting irony. Banks like Citigroup (NYSE:C) or U.S. Bancorp (NYSE:USB) generally don’t want this segment of consumers as their customers because they’re not profitable enough to bother with. Yet, this same segment of consumers can be stunningly fruitful for other financial service companies.
That segment of consumers is simply called the “unbanked” … people who don’t have any sort of bank account with which to deposit, store or withdraw money. Some are unbanked by choice, while others are unbanked because they can’t meet the banks’ minimum deposit requirements without incurring ridiculous fees.
Either way, these folks still need cash and spending flexibility, and those who are providing that service are doing surprisingly well.
Investors should be interested in the “surprisingly well” part.
The Industry Is Worth How Much?
The statistics are stunning. According to a recent FDIC report, nearly 10 million households don’t have any sort of bank account. That’s about a million more households that didn’t have bank accounts in 2009.
The numbers get even crazier when you expand the category to “underbanked.” That description covers 24 million U.S. households that may or may not have bank accounts, but still use an alternative means to meet at least some of the cash and check-cashing needs.
The craziest number of all: $36 billion. That’s how much the underbanked spend on check cashing, payday lending, prepaid credit cards and the like every year.
And just to clarify, that’s not the amount of money being handled or passed through by the industry. That’s the amount these consumers are paying in fees and interest to facilitate these loans and cashed checks that goes directly into the purveyors’ pockets.
It’s a number that’s getting bigger every year, too, as the economic recovery continues to widen the distance between the haves and have-nots.
So how are companies tapping into that growth? Two ways:
#1: Prepaid Debit/Credit Cards
On the surface, they look and feel like the bank-issued credit card you carry around in your wallet. For that matter, they appear to be akin to the gift cards you see at the front of your favorite big-box retailer or grocer … the kind that can be activated by the cashier in the amount of your choosing, once you pay for it.
A Green Dot card is so much more than that, though.
Unlike most gift cards, a Green Dot card can be loaded, and reloaded; it’s designed to be reused, in fact. But it’s not a giveaway. Those cards cost $4.95 up front, plus the amount you load into them, then cost $5.95 in “maintenance” unless you spend $1,000 or more on 30 purchases or more in that month. It also costs another $4.95 for each reload. ATM fees at non-MoneyPass ATMs cost $2.50.
It’s not a stifling amount, but considering it takes no real effort from Green Dot to keep the card active once you buy it, it is easy money … not to mention reliable, recurring revenue. More telling is that Green Dot cranked up 2010’s top line of $377 million to $484 million, turning $52 million of it into a net profit. There is a market here.
#2: Check Cashing (Non-Bank)
If even a prepaid credit card is just too much of a headache for an underbanked consumer, check-cashing services (payroll, personal or government) remain a viable choice.
There are plenty of choices here too, like payday and pawn lenders First Cash Financial Services (NASDAQ:FCFS) or EZCORP (NASDAQ:EZPW). Both have nearly doubled their annual top lines between 2007 and now.
The industry and its companies seem to be under perpetual regulatory (and social) assault, and the market regularly punishes these stocks for exposing investors to that risk. The dip in the price of gold through the first half of the year didn’t help matters much on that front, either — at least for the pawn operations of these outfits. Most of these companies had only been too happy to trade gold jewelry for cash, then turn around and make a tidy profit on the resale of that gold.
Those regulatory fears haven’t been merited yet, though, and likely won’t be in the foreseeable future. And with gold back in rally mode, the already-solid pawn business might be on the verge of turning great again.
Yet, one of the biggest check-cashing names isn’t even a name that was built on check-cashing. It’s Wal-Mart (NYSE:WMT); perhaps you’ve noticed many of its locations have established money centers at the front of their stores over the past couple of years.
The fee structure the world’s biggest retailer charges in its check-cashing business is pretty typical … $3 for checks under $1,000, and $6 for checks over $1,000. The company won’t cash a check over $5,000. Wal-Mart also offers a no-fee reload of its MoneyCard — which is a Green Dot-serviced card in a Wal-Mart wrapper — if you opt to get a prepaid credit card rather than take the cash.
The fees seem reasonable on the surface, because they are. But, when you’re talking about a few hundred customers per day at a few thousands stores, it becomes big business (not to mention a big draw for Wal-Mart).
Say what you will about the ethics behind the industry. Just know that there’s still a big investment opportunity as a result of it. And, unlike the majority of industries, this one has proven to be fruitful — and grow — regardless of the economic environment.
Thirty-six billion dollars per year is a mighty big number to ignore.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.