The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

One of the largest concerns involving the rapidly growing prepaid card market is that money deposited onto prepaid cards does not have the same protections as money held in mainstream bank checking accounts. Specifically, prepaid cardholders are not covered under Regulation E of the Electronic Transfer Fund and therefore do not have protections against lost or stolen cards like those afforded to checking account debit cards. Nor are prepaid card companies required to provide consumers with important information such as statements, receipts, and notifications. Additionally, prepaid cardholders lack the benefit of having Federal Deposit Insurance Corporation (FDIC) insurance of up to $250,000 on their accounts.

According to the Consumer Financial Protection Bureau (CFPB), from 2007 to 2011 the dollar amount loaded onto prepaid cards grew 477% ($12 billion in 2007 compared to $57.2 billion in 2011), and this year Americans are expected to load over $200 billion onto these cards. Prepaid cards essentially function that same as debit cards, but without the underlying banking account, and are frequently touted as the same thing as a checking account despite the fact that important consumer protections may be missing from these products. These cards are typically marketed to the 34 million Americans who lack access to mainstream banking services: the so-called unbanked and underbanked.

While some prepaid card providers are able to offer their customers FDIC insurance by complying with the FDIC’s requirements for “pass-through insurance,” many prepaid cards do not. Moreover, it is often impossible for a consumer to know whether or not a prepaid card has such insurance because issuers do not have disclosure requirements. In addition, most consumers probably do not even understand the ramification of not being FDIC-insured. Yet, since the establishment of the FDIC in 1933, no depositor has ever lost money from FDIC-insured funds.

Money Transmitter Laws regulate any entity that acts as an intermediary of a transfer of money between two parties. PayPal, for example is considered a money transmitter because it serves as an intermediary for a large portion of online purchases. Thus PayPal must comply with all 50 state money transmitter laws. In addition, PayPal has pass-through insurance, meaning funds held by PayPal are insured by the FDIC up to $250,000. PayPal is not legally required to purchase pass-through insurance in order to protect consumer funds, however it is required to comply with state money transmitter laws. A recent report by the Pew Charitable Trust details the state-by-state requirements for complying with money transmitter laws in terms of insuring consumer funds. According to the report, requirements for insuring consumer funds vary across all 50 states, and in general, consumer protections required by money transmitter laws are much worse than the protections offered by FDIC insurance. For example Montana, South Carolina, and New Mexico money transmitter laws do not require transmitters to insure consumer funds at all, whereas New York transmitter laws require the transmitter to purchase a $500,000 surety bond. If companies were to comply with the floor state money transmitter requirements across all 50 states they would be required to purchase on average a $75,000 surety bond in each state. Thus, if the money transmitter went under, there would be insurance to cover an average of only $75,000 losses per state, not to mention the fact that three states do not even require the transmitter to purchases insurance.

The Pew report also points out that prepaid cardholders without FDIC-insured funds would likely be required to navigate burdensome legal processes in order to obtain their funds in the event of a money transmitter default.  However, it is unclear what this legal process would like; it is implied that most prepaid cardholders would lose their money in the event that the uninsured company became insolvent.

Even when prepaid card companies have FDIC pass-through insurance, the protections for consumers are thin at best. One of the largest prepaid cards on the market today is the Bluebird card issued by American Express and Walmart. When Bluebird was first launched, it did not have FDIC pass-through insurance. Only recently, after criticism, did they decide to provide this feature. The FDIC insurance only covers the funds in the event that the bank in control of the custodial accounts (Wells Fargo or American Express Centurion Bank) becomes insolvent. If American Express becomes insolvent, consumer funds are not protected. 

In addition, the Bluebird card has limited coverage for cardholders who lose their cards. While Regulation E protects mainstream credit and debit cardholders against lost or stolen cards, prepaid cardholders are afforded no such protections, and most companies do not voluntarily offer such protection. According to Bluebird’s cardmember agreement, lost or stolen cards are replaced with a value equal to the available funds on your card at the time you notify Bluebird of the loss or theft. By that time a cardholder’s funds have likely been taken. Also, the cardmember agreement details a laundry list of exclusions comprising almost any imaginable situation in which a card would be lost, stolen, or damaged. So in reality, if you lose your Bluebird card, you lose the money on the card.  

To ensure that the growing number of prepaid card users are protected, the federal government should require that all prepaid card issuers offer FDIC insurance and comply with Regulation E. While the prepaid market may be new, there is no reason that the same, tried-and-true protection given to debit cardholders can’t also be required for prepaid cardholders. 

