There’s a large swatch of the country that doesn’t use banks. These people are a huge market, and The New Yorker recently highlighted why you should be looking for opportunities in the space.
Undocumented Income
One of the big blocs that don’t use banks are illegal immigrants. This fact has given the space a bad name. However, it isn’t only illegal immigrants that avoid banks. Anyone who earns cash but doesn’t want to pay taxes can fall into the unbanked or underbanked category.
This is because as soon as money hits a bank, it raises questions as to where that cash came from. A little money isn’t a big deal, but a lot turns into a problem. With more and more people falling out of the workforce, The New Yorker suggests that they are falling into a gray area.
For example, the magazine suggests that: “Off-the-books activity also helps explain a mystery about the current economy: even though the percentage of Americans officially working has dropped dramatically, and even though household income is still well below what it was in 2007, personal consumption is higher than it was before the recession, and retail sales have been growing briskly (despite a dip in March).”
This is a big deal. Bernard Baumohl, an economist at the Economic Outlook Group, told The New Yorker that “retail sales are actually what you’d expect if the unemployment rate were around five or six percent, rather than the 7.6 percent we’re stuck with.”
How to Play
With people from construction workers to web designers falling into this gray space, serving those with limited or no bank relationship is an area that investors playing macro trends should be watching. Here are a few names to consider:
A Leader
Green Dot Corporation (NYSE:GDOT) proudly proclaims “Big Banks, No Thanks” on its retail website. Although the company is technically a bank holding company, its main offering is prepaid and reloadable debit cards. The cards carry the Visa and MasterCard brands. It claims to have around 60,000 retail locations nationwide dispensing its cards.
Although a relatively young company, its top line has been growing steadily. It has no debt and reports to have over $10 per share of cash on its balance sheet. With the shares trading in the mid teens, that doesn’t assign an industry innovator much value. This could be an interesting option for more aggressive investors.
An Old Name
While Green Dot Corporation (NYSE:GDOT) is new, The Western Union Company (NYSE:WU) has been around “forever.”
The company is the dominant money transfer company. Most people write a check to get money from one place to another. However, if you don’t have a bank, that’s not an option. The Western Union Company (NYSE:WU) fixes that problem.
The company has over 500,000 locations in more than 200 countries where a customer can walk in with cash and send it to another person. The bulk of the company’s locations are foreign, so this is a play on several trends. The first is the underbanked in the United States. Second is illegal immigration.
The third is, perhaps, the most interesting — the underbanked in foreign markets. Emerging markets, where The Western Union Company (NYSE:WU) has a material presence, have a massive population of underbanked citizens. The Western Union Company (NYSE:WU) is positioning itself to serve these customers before the banking industry gets to them.
A problem along the key Mexico/U.S. corridor took a toll on the shares last year. They haven’t recovered yet, which means now could be a good time to get in on the cheap.
Getting Into the Industry
Total System Services, Inc. (NYSE:TSS) is a large payment processor. It basically connects the point of sale to the bank that issues a credit card or debit card. That alone doesn’t make the company very interesting with regard to the underbanked sector.
However, it recently agreed to acquire Green Dot Corporation (NYSE:GDOT)’s main competitor, NetSpend Holdings Inc (NASDAQ:NTSP). That will expand the company’s business to include a retail component. And one that will serve the underbanked without competing directly with the banks.
It could actually use its acquisition to expand its relationship with the banks via co-branding. Even without such an expansion, the shift makes Total System Services, Inc. (NYSE:TSS) look pretty interesting as a way to play the underbanked. Its more broadly diversified business adds some safety, as well.
Like Western Union, however, the company is a global player. So, with operations in over 80 countries, including emerging markets, it isn’t a stretch to expect NetSpend Holdings Inc (NASDAQ:NTSP) to expand into new markets after the acquisition is consummated. An all-cash deal, NetSpend Holdings Inc (NASDAQ:NTSP) shareholders should probably lock in gains.
Into the Unknown
No one really knows how large the underbanked market is. However, it is notable and there are some good investment options for tapping into it. The three companies above are a few examples.
The article It’s a Bigger Opportunity Than it Seems originally appeared on Fool.com is written by Reuben Brewer.
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