PayPal's February acquisition of TIO Networks is the latest example of a growing trend of financial services providers targeting the underserved, developing products that bring the cash-heavy group into the digital payments fold. PayPal and its peers are finding ways to serve the underserved market without stumbling into the same issues that banks have long confronted. “Most legacy institutions traditionally considered the underserved an unprofitable segment,” said Andy Lerner, managing partner at IA Capital Group. “They keep very little money in their checking and savings accounts and so banks largely stayed away from these people.” ![]()
IA was the largest shareholder in TIO Networks from 2008 through 2016. With inexpensive internet-based technology, it has become cost-effective to serve these consumers, Lerner said. And as costs continue to drop, more progressive financial services providers like PayPal will continue to seek out ways to serve lower income, underbanked populations, he said. Other examples include Intuit's 2014 purchase of Check, a mobile bill payment provider; Ingo Money’s acquisition of Fuze Networks, a provider of cash loads for credit, debit and prepaid accounts; and electronic cash payment network PayNearMe’s purchase of Prism Money, a personal finance management platform that allowed for bill pay. “The payment infrastructure is run and controlled by banks and similar entities … and what’s happened over the last couple years, is startups have begun leveraging digital technology to ride on those rails,” said Ryan Falvey, managing director of the Financial Services Lab for the Center for Financial Services Innovation (CFSI). And since it will be easier for large institutions to acquire startups that have reached a certain amount of scale rather than build from the ground up, the industry will continue to see a significant number of mergers and acquisitions, said Ben Jackson, director of prepaid at Mercator Advisory Group. Plus these legacy companies “see the money that had been made by serving underserved communities and think there’s opportunity for them to do the same. Not to mention, a lot of the products in underserved communities are expensive and unfair to the customers,” said Jackson. PayPal’s acquisition of TIO Networks could also give this audience a way to participate more easily in e-commerce, predicts Jackson. And PayPal agrees. “It’s something we want to look at, allowing people without payment cards to pay for goods online with cash,” said John Kunze, PayPal’s vice president of consumer products and vice president of its Xoom subsidiary. But really that’s just icing on the cake rather than the main goal of the TIO Networks deal. “If you’ve listened to our CEO talk publicly or talked with any of PayPal’s senior team, what you will find is that we’re on a long-term mission to … democratize money, to bring financial services to broader sets of the population, to make payments easier to access, simpler, faster and more affordable,” Kunze said. He points to Venmo, a P-to-P payment app PayPal obtained through its acquisition of Braintree, as a move to help millennials; and the Xoom acquisition as one that allows people in the US to send money back home to loved ones in emerging markets. CFSI’s Falvey commends PayPal, and especially the company’s CEO, Dan Schulman who used his Money2020 keynote speech in October 2015 to talk about the plight of the poor. “It’s expensive to be poor … and that’s ridiculous,” he said during the keynote. “Managing and moving money should be a right for all citizens, not a privilege for the affluent.” And that’s an awareness that has pushed many financial services companies to use technology to reach the underserved. “I think a lot of the changes over the past eight to nine years [during President Obama’s administration] have had an affect on this trend,” said Falvey, who is looking for a new cohort of companies focused on building for segments of the population that are hard to reach for the Financial Services Lab. “There’s a greater awareness that there are a lot of Americans that the systems isn't working as well as it should for them.” And what does work for this segment is opening up access to a variety of products, said Mercator’s Jackson. “If you look at where low income people get financial services today … and you look at what those people can do at those places, they can do much more than they can at a traditional bank,” he said. Payday lenders and check cashing locations offer a suite of services including everything from paying bills, loading prepaid cards, remitting money internationally and topping up their mobile device. “There’s this notion that people don’t participate in traditional financial services because they don’t know these things exist, but that’s generally not the case,” Jackson said. “We don’t think about this in the context of people’s entire lives. Like ‘why is this person doing these expensive things?’, but they’re making the same calculations [mid- to high income people] make—is this saving me time, is it convenient, am I getting cash now, is this the only place open where I get off work?” PayPal and other payment providers' seem to be recognizing this fact in their moves to acquire companies that offer a more diverse set of capabilities. And investment in this space is most definitely going to continue, said Falvey, although, probably more so in emerging markets. “There’s a disconnect in sending money digitally from the cash economy—if you look outside the U.S.— is arguably the single greatest area of investment and business opportunity in payments,” he said.