[Editor's Note: The Illinois Asset Building Group will sponsor a free webinar on prepaid cards on May 21, 2013. Learn more.]

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In March, the Federal Reserve released a report examining the use of mobile banking in the U.S. The report, which defines mobile banking as “using a mobile phone to access your bank account, credit card account, or other financial account,” revealed mobile banking is on the rise, up 33% since December 2011. 

According to the report, the most common use of mobile banking is to check account balances or recent transactions (87% of mobile bank users). The second and third most common uses of mobile banking is to transfer money between accounts (53%) and to receive text message alerts (29%).

The report also discusses the use mobile banking by the un- and underbanked. According to the most recent Federal Deposit Insurance Corporation (FDIC) study of the un/underbanked, more than 1 in 4 households are un- or underbanked (28.3% or 68 million people). According to the Federal Reserve mobile banking report, the un/underbanked make significant use of mobile phones and smartphones. Among the unbanked, 59% have access to mobile phones, and 50% of these are smartphones. Among the underbanked, 90% have mobile phones, 56% of which are smartphones. In general, the low-income population has a high rate of access to mobile phones. Seventy-six percent of adults earning less than $25,000 per year have a mobile phone, and 40% have smartphones. Yet, despite their high rates of mobile phone access, people earning less than $25,000 are far less likely to use mobile banking compared to people making over $100,000 (16.7% compared to 28.4%). In addition, people who lack a high school degree are far less likely to use mobile banking than those with a bachelor’s degree or higher (5.6% compared to 37.1%). 

In the search for new, creative ways to expand access to banking among the un- and underbanked, the idea of mobile banking has generated momentum among asset building advocates. Specifically, it is hoped that digital access to mainstream banking might make it easier for people to avoid costly alternative financial services such as payday lenders, pawn shops, and check cashers. Unfortunately, since the most common uses of mobile banking are tied to an already existing account, these types of mobile banking do nothing to help bank the un- and underbanked.

One mobile banking use that has seen the greatest increase is depositing a check by phone. This feature, known as “remote deposit capture,” nearly doubled in usage from 11% in 2011 to 21% in 2012. This feature, particularly if combined with Bank-On programs that offer low or no-cost bank accounts to the unbanked, could harness mobile technology in a way more likely to benefit low-income people. 

According to the FDIC’s report on the un- and underbanked, the most commonly cited reason for using non-banks instead of banks was convenience; this was cited by 45.2% of all households that used non-bank check cashing and 56% of all households that used non-bank money orders. These results are similar to those reported in 2009. Convenience was the most common reason given by both underbanked and fully banked households. Among under­banked households, the second most common reason for using non-bank check cashing was “to get money faster” (18.4%), while the second most common reason for using non-bank money orders was that “a bank charges more” (28%). Among unbanked households, the most commonly cited reason for using non-bank check cashing was the fact that the household did not have a bank account (38.9%); convenience was the next most common reason (28.7%). These were also the most common reasons for unbanked households’ use of non-bank money orders, although the order was reversed: the most common reason for using non-bank money orders was convenience (39.1%), and the second most common reason was that the household did not have a bank account (27.3%).

By linking the remote deposit capture mobile banking feature and Bank On programs, which provide low-cost accounts to consumers, mobile banking could become more frequently used among the un- and underbanked. The convenience of this feature and its low cost, combined with access to an account through the Bank On program, could encourage this population to become banked.

To learn more about mobile banking in the lives of low-income and un/underbanked people view our webinar and read our Clearinghouse Review article. 

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In December, the Federal Deposit Insurance Corporation (FDIC) released the 2011 Survey of Banks’ Efforts to Serve the Unbanked and Underbanked. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services (AFS). 

In September 2012, the FDIC released its 2011 National Survey of Unbanked and Underbanked Households, updating its findings from its original 2009 report, and found large increases in the number of unbanked and underbanked households. According to the report, 8.2% of all households in the U.S., 17 million adults, are unbanked; and 20% of all households, 51 million adults, are underbanked. This is a 7% and 16% increase from 2009 respectively. 

The FDIC report released in December examines how banks interact with unbanked and underbanked (un/unbanked) and underserved people and updates the survey that was done in 2009. The purpose of this new report is to understand the current banking practices that affect un/underbanked people, and the extent to which insured depository institutions reached out to the un/underbanked. Unfortunately, since the 2011 survey instrument was considerably revised from the 2009 one, it is largely impossible to compare results from the two surveys. Thus, while the number of un/underbanked households has continued to grow, it is unclear whether or not banks’ efforts to bring these households into mainstream banking has kept pace. 

