2012 Financially Underserved Market size stUdy · Auto Loan: Subprime 2 13.8 23.6% 23.1% 130.3 High Experian Automotive Quarterly and Annual Reports 2009 - 2013 Auto Title Loan 3.7

DECEMBER 2013

INSIDE:

Industry Revenue by Categoryand Segment ......................................page 1

Revenue Growth Rate by Category ...page 2

Revenue Growth Rate by Product Segment ...............................page 3

Product Segments to Watch ...............page 3

A Closer Look at Four Years of Growth ................................................page 4

Appendix: Methodologyand Data .............................................page 5

COREINNOVAT ION

CAPITAL

sponsored by

2012 Financially Underserved Market size stUdy

Key Findings in an $89 Billion Market:➤ Thefinanciallyunderservedmarketgeneratedapproximately$89billioninfee

andinterestrevenuein2012fromavolumeofapproximately$792billioninprincipalloaned,fundstransacted,depositsheld,andotherfinancialservicesprovided.

➤ Thefinanciallyunderservedmarketsawannualgrowthinrevenueof8%,fromaprevioustotalof$82billion,whilethevolumeofbusinessconductedgrew7%from$740billionin2011.

➤ Steady,moderaterevenuegrowthoccurredacrossallproductcategories:ShortTerm Credit grew by 10% from 2011 to 2012,Very ShortTerm Credit andPaymentseachgrewby7%,Depositsgrewby4%andOtherservicesby6%.

➤ The strongest growth segments in 2012 included: open-loop prepaid cards– both Payroll (32.7%) and General Purpose Reloadable (28.5%), RefundAnticipationChecks(25.3%)andSubprimeAutoLoans(23.6%).

➤ Indicators project the financially underservedmarketwillmaintain a steadygrowthrateof8%in2013,reachingatotalof$95billioninrevenue.

➤ SubprimeAutoLoansare likely tobe thehighestgrowthproductsegment in2013withaprojectedgrowthrateof23.1%.

Industry Revenue by Category and Segment in 2012

0

10

20

30

40

50

� �

Fees

and

Inte

rest

($B

)

Overdraft

Payday Loan: Storefront

Pawn Loan

Payday Loan: Internet

Refund Anticipation Check

Deposit Advance

$21.4B

Very Short Term Credit Short Term Credit Payments Deposits Other

Credit Card: Subprime

Auto Loan:Subprime

Auto Loan:Buy Here Pay Here

Rent to Own

Credit Card: Secured

$49.6B

Installment Loan

Auto Title Loan

Money Order

Walk-in Bill Pay

Prepaid Card: GPR

Remittance

Payroll Card

Check Cashing

$8.9B

$4.7B

Checking Account

Savings Account

$4.2B

Debt Settlement

Tax Preparation

Short Term Credit56%

Very Short Term Credit

24%

Payments10%

Deposits5%

Other5%

Financially Underserved Market Revenue: $89 Billion

Note: Figures based on available market data and CFSI/Core proprietary analysis, calculations and assumptions. See appendix for source listing and further information for individual product segments.

2 2012 Underbanked Market Sizing StUdy

Revenue Growth Rate by Category

6.6%

9.9%

7.0%

4.0%

5.5%

2.8%

10.5%

6.8%

11.2%

2.3%

Very Short Term Credit Short Term Credit Payments Deposits Other

2011 to 2012

2012 to 2013

Projected


The Financially Underserved Market

TheUnitedStatesfinanciallyunderservedmarketgenerated$89billioninfees

andinterestin2012,representinggrowthof8%from$82billionin2011.*

Financial services for underserved consumers in the US constitute a diverse

and continually growing marketplace, encompassing close to two dozen

products and services accessed by more than 68 million individuals each

year.**

Overall, the market continues to show growth in both revenue and volume

of usage across all categories, including Very Short Term Credit, Short Term

Credit, Payments, Deposits and Other financial services.

