New Tools for the Unbanked

Philip Brewer — Wed, 15 Jun 2011 10:24:21 +0000

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).

The Unbanked

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.

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.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Making direct deposit safe for the garnished

Philip Brewer — Wed, 25 Jun 2008 12:26:52 +0000

The US Treasury pays more money to more people than just about anybody in the world. Last year it disbursed more than $1.6 trillion in 982 million individual payments. As you can imagine, they save a lot of money when they can make direct deposits instead of printing paper checks. So they're always trying to figure out what makes people reject direct deposit. One such thing is garnishment.

Social Security and other "lifeline" payments from the federal government such as veterans benefits, are supposed to be safe from garnishment--they can't be taken away just because you've lost a lawsuit or are behind on your bills. As a practical matter, though, if the recipient lets the money be direct deposited into his or her checking account, access to the money can easily be lost. Even bank accounts that hold only exempt money can be temporarily frozen while the bank sorts out the facts--and if the account has also received money from other sources, some or all of it can be seized. That makes a paper check awfully attractive to people facing garnishment--they can cash their check and get their money, even if their account is frozen.

One solution that the Treasury has come up with for this issue is the Direct Express card. It's a debit MasterCard, set up to receive payments from Social Security and other federal payment systems, that can be used to make ordinary purchases and one cash withdrawal per month for free.

It's primary purpose is to make direct deposit available to people who don't have a bank account. (People in the financial industry call them "the unbanked.") The sweetener for them is that they don't have to pay the fee that a check-cashing place would charge. But the Treasury is also going after people besides the unbanked, such as those worried about garnishment.

With almost 20% of payments still not being made electronically, the Treasury has a strong incentive to figure out what problems are keeping people from choosing direct deposit--and solve them.

I've mentioned before that one of the advantages of having some of your assets in legal compartments such as IRAs and 401(k)s is that they are somewhat protected against being seized if you get over your head in debt, lose a lawsuit, make a mistake on your taxes, get divorced, or otherwise have someone out there with some sort of legal claim on your money.

These different kinds of compartments (and similar ones like pensions, annuities, trusts, insurance, etc.) get these protections by law. The laws differ in specific details, which suggests to me that it makes sense to use more than one kind of special compartment, just in case your particular situation leaves one kind of compartment more exposed than another.

This Direct Express card is another special compartment, not subject to garnishment in most circumstances, and available to anyone receiving federal benefits.

Although it's cheaper than printing paper checks, it's still not as cheap for the Treasury as direct deposit to your regular bank account, so the Treasury is looking to solve the garnishment problem for ordinary bank accounts as well. Among other things, they're working to "provide guidance to financial institutions on how to discern if there are exempt funds in an account and what amount of funds should not be frozen." (That according to Deputy Assistant Secretary for Fiscal Operations and Policy Gary Grippo, testifying yesterday to a House subcommittee.)

If you receive federal benefits, and are subject to garnishment, the Treasury is looking out for you. And, if you're not, the Treasury is trying to save a few dollars of taxpayer money.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: