The tremendous cost of check cashing for American Workers (and how to avoid them)

The team at CurrenC SF has put together an excellent video about the benefits of direct deposits to alleviate the very high costs of check cashing for American workers.

Here it is:

This video Copyright CurrenC SF and the San Francisco Office of Financial Empowerment

 

Coming soon: DirectDeposit.Center  the place that delivers Direct Deposits to All.

 

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Prepaid is the new checking… Now what’s next?

Prepaid As Checking is a FoundationI think the prepaid card industry has reached a maturity plateau in terms of features, access, and acceptance. Products like H&R Block’s Emerald, American Express Bluebird, T-Mobile’s Mobile Money and our own UPside card are pretty good alternatives to checking accounts.

While you don’t get a paper checkbook with those cards, you can pay your bills electronically, and at least the Bluebird and the UPside cards offer paper checks on demand.

You can also deposit paper checks directly into the cards through mobile photo deposit powered by companies like FIS and Ingo Money or services like WalMart’s Rapid Reload.

Don’t get me wrong: prepaid cards still have a lot of growth potential. A majority of people who could benefit from them still don’t use them, mostly because they are not aware of their availability, or because they confuse them with one-time use gift cards. So, the industry has some work to do marketing the cards to the right people through the right channels. For example, under-banked employees who work for small and medium businesses generally do not have access to dedicated payroll cards; so the new generation of “prepaid as checking” has an important market to address among the 110M Americans who work for the 2M businesses of less than 1,000 employees.

Prepaid cards have the ability to upgrade most consumers out of the “cash only” economy by offering them a way to manage their deposits and payments electronically (and with paper checks for as long as paper checks will survive). So far so good.

What should the industry do now to bring consumers one or several more levels up in the world of banking?

Beyond prepaid: Savings and CreditAmong the several services that people need beyond deposits and payments, are at least 2 obvious ones:

  • Savings: the ability to set money aside for later
  • Credit: the ability to borrow some money

Neither of those two services are easy to deploy, in particular among those who need them most: low to moderate income (LMI) consumers.

Savings

Allowing people to set money aside for later is in fact technically easy: several prepaid cards already provide savings “purses” or sub-accounts. Others offer a separate but easy to open savings account.

What is difficult is to motivate people to save, especially when they live paycheck to paycheck and don’t have much to save at all. Current interest rates are so low that the interest accumulated at the end of the year is just a few dollars or even less for most people.

Research is being conducted by the likes of Doorways to Dreams to “gamify” savings: this consists of combining the act of savings with some fun, challenging and rewarding activities other than just accrued interest. Financial fitness games, sweepstakes, contests… are all options being explored. SaveUp is a good example of savings gamification.

Credit

Credit is even more difficult: prepaid cards cannot help build up credit files and credit scores because they are just a deposit instrument.

Very short term loans from payday lenders and pawn shops are easily accessible to prepaid cardholders with no credit history, but they are costly and don’t usually build credit scores.

Alternative (to FICO) credit scoring services that rely on “Big Data” tend to have a market ignition problem, because they are of little use to creditors if few borrowers use them, and of little use to borrowers if few creditors consult them. While the law requires creditors to consider all available credit scores, the market reality is that the FICO score is still indispensable for the vast majority of consumers, while the recent interest in Big Data based scoring has not yielded practical scalable products yet.

Un(der)banked people eagerly seek credit cards because they do build up mainstream credit files and scores by reporting to the top 3 Credit Bureaus. However, the standard qualification criteria for mainstream credit cards are ill-suited because they rely on the very same credit scoring system they contribute to.

Here is how we think access to credit can be provided to prepaid cardholders:

  • use the savings that users of certain prepaid cards have been able to set aside as the security deposit  for a secured credit card
  • use the history of prepaid card transactions as input data for the underwriting decision, to evaluate the creditworthiness of the cardholder

Secured credit cards are not very widespread but they require little of no prior credit history and they do report to the 3 main credit bureaus.

Eligible people would end up with two cards in their wallet:

  • The prepaid card available as a ‘safe to spend’ instrument for everyday purchases.
  • The secured credit card to be used very carefully as its bill will come at the end of every month. When handled within the intended rules, the card starts contributing to the user’s FICO score.

In summary, the prepaid card industry has the opportunity to “graduate” its customers into savings and credit services, by using prepaid cards as a foundation. This is a bright and promising future.

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In New York Times, Prepaid Fee Story Misses The Mark

Fees?In yesterday’s New York Times story Paid via Card, Workers Feel Sting of Fees, reporters Jessica-Sliver-Greenberg and Stephanie Clifford raise an important question but fail to answer it: are a significant number of employers forcing hourly workers to use expensive payroll cards?

The three key conditions here are “significant number,” “forcing” and “expensive”. If these conditions are true, this clearly is a front-page size problem. But I can’t find a single concrete example in the story of an employer that forces employees to use expensive payroll cards as an only option.

Instead, the story smears by implication all payroll prepaid cards by naming a couple of outlier fees. And it implicates major retailers like Taco Bell, Walgreens and Wal-Mart up high, only to emphasize later in the story that these companies offer their employees payroll cards as one choice out of several, not as an only option. The story also fails to examine whether these companies’ payroll cards have expensive fees for common uses. I am familiar with the Wal-Mart prepaid card programs. They are known in the industry as some of the most cost-effective accounts available to consumers.

The problem with a story like this is it sows mistrust without adding relevant information for the people who are most impacted: the underbanked.

What would be more helpful? For one, show an actual fee table for a card like the JP Morgan Chase payroll card so readers can see if it is expensive for the way they bank. Then compare those fees side by side with a more affordable prepaid program, a checking account and the cost of relying on check-cashing stores and money order services. Base everything on someone whose annual income is below $25,000 and whose average monthly account balance is below $500.

Also, explore alternatives. For instance, ATM fees are complicated because there are multiple networks involved in different ATMs. It’s unclear whether the charges are from the payroll card program or the ATM network. But most prepaid cards let consumers get cash back for free at the grocery store. People like Krystal McLemore in the Times story who like to get smaller amounts of cash out more frequently can avoid fees altogether by skipping the ATM and using the free cash back features.

For broader context, mention that groups like the Center for Financial Services Innovation (CFSI) have published a set of principles – the Compass Principles – and that consumers and employers may want look at and prioritize card programs that subscribe to these principles.

And perhaps point to the Consumer Financial Protection Bureau’s Project Catalyst program, which has a major initiative to research how the underbanked use features on the more advanced prepaid programs to do things like avoid high-interest payday loans.

 

I wouldn’t expect New York Times journalists to be experts in the payments industry or underbanked consumers. But if the story is about how employers are forcing employees to use expensive payroll cards, I would expect good reporting to uncover specific examples and additional reporting to provide high-quality data and context to put the problem in perspective. Finding a few people to say they’re upset and citing the general growth of prepaid cards as a proof of the problem’s scope just places all payroll programs under the same umbrella and paints them with a black brush.

The lack of specific examples, quality data and thoughtful context turns this into a “he said she said story” that no doubt gets people excited and drives clicks but that is more likely to confuse than help the impacted audience.

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