CFSI and Core Innovation Capital present this Knowledge Brief to share

the significant trends and the range of revenue opportunities the financially

underserved market offers today and in the future. The inclusion of products

in this report are intended to describe the financially underserved market

landscape and do not constitute a commentary on the appropriateness,

safety or quality of any specific product for consumers.

* Updated from previous annual report to reflect revised 2011 estimates. See appendix for detailed information.

** “2011 FDIC National Survey of Unbanked and Underbanked Households,” September 2012

The Financially Underserved Consumer

Ourmarketof interest encompassesfinan-

cial products that serve consumers whose

needsarenotfullymetbytraditionalprod-

uctsandservices.Theseconsumersmayuse

alternativefinancialservices-suchascheck

cashingorpaydayloans-tomeetsomeor

all of their financial needs. They may be

challengedbysubprimecreditscoresorthin

ornocreditfiles.Ortheymayfindtheirac-

cesstoafullrangeofconventionalfinancial

productsotherwiselimitedbylowtomod-

eratehouseholdincomesorincomevolatil-

itythatinhibitstheachievementoffinancial

health. Collectively, these consumers rep-

resent approximately $1 trillion in annual

income.


GPR Prepaid and Payroll Cards had the highestgrowthratesin2012amongallproductsreviewedand our projections place them among the threefastest growing products reviewed for 2013.

However,weexpect the rateof revenuegrowth todecreasemoderatelyduetoprepaidmarketmaturationandincreasingcompetitionresultinginlowercardfees.

AlthoughBuy Here Pay Here Auto Loans (BHPH) hasbeenthedominantautoloanproductoverthepast fouryears intermsofrevenue,weexpect theSubprime Auto Loan segment to surpass BHPH

in 2013, as it maintains a faster pace of growth driven byincreasing availability of subprime credit and decreasinginterestrates.

Subprime Credit Cardssawstronggrowthin2012asconsumerlendingreboundedfromconstrictionsfollowingthefinancialcrisis,andweprojectcontin-uedgrowthatamoremoderateratein2013aspent

updemandforrevolvingsubprimecreditbecomessatisfied.

As online lending became increasingly available,growth of Internet Payday Loans far exceededgrowthofStorefront Payday Loansin2012andthistrendwilllikelycontinueinto2013whenweproject

InternetPaydaywillnearlymatchStorefrontPaydayinoverallrevenueforthefirsttime.However,weexpectInternetPaydaygrowth to slowsomewhat in2013due to increasingmarketsaturationandpressurefromstateandfederalregulators.

Product Segments to Watch in the Financially Underserved Market

We project Checking Account revenue willexperience accelerated growth in 2013 drivenbyhigherfeestructuresandtheneareliminationoffreecheckingaccountsbymostmajorbanks

following regulatory changes to interchange fees in theDodd-FrankAct.

Severalfinancialproductsbasedonolderpoint-of-sale models including Storefront Payday Loans, Auto Title Loans, Money Orders, Walk-in Bill Pay,andCheck Cashingdemonstratedvery

lowgrowthorslightcontractionsin2012andforour2013projections.WeexpectCheckCashingtorallyslightlyin2013,however,due tomoderatemacroeconomicgrowthdrivingincreasedcashflow.

Products including Secured Credit Cards andOverdraft protection also showed modestgrowthorslightcontractionin2012.Weexpectthistrendtocontinuein2013duetoincreased

regulatoryscrutinyfollowingthe2009CARDActand2009changestoRegulationEthatresultedinlimitedfeesoral-teredbusinessmodels.

Refund Anticipation Checks(RACs)experiencedheightened growth in 2012 as this perceivedalternativetoRefundAnticipationLoans(RALs)absorbedmarketdemandfollowingchangesin

IRSpoliciesthatendedRALprovision.Withtheconsumershift fromRALs toRACs effectively complete,we expectgrowthforRACstoreturntomoderateratesin2013.

Revenue Growth Rate by Product Segment


35%

30%

25%

20%

15%

10%

5%

0%

-5%

Financial Products

2011 - 2012

2012 - 2013: Projected


A Closer Look at Four Years of Growth in the Financially Underserved Market

Change in Revenue Growthfor Payments Products

Change in Revenue Growthfor Short Term Credit

Products

Change in Revenue Growthfor Very Short Term Credit

Products

-10%

0%

10%

20%

30%

40%

!"#"$ !"##$ !"#!$ !"#%&$

-40%

-30%

-20%

-10%

0%

10%

20%

30%

!"#"$ !"##$ !"#!$ !"#%&$

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

!"#"$ !"##$ !"#!$ !"#%&$

2009 to 2010

2010 to 2011

2011 to 2012

2012 to 2013e

Deposit Advance

Overdraft

Pawn Loan

Payday Loan: Internet

Payday Loan: Storefront

Refund Anticipation

2009 to 2010

2010 to 2011

2011 to 2012

2012 to 2013e

Auto Loan: Buy Here Pay Here

Auto Loan: Subprime

Auto Title Loan

Credit Card: Secured

Credit Card: Subprime

Installment Loan

Rent to Own

Check Cashing

Money Order

Payroll Card

Prepaid Card: GPR

Walk-in Bill Pay

Remittance

Per

cent

Cha

nge

in R

even

ue

Year-over-Year Intervals


Per

cent

Cha

nge

in R

even

ueP

erce

nt C

hang

e in

Rev

enue


2009 to 2010

2010 to 2011

2011 to 2012

2012 to 2013e

Check (RAC)


MethodologyMarket sizinganalysis is anexerciseofbestestimation foraquantitythatisfrequentlyunknowable.Forthisanalysis,wesoughtsourcesthatarecredible,consistentwithotherestimates,andcontinuous,providinghistoric figures for reference. In many cases, we extrapolated frommultipledatasourcestoarriveatourfinalestimateforagivenproductsegment.Oursourcesandkeyfiguresaresummarizedbelow,andwetransparentlydiscloseourconfidencelevel(high,medium,low)foreachproductsegment.Weencouragereaderswithaccesstofurtherinformationtosharethosefiguressothatwecancontinuouslyimproveouranalysis.

CONFIDENCE LEVELSHIGH•Methodologydisclosed•Basedonsurveysorcompany-specificinformation•Citedbyindustryleaders

MEDIUM•Estimatederivedfromcrediblemarketdata

LOW•Nomethodologydisclosed•CFSI/Coreestimaterequiringsignificantextrapolationsandassumptions

•Pre-2010data

Auto Loan: Buy Here Pay Here 16.0 3.7% 5.9% 66.6 HighExperian Automotive Quarterly and Annual Reports 2009 - 2013; “2013 Industry Market Report,” Leedom & Associates, LLC

Auto Loan: Subprime 2 13.8 23.6% 23.1% 130.3 High Experian Automotive Quarterly and Annual Reports 2009 - 2013

Auto Title Loan 3.7 0.9% 0.9% 1.6 Medium“Driven to Disaster: Car-Title Lending and Its Impact on Consumers,” Consumer Federation of America and Center for Responsible Lending; Federal Highway Administration Statistics 2009- 2013

Checking Account 3 3.3 3.8% 14.1% 159.4 Medium

United States Census and Federal Reserve Data, 2001 – 2012; National Survey of Unbanked and Underbanked Households,” FDIC 2009 and 2012; “Prepaid Cards or Traditional Checking Accounts: What is the Better Choice?” Javelin, 2013; Market scan of checking account fees; Estimates exclusive of Overdraft revenue

Check Cashing 1.8 -3.3% 2.2% 65.7 High“National Survey of Unbanked and Underbanked Households,” FDIC 2009 and 2012; "Check Cashing & Money Transfer Services: A Market Analysis," Marketdata Enterprises, Inc., 2013; Information provided by industry professionals.

