May 25, 2005

Financial Services to Grocers and C-Stores

Convenience and grocery stores are in trouble. Long-standing revenue streams like cigarettes are disappearing in a puff of smoke. Intense pricing pressure from Wal-Mart has flattened margins for the foreseeable future.

An aging store asset portfolio drains available working capital. And the channels have blurred with Starbucks coffee at Safeway and gasoline at Wal-Mart.


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Convenience and grocery executives are desperately looking for new growth drivers. And smartly, theyre looking beyond physical products you can only stock the shelves with so much stuff and theyre finding success with services.

The success convenience and grocery chains are having with prepaid wireless has led them to look for other services beyond prepaid and to evaluate the consumers who are purchasing prepaid phones and refill. These chains are finding a plethora of deliverable services which, like prepaid wireless, are targeted toward the unbanked market people who through choice or necessity manage their finances outside of the traditional banking system. Some call this activity fringe banking.

The unbanked population, estimated at over 40 million strong, or over 30 percent of the U.S. population, is made up primarily of teens and young adults, minorities and the working poor. Theyre already shopping in convenience and grocery locations, yet these locations have not offered the services they need in order to manage and access their money, forcing them to make special trips to outlets outside of their daily routine.

Services expand
Convenience and grocery stores will now become banks for the unbanked. Theyll seek to offer point-of-sale or kiosk-driven services, which will allow unbanked customers to manage their money, pay their bills, purchase and consume products and services, and make their lives a bit simpler.

Prepaid wireless is one service already offered at many of these stores. This market has exploded from $4.5 billion in 2000 to over $23 billion in 2004 driven by youth, minorities and unbanked customers. Another service, prepaid debit cards, is currently a $600 million market. The Pelorus Group expects it to grow to over $5 billion by 2007. Next Estate Communications reports that 65 percent of prepaid debit users are under the age of 35 years.

Payroll check cashing can also be offered. The Financial Service Centers of America (FiSCA) reports that this $60 billion industry processes over 180 million checks a year, growing 10 percent annually. Walk-up bill payment would be another convenience for the unbanked. Checkfree, the online bill-payment service, reports that 20 percent of American households regularly pay their bills in person.

Offering money transfer service can be lucrative for convenience and grocery stores. Celent expects the global money transfer market to surpass $170 billion in 2006. InterAmerican Bank reports that over 60 percent of foreign-born U.S. Latino adults send money back home regularly.

Retailers look for partners
Overburdened convenience and grocery merchants will look to one-stop full-service distributors to carry the load bringing in the offers, enabling the transactions and developing the signage and display. For these distributors, banking services would allow them to establish deep relationships with the merchant from a product portfolio and technology perspective and would enable them to cash in for years to come.

Distributors of prepaid telecom have been playing a key role in the U.S. prepaid supply chain securing the locations, deploying the delivery technology, communicating the offer and enabling the transaction. But margins are getting squeezed; many of the best locations have been secured, competition is fierce and consolidation is rife. The addition of new revenue-driving products and services to the portfolio is crucial.

Offerings that appeal to the same consumer base as prepaid telecom, utilizing the same point-of-sale or kiosk-based delivery technology, make fringe banking, or banks for the unbanked, a natural for distributors to take on and for retailers to migrate toward.

To be successful in this space, distributors will need to:
develop the relationships with the necessary product and service providers to form the comprehensive bank for the unbanked offering
educate their retail partners as to the opportunity and the requirements
create the point-of-sale and/or kiosk delivery network necessary to successfully deliver the offering
design clear, concise and relevant marketing communications inside and outside the store to drive adoption and demand
develop a deep and continual understanding of the unbanked consumer, including who they are, what they need, how they want it delivered and how to reach them

Achieving critical mass
This year promises to be the year fringe banking breaks out. Circle K and 7-Eleven are rolling out check-cashing services to all stores. Stored value gift and debit cards are all the rage. Prepaid wireless continues to explode. Kiosks and multiapplication point-of-sale devices make product delivery possible. All of this is happening while the nation sees a continued explosion in Hispanic population, an increase in population living below the poverty level and a reduction in the number of traditional banking outlets.

Retailers, distributors, processors and product and service providers are all taking note, and many will develop a sense of urgency in 2005 to win in this space, to prosper and to survive. Will you?

The author is president of Tefisto Partners, a consultancy focused on the stored value and fringe banking space. He can be contacted at (602) 750-8055 or visit the company website at www.tefistopartners.com.

Posted by keefner at May 25, 2005 02:40 PM