Laura Rowley Money & Happiness

More than 35 million U.S. households are "unbanked" or "underbanked," according to the Federal Deposit Insurance Corporation (FDIC). These people shun traditional institutions for day-to-day financial transactions -- often relying on costly check-cashing stores or payday loans.

Banks and other firms are launching products and services to reach the unbanked -- but they're not the only ones reaping the benefits. Higher-income consumers are also tapping these tools to get a better handle on their finances.

Banking on Technology

"A number of companies are developing new products that will be launched in 2008," says Jennifer Tescher, director of the Center for Financial Services Innovation in Chicago. "Banks realize that attracting new customers is easier than trading consumers with the bank across the street."

Technology has played a key role in the innovations, which range from banking by mobile phone to prepaid debit cards to alternative credit scoring.

Here's a rundown:

• Mobile Financial Services

Among the biggest advances is mobile financial services (MFS), which essentially turns a cell phone into a bank branch or a Western Union.

"Mobile is an important trend for everybody -- it has positive implications because cell phone penetration is so high," says Tescher. More than 40 percent of households earning less than $25,000 have cell phones, according to a 2004 study by research group Mintel.

Non-bank "mpayment" firms -- such as Obopay, PayPal Mobile, and KushCash -- allow users to instantly send cash by phone. For instance, Obopay users can transfer money to someone else simply by keying in their phone number and the dollar amount -- up to $1,000 a week -- for a fee of just 10 cents. (The recipient doesn't pay a fee, but needs to register with the service to collect the cash.)

The majority of Obopay's customers are conventional users: parents who send money by cell to their college-student kids, or friends splitting a dinner check. But Obopay has attracted many unbanked consumers by linking its service to a prepaid debit card. Customers can direct-deposit their paychecks to the debit card and use it to get cash or make transactions, circumventing traditional banks altogether.

Tescher says mainstream banks are focused on MFS as an added convenience for existing customers. "I'm not sure mobile is going to pan out for low-income consumers in the U.S. the way it has for other countries," she says, citing services such as Wizzit Bank in South Africa, where an estimated 50 to 60 percent of the population is unbanked.

Citigroup rolled out the most extensive services this summer, allowing customers to check balances, pay bills, or make other transactions from any cell phone. Other banks have formed alliances with specific carriers, such as Wachovia and AT&T.

• Prepaid Cards

Prepaid debit cards, a mainstay of the subprime market, have become big business -- thanks to Wal-Mart, the new 800-pound gorilla of the sector, and consumer frustration with ubiquitous bank fees.

This summer, Wal-Mart began selling a prepaid Visa debit card for $9 upfront, with a monthly fee of $4.95. Customers can reload it for free through direct deposit, or by cashing a payroll or government check at one of the chain's MoneyCenters. (Other reload methods cost $4.64.)

Wal-Mart, which abandoned a longstanding effort to start its own bank earlier this year, has the inside track on the unbanked market: In March 2006, Scarborough Research found that half of Americans without bank accounts had shopped at Wal-Mart stores in the previous 30 days.

But small startups are entering the debit-card fray, exploiting universal anger over high bank fees -- particularly multiple overdraft charges. (See my earlier column "Less Than Zero: How Overdraft Fees Can Clean You Out" for more on this topic.) Many of the new debit cards have no fees for loading, transactions, or overdraft (the purchase is declined if the card is empty). They also offer better fraud protection. (Funds stored on the card are insured by the FDIC.)

"Banks are feeling the backlash on excessive fees," says James Haworth, a former Capitol One executive who launched Ready Financial Group with several partners in July. "Anyone who has even a possibility of incurring a $35 overdraft fee twice a year is probably better off with a prepaid card."

The pricing on Ready Financial's prepaid READYdebit card is similar to Wal-Mart's: a $10 upfront fee and $5 monthly charge; and free loading, transactions, and online bill payment with direct deposit. (Nearly all debit cards charge an ATM fee.)

But the company is pitching the card to middle-income consumers as well as the unbanked. "We were looking to build a new financial services product that's helpful not only for subprime consumers, but for average people who lose track of their spending," says READYdebit president Will Tumulty.

The idea is to aggregate a category of spending on the debit card that represents a black hole in your budget, such as dining out. You transfer the monthly amount from your checking account to the debit card, use it only for that budget category, and stop spending once the card is empty. If you can potentially save more than $5 in that category by forcing yourself to budget on the card, Tumulty argues, the product is worth the expense.

Debit cards can also be used by parents to introduce teens to sound financial habits. Parents can monitor the card's use online, and send money to it instantly in case of an emergency. (For more on plugging black holes in your budget at no cost, see my blog.)

• Alternative Credit Scoring

Finally, the last few years have seen a flurry of activity in credit scoring. Companies have been devising new data methods to determine the creditworthiness of customers whose financial lives don't register with traditional credit bureaus.

"A lot of lenders across the spectrum are wondering how they can reach the 35 to 50 million people who are unscoreable," says Tescher, referring to the FICO score, a standardized scale of 300 to 850 points calculated by Fair Isaac Corp., which determines the interest rate a consumer will pay on a loan. "Many [unscoreable] consumers can't get loans at all, when some of them are good credit risks."

For example, Payment Reporting Builds Credit (PRBC) in Maryland is an alternative credit bureau that allows individuals and small businesses to build a credit history by reporting data that don't show up in FICO scores -- on-time payments of rent, utilities, medical bills, alimony, and child support, and other recurring bills. Meanwhile, FICO has launched its own "expansion score."

Alternative data methods can assist consumers who may have previously enjoyed a high FICO score, but were derailed financially by an illness, layoff, or divorce. "The focus is on how to understand the data, what kind of data is predictive, and how to integrate it into existing systems," Tescher says.

(For more on the data tracked by your FICO score, and how to enhance your score, see my blog.)