Credit Card: Secured 0.3 -2.3% -2.3% 5.2 Low“Card Act Report,” Consumer Financial Protection Bureau, 2013; Market scan of leading secured credit card companies; Information provided by industry professionals.

Credit Card: Subprime 4 5.8 12.7% 7.6% 11.3 LowUnited States Census and Federal Reserve Data, 2001 – 2012; Market scan of leading subprime credit card companies; Equifax press statements; FICO press statements; American Bankers Association letter to CFPB, 2013

Debt Settlement 1.2 -7.8% 0.0% N/A LowMarket scan of leading debt settlement companies; Federal Trade Commission regulatory data; State-level public record data

Deposit Advance 0.4 0.4% 0.4% 4.3 Medium“Payday Loans and Deposit Advance Products,” Consumer Financial Protection Bureau, 2013; Deposit Advance market scan; Information provided by industry professionals.

Installment Loan 4.3 4.9% 4.0% 9.5 MediumSEC quarterly and annual report filings of market leading installment loan companies, 2009 – 2013; Installment loan market scan

Money Order 0.3 0.9% 0.0% 53.9 MediumFederal USPS money order data, 2009 – 2013; Money order market scan; “National Survey of Unbanked and Underbanked Households,” FDIC 2009 and 2012

Overdraft 3 6.9 -0.1% -1.5% 8.3 MediumMoebs $ervices annual overdraft data, 2009 – 2013; “National Survey of Unbanked and Underbanked Households,” FDIC 2009 and 2012

Pawn Loan 4.3 12.9% 8.6% 13.6 MediumSEC quarterly and annual report filings of market leading pawn companies, 2009 – 2013; “Pawn Industry Overview 2013,” National Pawnbrokers Association

Payday Loan: Internet 4.3 18.7% 9.1% 18.6 High

“Payday Loan Industry,” Stephens Inc. 2011; Stephens Inc. 2012, 2013; “A Complex Portrait,” CFSI, 2012; “Payday Loans and Deposit Advance Products,” Consumer Financial Protection Bureau, 2013; SEC quarterly and annual report filings of market leading payday companies, 2009 – 2013

Payday Loan: Storefront 4.9 1.0% -2.3% 30.1 High


Payroll Card 1.0 32.7% 22.0% 34.1 High“The Contenders: Prepaid Debit and Payroll Cards Reach Ubiquity,” Aite Group, 2012; “Winning the Void,” Aite Group, 2010; SEC quarterly and annual report filings of market leading payroll card companies, 2009 – 2013

Prepaid Card: GPR 1.6 28.5% 22.4% 53.6 High“The Contenders: Prepaid Debit and Payroll Cards Reach Ubiquity,” Aite Group, 2012; “Winning the Void,” Aite Group, 2010; SEC quarterly and annual report filings of market leading GPR prepaid companies, 2009 – 2013

Refund Anticipation Check (RAC)

0.5 25.3% 7.9% N/A High“Something Old, Something New in Tax-Time Financial Products,” National Consumer Law Center and Consumer Federation of America, 2013; RAC market scan

Remittance 3.5 1.9% 0.3% 51.1 HighAnnual Remittance Data (Inflows, Outflows and Bilateral Remittance Matrices), World Bank, 2013; “Remittance Prices Worldwide,” World Bank, 2013; remittance market scan

Rent to Own 5.7 7.0% 7.2% 8.5 MediumSEC quarterly and annual report filings of market leading Rent to Own companies, 2009 – 2013; RTOHQ.org industry data, 2013

Savings Account 3 1.4 4.4% 4.4% 42.3 Low“National Survey of Unbanked and Underbanked Households,” FDIC 2009 and 2012; “Beyond Barriers,” New America Foundation, 2011

Tax Preparation 3 3.1 11.7% 3.2% N/A LowIRS tax filing data; “The Impact of Free Tax Preparation on New Haven’s Economy,” New Life Corporation and Coalition for Working Families, 2011; Arlington EITC Study, 2011; Estimates exclusive of RAC and RAL revenue

