According to the FDIC, over 28% of U.S. citizens are "under banked", having limited or no access to banking services. That's a big population, but they've hardly been forgotten. Companies like Green Dot (NYSE:GDOT), Total System Services (NYSE:TSS), Western Union (NYSE:WU), and XOOM (NASDAQ:XOOM) are eagerly providing bank-like services to this group.
What does "under banked" mean?
Imagine paying a bill without the ability to write a check. Or cashing your paycheck if you didn't have a bank account. That's what it means to be under banked, and it's a major impediment to daily life. The 72% of the country that have banking relationships probably can't imagine life without such services. Still, the under banked manage to get by with the help of key service providers.
For example, Green Dot allows people to buy pre-paid credit cards that can be replenished with cash. Customers can also have their paychecks or government support checks sent directly to their Green Dot card. Wal-Mart (NYSE:WMT) even allows Green Dot customers to bring in physical checks to be cashed and deposited to their cards.
Helping and making money
Green Dot gets paid for all of this activity, as does Wal-Mart for cashing a physical check. While someone with a banking relationship might balk at that notion, those without a bank find the service valuable enough to pay for: Green Dot has 4.5 million cards outstanding and, between 2006 and 2012, the annual growth rate of money transfers on its system was 45%.
That helps explain why Total Systems Services bought Green Dot competitor NetSpend for $1.4 billion in mid-2013. Total Systems Services provides payment services to companies and banks around the world, essentially supporting the "pipes" over which money is transferred between different parties.
Adding NetSpend was a good fit, since it allowed the company to expand its connections right down to the individual customer level. This segment now makes up about 20% of the company's revenues, and Total System saw a nearly 22% increase in the amount of money put on its NetSpend cards in the fourth quarter.
One interesting difference between Green Dot and Total System Services is reach. Green Dot is largely U.S. focused, but Total System Services derives about a quarter of its overall business from international markets. That should make reaching the under banked in other nations a lot easier. But it will have to take on big name competitors already working in the space, like Western Union.
In this country, Western Union is known for money transfers, a good portion of which start in a U.S. location and end in a foreign one. However, the company has operations in over 200 countries, and an impressive network of over half a million locations. It has been venturing online and into bank-like services, including prepaid cards much like the ones offered by Green Dot and NetSpend.
Interestingly, however, Western Union is using its trusted name brand to introduce such cards in select foreign markets. That makes the company look more and more like a non-bank bank with room to grow its presence domestically and abroad.
Xoom, meanwhile, is an upstart alternative to keep an eye on. Historically, it has competed with Western Union in just the money transfer space. However, it recently bought a company that will allow it to start offering bill payment services, too. So it clearly has big aspirations.
While the services Xoom provides are relatively limited today, it's differentiating itself by using a web-based business model. That keeps costs down and has allowed for quick growth. For example, its customer count grew 36% year over year in the fourth quarter and full-year revenues jumped an impressive 53%. It probably won't be able to keep that kind of growth up, but whatever management's doing is clearly working!
Green Dot, Total Systems Services, Western Union, and Xoom are all in the business of helping people with limited or no access to a bank survive in a world built around them. This is a segment of the market you shouldn't ignore, with the growth of new entrant Xoom showing just how big an opportunity there is.