The report shows that 48% of banks required a minimum $100 deposit to open a basic checking account. While the minimum opening deposit may serve as an entrance barrier for people living paycheck to paycheck, 65% of banks did not charge monthly maintenance fees for their basic checking accounts, which can be of great benefit to many low-income people. Based on the report it appears that a large percentage of banks surveyed have low-cost checking and savings products that would greatly benefit people relying on costly AFS products, such as check cashing and payday loans. However, as the FDIC’s September report on unbanked and underbanked people shows, these low-cost products are not being utilized by the millions of un/underbanked people. The high rates of un/underbanked appears to be largely related to shortcomings on the part of the banks in marketing these low-cost checking and savings products to the un/underbanked.

Only 37% of banks in the survey said they actively marketed products to underserved populations. Of these banks, a plurality, 39%, said that their primary tool for marketing was forming community partnerships. Community partnerships are valuable when trying to reach underserved populations, because many community organizations are in direct contact with un/underbanked clients. Bank-On programs across the country have shown that such a partnership strategy is very effective. In 2011 nearly 70 cities/states/municipalities used the Bank-On model, which is driven by partnerships between municipal leaders, community organizations, financial institutions, and other community stakeholders, in order to provide low-income consumers access to mainstream financial services. The primary strategy of Bank-On is to market low-cost checking and savings products to the un/underbanked. Community organizations coordinate with banks to provide their clients the opportunity to feel comfortable walking into a bank and opening a low-cost checking and savings account. The community organization educates its clients about the opportunity to open a bank account and encourages clients to visit the partnering bank. Yet, according to the FDIC’s December report, too few banks, approximately 14% of all banks surveyed, are involved with community partnerships in an effort to bank the un/underbanked. Overall the survey shows that banks have affordable checking and savings product yet they appear to be avoiding marketing these products to underserved populations. The question is why? The answer lies in misperceptions held by banks. In the survey, banks reported that they believed obstacles for offering financial products and services to the underserved were fraud (32%), underwriting (28%), and profitability (24%). However there is no evidence that underserved people cause a burden to a bank’s bottom line. In fact there is evidence suggesting that the un/underbanked market would be safe and profitable for banks. In 2011, the FDIC launched the Model Safe Accounts Pilot in which banks offered low-cost savings and checking account products to un/underbanked participants. The results of the pilot study showed that these accounts were safe and profitable for the banks. Thus, the anxiety that banks have about the un/underbanked population appears to stem more from ingrained prejudice and stigma than from reality. 

Since 2011, the FDIC has produced several research studies and reports that build an extremely compelling case for why banks should reach out to un/underbanked people. The studies have shown that millions in the U.S. lack access to mainstream financial services, that many banks already have low-cost products, and that un/underbanked people would in fact be a valuable market for the banks to tap into. It seems to be a win-win situation for everyone involved. Yet, banks are not acting on this opportunity. More work must be done to encourage and facilitate partnerships between banks and community organizations.  

Chicago-area community organizations interested in participating in Bank-On Chicago can contact Alex Hoffman at the Shriver Center or the visit the City of Chicago Treasurer’s Office’s Bank-On Chicago website.  

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In January 2011, the U.S. Treasury Department launched a pilot to offer taxpayers a safe, convenient, and low-cost financial account for the electronic delivery of their federal tax refunds. Specifically, Treasury sent letters to low- and moderate-income taxpayers who were likely to be unbanked or underbanked inviting them to participate in the MyAccountCard pilot program. 

Under the pilot program, Treasury randomly gave taxpayers several different variations of a Visa® branded MyAccountCard card in order to evaluate which product features, fee structures, and marketing messages generated the greatest positive response from taxpayers. These features, which helped cardholders limit the costs of using the card, included free point-of-sale transactions, free online bill pay, free ATM cash withdrawals at more than 15,000 ATM machines nationwide, and free cash back at participating retail stores.  

This month the Urban Institute released the results of its evaluation of the pilot in a study entitled Tax Time Account Direct Mail Pilot Evaluation. The report, which evaluated the pilot program’s effectiveness at streamlining the tax refund process and expanding access to banking for the unbanked and underbanked populations, will help determine the benefits and feasibility of a card account as an integrated part of the tax filing and refund process.  

Similar to other federal programs that already use electronic money delivery systems, such as Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP), Supplemental Security Income (SSI) and Social Security, the MyAccountCard pilot program provided taxpayers the option to receive their tax refunds electronically. In addition to providing taxpayers with a debit card on which receive their tax refund, this program offered some taxpayers a traditional savings account linked to the card that could hold their tax refund, as well as any other money individuals choose to place into their accounts.  

