A recent blog post, entitled “The Top 4 Reasons the Unbanked Pay Prepaid Fees & Why Consumer Groups Should Let Them,” advocates prepaid cards as a good alternative to bank accounts for people who are unbanked and perpetuates three common myths about banks, the unbanked, and prepaid cards. Let's clear up these widespread misconceptions once and for all.
Myth #1: Since banks and credit unions don’t open branches in high-crime areas, prepaid cards finally provide the unbanked population with access to financial services in their communities, but of course there is a cost for such services.
Fact: First, the assumption that all unbanked people live in high-crime neighborhoods is patently false. Being unbanked is a widespread phenomenon. In fact, according to the Federal Deposit Insurance Corporation (FDIC), 8.2%, or 17 million adults, are unbanked. People are unbanked for many reasons, including lack of access to financial institutions in their neighborhoods. A recent analysis by Bloomberg shows that 90% of the 1,826 bank branch closings in recent years have been in zip codes where the income is below the national median. Additionally, while the FDIC Model Safe Accounts Pilot shows that banks could profit from banking the unbanked, most banks continue to ignore this population. At the same time, this past year banks posted their second most profitable year on record.
But lack of access isn’t the primary reason many people are unbanked. Instead, more than half of all unbanked households do not have an account because they do not believe they have enough money (32.7 percent) or they do not need or want an account (21.0 percent), not because they live in high-crime area and therefore don’t have physical access to an account in their community.
Second, the fact that banks and credit unions are not fulfilling their responsibilities to low-income and minority communities by opening branches in these neighborhoods doesn’t give prepaid card issuers the right to enter these markets and charge whatever fees they want.
Not only should banks be required to provide financial services in these areas, but prepaid card fees should be capped as well. Prepaid card issuers act as though they are actually the good guys because they service this market. But greed, not kindness, is the reason they are picking up where banks have fallen down. We shouldn’t allow them to make a bad situation (i.e., lack of equal financial access) worse by giving them carte blanche to charge whatever fees they want.
Myth #2: Transaction fees make the prepaid card value proposition clear because fees are only charged for the services the cardholders use and there are no surprise costs associated with negative balances.
Fact: To imply that prepaid card fee structures are in any manner clear and understandable is ludicrous. And expecting underserved people to find the hidden fees, let alone interpret such complex unregulated fee structures is ridiculous.
First of all, the fees are unregulated and therefore lack the kind of transparency and clear disclosure that consumer protection laws typically require. Second, fee structures vary across cards, so keeping track of them is nearly impossible, and prepaid card issuers create new types of fees all the time. Common fees found on prepaid card plans include ATM fees, inactivity fees, customer service fees, money transferring fees, acquisition fees, point-of-sale-fees, and monthly fees, to name just a few. According to a NerdWallet study, prepaid card users end up spending on average $300 per year in fees.
As the Consumer Financial Protection Bureau (CFPB) has noted, the lack of an industry-wide standard on prepaid card fee disclosure may make it difficult for consumers to understand the cost of the product or to compare fees. As a result, consumers do not know what protections or fees come along with their prepaid cards prior to purchase because such disclosures are contained inside the packaging, thereby preventing consumers from being able to comparison shop in order to make a well-informed decision. This is one of the reasons that the CFPB issued a notice of proposed rulemaking seeking to ensure that consumers’ funds on prepaid cards are safe and that card terms and fees are transparent. As CFPB Director Richard Cordray noted:
The people who use prepaid cards are, in many instances, the most vulnerable among us. All consumers need, and deserve, products which are safe and whose costs and risks are clear upfront. Yet right now prepaid cards have far fewer regulatory protections than bank accounts or debit or credit cards. That’s why the [CFPB is] launching a rulemaking to promote safety and transparency in this emerging market.
Claims that paying $300 in annual prepaid card fees is a good alternative to having a mainstream bank account are especially outrageous when many individuals could open mainstream banking accounts through Bank On programs virtually free. Nearly 70 cities/states/municipalities offer Bank-On programs, which are partnerships between municipal leaders, community organizations, financial institutions, and other community stakeholders, that market low-cost checking and savings products to the un/underbanked. So, avoiding these fees is not only doable, but preferable.
Myth #3: If fees are capped, then prepaid card issuers will either have to find ways to reduce costs or increase revenues from cardholders, perhaps by abandoning low-income cardholders, or adding new services for a fee, or a bit of both.
Fact: The argument that restrictions on fees will eliminate prepaid products from low- and moderate-income neighborhoods and reduce consumer choice is unfounded.
In the past five years, the prepaid card industry has quadrupled—consumers loaded an estimated $19.5 billion onto prepaid cards in 2008, and this rose to nearly $77 billion in 2012. This amount is expected to increase to $168 billion by 2015. Even if fees were capped, prepaid card issuers can still earn millions from these cards. If such issuers choose to abandon the market simply because they aren’t making enough, then they are no better than the banks and credit unions who have neglected this market in the first place.
The unbanked and underserved do need financial services that are available beyond the traditional 9:00 a.m. and 5:00 p.m. banking hours. These consumers value the convenience of non-traditional financial providers that have longer hours. Merchants that sell prepaid services are commonly open until midnight; many are open around the clock. Consumers may find it easier to buy prepaid products than to use traditional banking services.
But arguing that fee caps will eliminate prepaid cards from merchants’ locations in moderate-income neighborhoods, thereby forcing the unbanked and underserved to walk farther and stay up later than they already do, doesn’t follow logic. Instead it’s just a thinly veiled threat that if prepaid card issuers aren’t allowed to gouge consumers they will make them suffer instead. With the ability to still make millions, even if subject to fee caps, it wouldn’t be a financial necessity, but rather a financial decision, and a poor one at that, to withdraw from the market.
As prepaid cards continue their rapid growth, we need to make sure that consumers understand the truth about them, their costs, and low-cost alternatives. Perpetuating myths about prepaid cards will not provide low- and middle-income families with the opportunities they need to build assets and move up the economic ladder. Implying that prepaid card companies are doing poor people a favor is an oversimplified view of the financial oppression faced by low-income and minorities in the U.S. Instead, we need to continue to provide accurate information about the true nature of prepaid products and not what the prepaid card industry wants everyone to believe.