Money service businesses have been granting the unbanked access to alternative financial services for a over a century. As traditional banking becomes increasingly expensive and exclusive, America’s underbanked population is relying on MSBs to bridge the gap. As we move further into the 21st century, FinTech companies are also popping up to meet the demand of today’s consumer.
In the US, approximately 9 million households, or 7% of the population, are unbanked. An additional 13% are underbanked, lacking full access to the traditional financial system. These households are shut off from the services many of us take for granted. An individual with a checking account enjoys the convenience of a myriad of digital options, including direct deposit, automatic bill pay, and easy money transfers between accounts and even with other people. Without a checking account, it is difficult to cash your paycheck, pay bills, and use a card for everyday purchases. For individuals with poor or no credit history, the challenges continue.
MSBs and check cashers fill the void with alternative financial services designed to help the underbanked complete everyday tasks. Individuals without a check account can take their paycheck to a money service business and cash it on the spot. These funds can then be used to pay bills through quick bill pay, reload a prepaid card for everyday purchases, and even sent to friends and family via money transfer. The money service business acts as the community hub for daily financial transactions.
Even if some of these unbanked households could acquire a bank account, many bank branches avoid low income neighborhoods all together, an act known as redlining. The phenomenon of redlining refers to banks avoiding areas which they claim are unprofitable. When banks stay out of these communities, the community members are even further shut out from the financial system. If a low income household does secure a bank account, monthly maintenance and overdraft fees can quickly chip away at the funds.
Instead of letting unexpected fees surprise them, these households opt to conduct their financial business with MSBs. At an MSB, the fees are clear and paid up front. No surprises down the road. This allows the underbanked and unbanked to more effectively manage their money. The fintech industry is taking note and creating new alternative financial services.
Fintech, or financial technology, is a burgeoning industry. Fintech companies are capitalizing on new technology and our ever-strengthening smartphone addiction. Peer-to-peer payment applications, like Venmo, and mobile wallets, like Apple Pay, are two examples of fintech. The term fintech now refers to any kind of technology applied to personal or commercial fintech.
Some fintech companies are working to specifically address financial inclusion or improve financial compliance. In Australia, fintech company MoneyCatcha is working to streamline the loan process by shortening turnaround time for applicants and reducing compliance spending for banks. The company is using financial technology to improve the experience for both the consumer and the financial institution. To do this, MoneyCatcha is partnering with HSBC Australia and using two blockchain platforms. Blockchain technology is the darling of the fintech industry.
The term blockchain refers to a continuously growing list of records. Each record is referred to as a block and these blocks are linked together securely in a chain using cryptography. Each block links to the previous block, building on the chain. A timestamp and transaction data are included in each block. By nature, blockchains prevent data modification and are nearly impossible to hack. Bitcoin uses blockchain technology for its decentralized currency.
Fintech & MSB Regulation
So how do fintech and MSBs fit together? On a basic level, MSBs are embracing technology to improve business processes and reinforce compliance. POS technology and machine-learning are helping MSBs capture transactional data and then process this data quickly and accurately on the spot. MSBs are using fintech to better serve their customers with mobile services, customer loyalty programs, and an improved customer experience.
On a regulatory level, fintech companies are now facing the same hurdles that MSBs have been jumping over for years. Currently, Fintech companies offering bank-like products and services across state lines are obligated to apply for multiple state licenses. After a lot of push back from the tech industry, this may be changing. The Office of the Comptroller of the Currency issued a white paper in December 2016 proposing to create a special purpose national bank charter for Fintech companies. This charter would help companies providing non-deposit banking products and services a simpler means for registration.
Regulators don’t really know what do with fintech. As the OCC and FinCEN clarify their stance and hand down new rulings, fintech companies will likely be left scrambling to comply with the latest regulation. Fintech and MSBs alike should invest in technology, data management, and machine learning capabilities to stay ahead of the curve.
The Future of Financial Services
As trends shift, one thing is clear: data is here to stay. Financial technology and data-management tools are the best friends of compliant MSBs. NCC serves the MSB and check cashing industries with advanced POS technology and a team that stays ahead of the latest compliance trends. NCC clients are able to view the activity at all of their MSB locations easily from a central system. From there, the MSB owner can drill down to a transactional level. As the technology communicates with national databases, relevant information is also immediately transmitted to the MSB’s financial institution. NCC’s technology keeps MSBs compliant and opens up the stream of communication between the MSB and the bank. This brings transparency and clarity to the relationship, which serves every party involved.
In addition to using technology, NCC also supports clients with real MSB bank accounts, extended deposit times, and rapid deposit turnaround. NCC forged a partnership with TransGuardian and Rapid Armour to bring nationwide cash logistics to MSBs across the country. Using the USPS, any MSB can send or receive cash to efficiently rotate their working capital. This is a game changer for money service businesses.