IA was the largest shareholder in TIO Networks from 2008 through 2016. With inexpensive internet-based technology, it has become cost-effective to serve these consumers, Lerner said. And as costs continue to drop, more progressive financial services providers like PayPal will continue to seek out ways to serve lower income, underbanked populations, he said. Other examples include Intuit's 2014 purchase of Check, a mobile bill payment provider; Ingo Money’s acquisition of Fuze Networks, a provider of cash loads for credit, debit and prepaid accounts; and electronic cash payment network PayNearMe’s purchase of Prism Money, a personal finance management platform that allowed for bill pay. “The payment infrastructure is run and controlled by banks and similar entities … and what’s happened over the last couple years, is startups have begun leveraging digital technology to ride on those rails,” said Ryan Falvey, managing director of the Financial Services Lab for the Center for Financial Services Innovation (CFSI). And since it will be easier for large institutions to acquire startups that have reached a certain amount of scale rather than build from the ground up, the industry will continue to see a significant number of mergers and acquisitions, said Ben Jackson, director of prepaid at Mercator Advisory Group. Plus these legacy companies “see the money that had been made by serving underserved communities and think there’s opportunity for them to do the same. Not to mention, a lot of the products in underserved communities are expensive and unfair to the customers,” said Jackson. PayPal’s acquisition of TIO Networks could also give this audience a way to participate more easily in e-commerce, predicts Jackson. And PayPal agrees. “It’s something we want to look at, allowing people without payment cards to pay for goods online with cash,” said John Kunze, PayPal’s vice president of consumer products and vice president of its Xoom subsidiary. But really that’s just icing on the cake rather than the main goal of the TIO Networks deal. “If you’ve listened to our CEO talk publicly or talked with any of PayPal’s senior team, what you will find is that we’re on a long-term mission to … democratize money, to bring financial services to broader sets of the population, to make payments easier to access, simpler, faster and more affordable,” Kunze said. He points to Venmo, a P-to-P payment app PayPal obtained through its acquisition of Braintree, as a move to help millennials; and the Xoom acquisition as one that allows people in the US to send money back home to loved ones in emerging markets. CFSI’s Falvey commends PayPal, and especially the company’s CEO, Dan Schulman who used his Money2020 keynote speech in October 2015 to talk about the plight of the poor. “It’s expensive to be poor … and that’s ridiculous,” he said during the keynote. “Managing and moving money should be a right for all citizens, not a privilege for the affluent.” And that’s an awareness that has pushed many financial services companies to use technology to reach the underserved. “I think a lot of the changes over the past eight to nine years [during President Obama’s administration] have had an affect on this trend,” said Falvey, who is looking for a new cohort of companies focused on building for segments of the population that are hard to reach for the Financial Services Lab. “There’s a greater awareness that there are a lot of Americans that the systems isn't working as well as it should for them.” And what does work for this segment is opening up access to a variety of products, said Mercator’s Jackson. “If you look at where low income people get financial services today … and you look at what those people can do at those places, they can do much more than they can at a traditional bank,” he said. Payday lenders and check cashing locations offer a suite of services including everything from paying bills, loading prepaid cards, remitting money internationally and topping up their mobile device. “There’s this notion that people don’t participate in traditional financial services because they don’t know these things exist, but that’s generally not the case,” Jackson said. “We don’t think about this in the context of people’s entire lives. Like ‘why is this person doing these expensive things?’, but they’re making the same calculations [mid- to high income people] make—is this saving me time, is it convenient, am I getting cash now, is this the only place open where I get off work?” PayPal and other payment providers' seem to be recognizing this fact in their moves to acquire companies that offer a more diverse set of capabilities. And investment in this space is most definitely going to continue, said Falvey, although, probably more so in emerging markets. “There’s a disconnect in sending money digitally from the cash economy—if you look outside the U.S.— is arguably the single greatest area of investment and business opportunity in payments,” he said.
