Research, regulation, industry reports

Banking the underbanked not so easy

Handing out a bunch of prepaid debit cards with the hopes of getting the unbanked population to be banked is proving to be a lot tougher than expected, says a new study.

With more than 40 million American households that don’t use banks or credit unions for their day-to-day financial transactions — amounting to $1.1 trillion in buying power — helping the underbanked establish traditional accounts has long been in the interest of the financial sector.

The Revel Card is a card marketed through local check cashing venues to try to get the underbanked to establish and use traditional accounts.

And getting the underbanked to use debit cards is also in the interest of several community nonprofits, whose mission is, in part, to connect financially underserved Americans with mainstream economic benefits. The Center for Financial Services Innovation (CFSI) studied three nonprofits — Center for Community Change, Consumer Credit Counseling Service of Delaware Valley and Service Employees International Union — that tried to do just that by distributing prepaid debit cards to underbanked consumers.

Offering prepaid cards to the economically underserved has been tried by credit institutions in the past; however, the nonprofits studied by the CFSI report decided that they might be better equipped than large financial services companies to acquaint people with bank accounts because of their face-to-face, hands-on relationship with the  people within the communities they serve.

The groups discovered that several obstacles exist to getting people without accounts to use debit cards. First, the underbanked have to go the most expensive route to deposit and access their money. Many of their employers do not offer direct deposit of paychecks, therefore they incurred exorbitant charges by having to cash their paychecks at check cashing outlets and only then could they deposit the money onto a debit card.

Type of fee for prepaid debit cards Cost
Account opening fee $4.95-$6.95
Monthly fee (primary/secondary card) $2.95/$2.50
ATM withdrawal U.S./international $1.00/$2.00
Signature and PIN purchase Free
Cash back with purchase Free
Direct deposit loading Free
Cash loading fee $2.50-$4.95
Card to card money transfer
(Local bank ATM fees apply to withdraw funds.)
Money transfer $8.95 flat fee

The nonprofits encountered the same problems with bringing the underbanked into the mainstream as others have. Education is the chief concern. Teaching people who are almost exclusively reliant on cash how to use credit cards was a difficult chore. It was resource intensive, requiring customer service support in languages other than English and Spanish, and banking rules, such as temporary holds on deposits, confused new card users — often causing their transactions to be declined.

Immigrant workers also needed resources to remit funds internationally. With cash, consumers could use popular money transfer services such as Western Union to send funds abroad. Transferring money internationally with a prepaid debit account meant foreign recipients needed access to ATM machines. Since the recipients frequently lack such access, the study determined a card-to-cash method of transfer would be necessary for similar programs in the future.

With these lessons learned, CFSI is now looking to conduct future studies of distribution of cards to the underbanked. Nonprofits couldn’t do it successfully by themselves, so perhaps it’s time for banks to step up and use their financial resources to solve the problems that are preventing billions in spending power from passing through their institutions.

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