Walk-in Bill Pay 0.7 -2.8% -2.8% 24.7 Medium“The 2010 Federal Reserve Payments Study,” Federal Reserve, 2011; “Third-Party Walk-In Bill Payments in the United States,” Mercator, 2012

Total Market 88.7 8.3% 7.9% 792.4

ProductSegment

Revenue($B) 2012

RevenueGrowth

2011 to 2012

Estimated RevenueGrowth

2012 to 2013e

Volume ($B) 20121

ConfidenceLevel

Data Sources

APPENDIXMarket Size Analysis Methodology and Data





























Total Market 88.7 8.3% 7.9% 792.4

ProductSegment

Revenue($B) 2012

RevenueGrowth

2011 to 2012


2012 to 2013e

Volume ($B) 20121

ConfidenceLevel

Data Sources

Market Size Analysis Methodology - continued




























Total Market 88.7 8.3% 7.9% 792.4

ProductSegment

Revenue($B) 2012

RevenueGrowth

2011 to 2012


2012 to 2013e

Volume ($B) 20121

ConfidenceLevel

Data Sources


Differences between the 2012 and 2011 Market Sizing ReportsBuyHerePayHere(BHPH)autoloanshavebeenseparatedoutfromtraditionalsubprimeautoloansforthefirsttimeinthisreporttoreflectthesignificantdifferencesbetweenthesetwoproductswithregardstointerestratesandtermsofrepayment.

RefundAnticipationLoans(RALs)havebeencompletelyremovedfromthisyear’sreport.RALswereofferedonaverylimitedbasisforthe2011taxyearprocessedin2012duetoregulatorychanges.Assuch,RALsgeneratedonly$46millioninrevenuesin2012,afiguretoosmalltobereflectedinthisreport.

Allyear-over-yeargrowthratesreflectrevisedfiguresforpastyearsbasedonupdateddataandmethodologywhereapplicableand the retroactive inclusionorexclusionoffinancialproducts toensure thatannualchangesaredirectlycomparable.Forinformationonour2011methodology,seethe2011UnderbankedMarketSizingStudy.

Endnotes1.Wedonotcomparevolumetorevenuefortheproductsinthisreportbecausevolumeanalysisvaries

dependingonproduct category.Very ShortTermCredit volume is sized according to annualdollarsborrowedtoreflecttheusageofproductswhichareoftenextendedmultipletimestoaconsumerduringoneyear;ShortTermCreditissizedbyaverageoutstandingvolumetoreflectloanspaidininstallmentsandbalancescarriedoveralongerperiod;Paymentsaresizedbyannualtransactionvolume;Depositsaresizedbyaverageannualbalancesheld inaccounts;and thevolumesofOtherfinancialservices,whichgeneraterevenueandfeesindependentofvolume,arenotsizedinthisreport.

2.In this report, Subprime Auto Loans indicate loans to consumers with aVantageScore under 640,approximatelycomparabletoaFICOscoreof650orbelow.

3.Onlytheportionoftherelevantsegmentencompassingfinanciallyunderservedconsumerswasconsideredforthisreport.Estimatesarebasedinpartontheshareofconsumersdesignated“underbanked”bytheFDIC’sNationalSurveyofUnbankedandUnderbankedHouseholdsin2009and2012.

4.SubprimeCreditCardsare typicallymarketed toconsumerswithFICOscoresbelow660andin thisreportindicaterevolvinglinesofcreditprovidedatsubprimeratestoconsumerswithFICOscoresatorbelow620.

