Serving the Unbanked and Underbanked

Convenience stores are uniquely positioned to provide financial services to the nation's 25 million unbanked, and 40 million underbanked people with no or low credit scores, because "lower income consumers tend to be heavier users of c-stores for food and beverage already," said David Bishop, partner in the Willard Bishop LLC retail consultancy, Barrington, Ill.

"The unbanked include 24 percent of black and 25 percent of Hispanic households, compared with 5 percent of whites," Bishop said.

Because banks and credit card companies "look past them," their ATM/money order/check cashing business has become integral to convenience stores, added Bishop, who noted high activity "in any market with a high concentration of first- or second-generation immigrants, such as Cubans in Miami or Puerto Ricans in New York. They look for locations where it is easy to wire money back home. When they find stores friendly and accommodating, they're vocal within their community and prompt others to go there too. This is invaluable in building business."

Concurring, Steve Verleye, general manager of the e-payment division, Coinstar, called financial services for the underserved "the big comer. C-store owners look across the lot at check cashing stores and see the customer traffic all day long. 'What if I can get them to come here with money in their pocket?', they think."

Indeed, with fees typically far lower than those in check cashing stores, and sites that are frequently more convenient, c-stores with banking kiosks or other mechanisms for moving money can become one-stop financial destinations -- to turn a paycheck into cash, minus a fee, or apply the value to a reloadable spend card or store gift card.

The economic model for a kiosk makes sense: Stores negotiate a percentage of volume going through the device, devote very little labor if any to it, and incur only electricity and merchandising opportunity costs for the 2-foot-by-2-foot or 4-foot-by-4-foot footprint. For security's sake, an armed courier typically replenishes money and paper materials on a schedule coinciding with its regular store stops.
According to Coinstar, a c-store could average $1,500 to $2,000 in revenues from e-pay products. Margins differ by product category and product offering, but the average margin is around 10 percent.

"So a c-store could bring in $150 to $200 a month in profit per store. That's for a no inventory, turnkey solution which takes up around 2 square feet in a store. Average revenues per square foot would therefore come in at $750 to $1,000 per month," according to Marci Maule, a Coinstar spokeswoman.

Automated Bill Pay Gets Techie
Automated kiosks for cash bill payers have grown in c-stores the past few years (7-Eleven's Vcom kiosks and Circle K's ZapLink kiosks are two examples). Now, TIO Networks, an established kiosk supplier with 900 retail sites, will begin deploying hybrid ATMs that accept cash through a distribution deal with Electronic Cash Systems.

"The convergence of ATM and kiosk functionality has taken a while to catch on. But software and hardware enhancements, consumer acceptance and a better understanding of transactions … are fueling new acceptance," said TIO founder and chief executive Hamed Shahbazi in a prepared statement. "Advertising at the ATM hasn't really worked for most … and bank branding is solid. The only other truly transactional opportunity is to accept cash …. When the customer looks at these hybrid ATMs [and kiosks], they know it's a one-stop shop."

He believes the ability of ATMs to accept cash will "open doors for other revenue-generating functions, such as mobile phone top-ups and stored-value/gift card dispensing and activation."

Is Success in the Cards?
As distributors widen appeals with diverse cards (from iTunes to Starbucks, for example) and lessen their risk with better security controls, they bring c-stores turnkey assortments, merchandising, replenishment and fee schedules that allow chains to take a no-fuss, no-muss approach. Moreover, since cards have no value until charged at the register (on some, only after an identifying phone call to the payment network), retailers are protected from theft losses.

"The minimal risk to retailers is they sell these cards to a consumer who most likely will use them somewhere else, so they just earn profit on the cards," Bishop explained. "As the market embraces them, retailers almost become obligated to sell them in order to hold onto their customers."

No chain, distributor or supplier source interviewed for this story could link the sale of prepaid reloadable spend cards, long distance or wireless cards, or store value or music download cards to measurable gains in retail customer counts, trips or transaction size. The channel doesn't measure this so closely, although distribution is indisputably broadening on fees that typically range as follows:

-- Purchase fee of a reloadable open payment general spend card --- $5.95 for Discover, up to $14.95 for other network brands, plus reload fees of $2.95 to $4.95 or more.

