New Tools for the Unbanked
Until just the past few years, lack of access to the banking system has been an expensive burden on the poor. Just recently, a surge in new financial products make it a lot less expensive to be unbanked. (See also Making Direct Deposit Safe for the Garnished)
It used to be that you either used the banking system, or you paid through the nose to buy individual banking services (3% or more at a check cashing store, $1 or more for a money order, outlandish rates for a payday loan).
Although the barrier to using the banking system is usually described in terms of poverty, merely having little or no money doesn't need to block access. It's really a cluster of related problems that add up to make using conventional banking services so difficult and expensive that people end up choosing to do without:
- No cash to keep a minimum balance
- No regular paycheck to have direct deposited to qualify for a no-fee account
- Not living in a neighborhood with a local bank
- Not speaking (or reading) English well enough to use banking services
- Not having the skills to maintain a check register
- Having a history of bounced checks or unpaid debts
- Working during banking hours
Any two or three of those issues can put the regular banking system out of reach (although someone with a little financial savvy can almost always find a cheap way into the banking system).
But if the way you live your financial life makes the banking system a poor fit, there are now some alternative financial service providers that can be cheaper than regular banks.
The New Prepaid Cards
These alternatives are organized around a prepaid debit card. Instead of cashing a check, they put the money onto your card. This is just as good for you (you can get cash at an ATM) and cheaper for them.
These cards do charge fees — a lot of them. There's often a fee to get a card, a fee to add money, a fee to use an ATM, a fee to check your balance, a monthly fee, etc. But the fees are clear (rather than mysterious the way bank fees can seem to someone whose parents didn't teach them how to use a bank). And they're low — a careful user can keep the monthly charges at just a few dollars (less than they'd pay for a bank account).
Further, we're about to see another step down in these fees. That's because the new cap on debit card swipe fees has an exception for reloadable debit cards — provided the cards have no overdraft charges and allow at least one no-fee ATM withdrawal per month.
That exemption has already drawn American Express into the market for reloadable debit cards. I expect that the other similar prepaid card providers will quickly start offering one free ATM withdrawal per month in order to qualify under the same exemption. (The new American Express card also offers some on-line services — such as checking the balance on the card — for free. I expect competition will force others to follow.)
I still think the banking system is the better choice for most people. But for everyone else, the next generation of prepaid cards will provide most of the banking services they need, and do it with lower fees than ever before.