Retail And The Underbanked Opportunity

In the last 10 years, the global retail industry has been hit by a debilitating concoction of technological disruptions and competitive challenges. From issue-based brand boycotts to rapidly changing customer expectations, many of these challenges have disproportionately affected the brick and mortar retail market. 

Even before the current global pandemic, it was becoming increasingly clear that traditional brick and mortar retailing was entering a period of protracted decline. Now, faced with volatile trading conditions and intensifying competition from e-commerce platforms, brick and mortar vendors have found it increasingly difficult to keep up with online retail giants like Amazon and Alibaba. 

Unless this trend can be reversed, UBS analysts estimate that 75,000 brick and mortar stores could be forced into closure by 2026. Sadly, the outbreak of COVID-19 has accelerated rather than reversed existing trends in the brick and mortar industry. In addition to shuttering main street malls and driving down store-based foot traffic, the pandemic has also encouraged traditional retail shoppers to seriously enter the online market, driving a fresh wave of consumers straight into the ever more sophisticated marketing strategies and advertising funnels employed by e-commerce platforms and online retailers. 

Unsurprisingly, online retailers are already reaping the benefits of this glut of new customers. For instance, when you consider retail sales data for Q2 of 2020, the broader retail market registered a disappointing 3.9% decline in total sales. However, taking a more fine-grained look at the data, you’ll see that the e-commerce sector actually exceeded expectations, raking in more than $200 billion in sales (a 37% increase on the sector’s Q1 performance). 

As traditional retail executives work to rebuild and restructure their business models, transaction and logistics companies have been forced to readjust their operations in order to service the relentless pace of growth in the e-commerce sector. However, with the gap continuing to widen between brick and mortar businesses and online retailers, it’s the underbanked and unbanked communities that stand to be hit the hardest. 

If you haven’t come across the expression before, the term ‘unbanked’ means that an individual does not have access to one or more basic banking products (i.e. a bank account, a credit card, or a debit card). Unsurprisingly, an unbanked or underbanked status tends to impact a person’s employability, retirement planning, and capacity to obtain a loan. If an entire community is unable to access basic banking products, that region is commonly referred to as a banking desert.  

Around the world, an estimated1.5 billion people are classified as underbanked or unbanked. While the problem is concentrated in the developing world, banking deserts are not uncommon in the western world. For example, the FDIC estimates that 80 million Americans—accounting for a staggering 25% of U.S. households—are underbanked. As you may have guessed, these banking deserts present a major issue for both retailers and customers. Without a bank account, the vast majority of customers have no way of transacting online, limiting their ability to interact with the wider economy and depriving retailers of much-needed commercial activity. 

Mark Carter, CEO of GammaRey, believes that novel digital solutions offer the best chance at more inclusive retail transacting. “As most underbanked Americans do not have a physical debit or credit card to swipe, the solution lies in digital advances,” asserts Mr. Carter. “Retailers have incorporated payment alternatives such as the ability to pay with your mobile phone, customer reward programs, and pre-paid account options.”

As the retail industry casts the net out for new transacting technologies, peer-to-peer payment systems (also known as money transfer apps) are already seeing some impressive results. According to Meaghan Brophy, Retail Analyst at FitSmallBusiness, peer-to-peer payment options excel due to their ease-of-use and lightweight approach to user requirements. 

“Apps like PayPal, Venmo, and Cash App offer businesses options to display QR codes for scan-to-pay,” Said Brophy. “Venmo and Cash App do not require users to connect a separate bank account, people can pay using the balance in their app, or get a debit card through the apps themselves.”

Nevertheless, peer-to-peer apps and programs have many shortcomings when it comes to integration with unbanked or underbanked communities. While they go some way towards bridging the banking gap, peer-to-peer systems often suffer from rigid operating conditions, such as a linked bank account requirement or a strict ID compliance check. In some cases, failure to meet these conditions may lead to users being locked out of their account and unable to access their deposited funds. This particular accusation has been repeatedly levelled at online payment and transfer systems like PayPal. 

Unless peer-to-peer systems can move beyond these shortcomings, the next frontier of retail payments will likely lie with cryptocurrencies. In the U.S. and EU, bitcoin is already an accepted payment option for a range of market-leading retailers, including Microsoft, BMW, Whole Foods, NewEgg, and Lanieri. 

Earlier this year, Jack Dorsey’s Square followed in the footsteps of MicroStrategy and announced that it would be investing $50 million in bitcoin, an acquisition that JPMorgan has called a “strong vote of confidence for the future of bitcoin.” As the company behind the Cash App, Square’s increasingly active position in the cryptocurrency industry suggests that Dorsey is in the process of tweaking his existing payment platform to be more accommodating for cryptocurrency retail transactions. 

Even as cryptocurrencies continue to gain traction in the retail and fintech industries, the broader process of transacting has been streamlined by bitcoin ATM (BTM) operators like CoinFlip. To date, CoinFlip has installed more than 1,100 BTMs across the U.S. Essentially acting as a regulated mini-exchange for buying and selling bitcoin, BTMs offer underbanked communities a desperately needed gateway to the digital frontier in retail transacting. 

As demand for BTMs skyrockets, CoinFlip has been joined by several other providers, most notably CoinCloud and RockItCoin. 

Due in part to the ongoing expansion efforts of BTM providers, the broader decentralized finance industry is now under pressure to reassess its value propositions and redefine its regulatory boundaries. 

This perspective is shared by more than a few major industry stakeholders, including Ben Weiss, the COO of CoinFlip. According to Weiss, regulatory clarity and transparent oversight are critical stepping stones in the path to the mainstream acceptance of digital assets and decentralized transaction tools.  

“The biggest issue with current regulations is a lack of clarity. By developing a straightforward framework, governments encourage investment and industry growth.”

Representing CoinFlip and the Blockchain Advocacy Coalition, Weiss recently testified in favor of Assembly Bill 2150, a set of pending legislation in California that recharacterized the taxonomy and treatment of digital assets and currencies. 

In 2020, more BTMs have been installed than in all previous years of operation combined. According to CoinATMRadar, there are now 10,877 BTMs across 71 countries. These kiosks allow customers to walk into a store, add cryptocurrency to a mobile wallet and then shop for retail goods online or in a nearby brick and mortar store. BTMs are not only boosting sales in the retail industry, but they’re also revitalizing unbanked communities and alleviating many of the catastrophic effects of banking deserts. 

Bucking the cashless trend

Bucking the cashless trend in favor of the underbanked, there’s been a notable uptick in brick-and-mortar retailers interested in adding more and more ATMs in locations further away from bank branches. Financial institutions want to capitalize on new business opportunities, which means figuring out how to offer convenience and accessibility is key. 

“For brick-and-mortar banks, the solution is installing ATMs in rural areas and LMI areas. That way, physical banks have visibility and value amongst individuals of varying backgrounds and geographic limitations, which means more customer opportunities and less likelihood of prospects opting for online payment alternatives,” said Nishank Khanna, CMO at Clarify Capital 

Furthermore, extending operating bank hours by pushing out operating hours, brick-and-mortar banks are able to accommodate individuals who have to travel greater distances to reach banks. The increased flexibility reduces the potential for customer churn because there are fewer hoops to jump through. 

Online retailers are pursuing the underbanked by allowing customers to add cash to their online accounts. 

“That way, those who don’t belong to banking institutions or have bank accounts are still able to participate in e-commerce,” Khanna said.

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