Morgan Stanley DisclaimerThisdocument isnotaproductofMorganStanley&Co.LLC, including theMorganStanleyResearchDepartment, and its affiliates (collectively “Morgan Stanley”). The information and opinions in thesematerials were prepared by the Center for Financial Services Innovation (CFSI) and Core InnovationCapitalwithfinancialsponsorshipandstrategicinputfromMorganStanley.ThesematerialsaresolelyforinformationalanddiscussionpurposesanddonotreflecttheviewsofMorganStanley.MorganStanleydoesnotundertaketoupdatethesematerialsandtheconclusionsdiscussedmaychangewithoutnotice.MorganStanleyshallnotinanywaybeliableforclaimsrelatingtothesematerialsandmakesnoexpressorimpliedrepresentationsorwarrantiesastotheiraccuracyorcompletenessorforstatementsorerrorscontainedin,oromissionsfrom,them.Pastperformanceisnotnecessarilyaguidetofutureperformance.Thismaterialisnotasolicitationofanyoffertobuyorsellanysecurity,commodityorotherfinancialinstrumentortoparticipateinanyinvestmentstrategy.Thismaterialwasnotintendedorwrittentobeused,anditcannotbeusedbyanytaxpayer,forthepurposeofavoidingpenaltiesthatmaybeimposedonthetaxpayerunderU.S.federaltaxlaws.Eachtaxpayershouldseekadvicebasedonthetaxpayer’sparticularcircumstancesfromanindependenttaxadvisor.Thetrademarksandservicemarkscontainedhereinarethepropertyoftheirrespectiveowners.MorganStanleyisaglobalFinancialservicesfirmthathaspursuedandmaycontinuetopursueinvestmentbanking,investmentmanagementandproprietaryinvestmentpositionsrelatedtotheunderbankedmarketplace.Factsandviewspresentedinthesematerialshavenotbeenreviewedby,andmaynotreflectinformationknownto,professionalsinMorganStanleybusinessareas.

This paper benefits from strategic input and financial support from Morgan Stanley. As with all CFSI research, this report is additionally supported by a grant from the Ford Foundation. The opinions expressed in this report are those of CFSI and Core Innovation Capital only and do not necessarily represent those of our sponsors.

The Financially Underserved Market Size Study is an annual report created jointly by the Center for Financial Services Innovation (CFSI) and Core Innovation Capital. Special thanks to authors Eva Wolkowitz, CFSI Research Analyst, and Jeffrey Oh, CFSI summer associate, to the CFSI External Relations team, and to design consultant Jon Heiniger.

© 2013 Center for Financial Services Innovation and Core Innovation Capital

ALL RIGHTS RESERVED. This document contains material protected under International and Federal Copyright Laws and Treaties. Any unauthorized reprint or use of this material is prohibited. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system without express written permission from the Center for Financial Services Innovation and Core Innovation Capital.

Core Innovation Capital is the only ven-ture capital fund that invests exclusively in financial technology companies serving America’s underbanked consumer market. Its target segment consists of more than 68 million consumers, who generate over $1 trillion in annual income and spend more than $89 billion in fees and interest on fi-nancial services per year. The fund part-ners with proven entrepreneurs who seek above market-rate returns and share its vi-sion to improve the lives of low- to moder-ate- income Americans. Based in New York City, the partnership is backed by leading institutional investors. For more informa-tion about Core Innovation Capital, visit http://www.corevc.com.

Supported by a grant from the

COREINNOVAT ION

CAPITAL

The Center for Financial Services Innovation (CFSI) is the nation’s leading authority on financial services for underserved consum-ers. Through insights gained by producing original research; promoting cross-sector collaboration; advising organizations and companies by offering specialized consult-ing services; shaping public policy; and in-vesting in nonprofit organizations and start-ups, CFSI delivers a deeply interconnected suite of services benefiting underserved con-sumers. Since 2004, CFSI has worked with leaders and innovators in the business, gov-ernment and nonprofit sectors to transform the financial services landscape. For more on CFSI, visit our web site and join the con-versation on Twitter @CFSInnovation.

Center for Financial Services Innovation20 N. Clark, Suite 1950

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Documents

2012 Financially Underserved Market size stUdy · Auto Loan: Subprime 2 13.8 23.6% 23.1% 130.3 High Experian Automotive Quarterly and Annual Reports 2009 - 2013 Auto Title Loan 3.7