-- Purchase fees for Discover, Visa or MasterCard predenonimated cards -- $3.95 for a $25 card, $4.95 for a $50 card, $5.95 for a $100 card.

"Our instant-issuance branded cards gratify customers, compared with the old days of taking seven days to buy, register and receive a card," said Jerry Uffner, senior vice president-sales at nFinanSe, a supplier of Discover open payment and gift, payroll and general spend cards. He says he feels the cards' striking designs are priced more reasonably than Visa or MasterCard. "Open payment is new territory for smaller- and medium-sized chains. Retailers care only about the brand. They don't want anything to do with the cardholder, and they don't want to absorb any theft risk," he added.

In his opinion, the gift cards are convenience items frequently bought by busy women. "My 7-year-old had a birthday and got eight gift cards," Uffner noted.

Card-selling opportunities are vast for retailers who are alert to the rhythms of consumer life. "Watch the trends," Uffner said. "If General Motors closes a factory somewhere. Or see how teens prefer to carry cards over cash, or how the cards allow employers to do direct deposit. The cards are an entry into financial management for the young and unbanked too."

What's coming? Perhaps an-all purpose card. "Our general spend card already has a long distance component. I can see it adding prepaid wireless, and an ability to transmit money overseas," Uffner noted.

"Gift cards via 'gift card malls' are far and away the most exciting new offering for c-store operators, giving them a new shopping occasion (gifting), new footfall (traffic), new sales, new profits and new relevancy," said Keith Brand, president of Tefisto Partners, a U.K.-based consultant. "Prepaid wireless will continue to be a cash cow and traffic generator for c-stores, although growth rates will be nothing like they were in the early 2000s as the market becomes saturated."

Brand, who formerly served as director of category management for the store value and financial services categories at Circle K, predicted that prepaid long distance will die a slow death, except for prepaid international calling cards, which will grow. He also foresees strong growth in prepaid debit products both for self-use and gifting acquisition.

"As consumers become more familiar and trusting of stored value products like prepaid debit and gift cards, you’ll start to see higher and higher loaded value, and you’ll see more frequent reloading and purchasing," he added.

Coinstar, one of many regional distributors in this sector, offers and activates a broad product suite of cards through a single terminal on the selling floor. It will also roll out beyond a six-store test the ability to money transfer in a 45-second transaction suited to leanly staffed c-stores.

"First-generation immigrants send a lot of money back home," Verleye said. "The U.S. is the largest send market." Verleye also sees large potential in prepaid wireless -- which has already tripled in the number of suppliers the past three years to about 20 different brands, largely on the popularity of Virgin Mobile's "edgy phones for youth" and BoostMobile. "Having one or two wireless carriers isn't enough. This is a very fragmented market. Don't get too nichy," he cautioned.

"Today, 14 percent of U.S. wireless minutes are prepaid. In most of Europe, it's 70 percent to 80 percent. In Asia, it's almost all prepaid because few people have credit cards,” he said. "With mortgage problems affecting credit scores, and more immigration, prepaid will penetrate further here."

Sales of prepaid telecom cards have quadrupled to $3.3 billion over the past five years, observed Carlos Rodriguez, vice president of Blackstone Calling Cards, who also noticed a trend among international carriers "to tap into their constituents in the U.S."

For its part, Blackstone has recently launched Blackstone Branded Mastercard gift cards in $25, $50 and $100 denominations, which activate instantly and yield $1 profit per card to retailers.

Coinstar's turnkey effort includes back-office technology support, transaction processing and reporting and auto-replenishment. "The retailer invests no money. The revenue share is one-third to us and two-thirds to the store operator," Verleye noted. "We act as category manager. We can see to the item level per store what's selling, and we can analyze trends to avoid out-of-stocks and continually improve product mix."

C-stores need a partner to help manage, build and drive their program in this category, contends InComm's Solomon, because "this category taps into a lot of technology … and technology changes things fast."

Therefore, he urged retailers to "ask your provider how they focus on these changes, and what they'll do to maximize your revenue opportunities. This category is about velocity of sales. Margins aren't big, but additional dollars can be substantial. So when speaking about revenue share, it's not about having the biggest margins or the biggest fee, it's about value to your business -- and how the growth, through support, technology and innovation, makes you more additional dollars in the long term.