While the option to receive tax refunds electronically already exists, it can only be utilized by people who already have bank accounts and is mainly utilized by upper-income families. Given that 17 million adults are unbanked and 43 million are underbanked, this direct deposit tax refund option is underutilized by most low- and moderate-income families, hence the need for the pilot that, according to the report, would provide people with a “safe, low-cost” bank account.

In addition to benefiting the individual, this proposed program would benefit the government by cutting costs. Electronic payments are cheaper to administer than paper checks ($1.02 to issue a paper check compared to $0.10 for an electronic payment) and electronic payments are safer and more reliable than paper checks. As a result, Treasury has begun increasing its use of electronic payments. In December 2010, for instance, Treasury issued a final rule to require anyone applying for Social Security benefits after May 2011 to receive payments electronically (either via direct deposit or a Direct Express prepaid card). Those already receiving benefits are required to switch to electronic payment by March 2013. Also, in addition to this tax refund pilot program, last year Treasury launched another pilot program to encourage current and potential payroll card users to have their 2010 federal tax refunds deposited directly onto payroll cards. 

Opponents, on the other hand, believe that the Urban Institute’s evaluation proves that the pilot program is a failure and that Treasury should not continue with its efforts to increase electronic payments. In fact, even before the report was released, Rep. Dave Camp (R-MI), Chairman of the House Committee on Ways and Means, and Rep. Charles Boustany, Jr. (R-LA), Chairman of the Oversight Subcommittee of the House Ways and Means Committee, wrote a public letter to Treasury Secretary Timothy Geithner expressing their disappointment with this pilot program, saying it was a waste of $1.5 million in taxpayer money since only 0.3% of the target population took up the offer. Yet, as the authors of the report note, the 0.3% uptake rate is typical for bank or credit card solicitations and does not indicate that the pilot was unsuccessful. In fact, the take-up rate was significantly higher for people who were most likely in unbanked households—nearly 0.8%. Moreover, as the report also notes, in an actual program, information about the prepaid card would be distributed directly in the tax filing and refund process rather than through direct mail offers thereby increasing the take-up rate.

Overall, the report concludes that there is an apparent demand for this product and that, with the proper fee structures and marketing, many people would utilize these accounts. By leveraging government electronic payments and bringing more Americans into the financial mainstream, this and similar programs could benefit both consumers and the government. 

This blog post was coauthored by Alex Hoffman.

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In the search for new creative ways to expand access to banking among the un- and underbanked, the idea of mobile banking has generated momentum among asset building advocates.  

Currently 34 million Americans are either unbanked or underbanked constituting more than one in four (28.3%) of households. Consumers who are “unbanked” do not have a checking or savings account, while those who are “underbanked” may have a checking or savings account but rely primarily on alternative financial services for their financial needs. Unbanked and underbanked Americans pay a high price for not being banked—they pay high fees to cash checks and are unable to earn interest on savings, develop credit, or obtain loans from mainstream financial institutions. This population is forced to use expensive alternative financial service products such as payday loans, refund anticipation checks, check cashiers, and auto title loans.

Yet this population does have cell phones. Approximately 83% of U.S. adults have mobile phones; last month, a new report indicated that by 2013 smartphones will account for half of the mobile phone market. While mobile phone penetration is less in lower income levels, nearly 75% of U.S. adults in households earning less than $20,000 a year have a mobile phone, and 20% have a smartphone. Among individuals who are unbanked, 65% have access to a mobile phone, and 91% of the underbanked have a mobile phone. Thus, mobile banking has taken on a new urgency in the U.S.

In fact, over the last five years, mobile banking options offered by large banks and other companies have proliferated. In general, electronic or mobile banking refers to a broad spectrum of services and products that are delivered electronically. Often a distinction is made between “mobile banking,” which refers to using a mobile phone to access a bank account, credit card account, or other financial account, and “mobile payments,” which refers to any type of payment made using a mobile phone including purchases and bill payments

Currently 92% of the top twenty-five banks in the United States offer mobile banking services.  Under the bank-based model, established banks offer mobile banking as another way for existing customers to access their accounts. The most frequent services used by bank-based mobile banking customers were checking financial account balances or transaction inquiries (90%), followed by transferring money between accounts (2%), or receiving text alerts from banks (33%). Unfortunately, since these uses are tied to an already existing account, this type of mobile banking does nothing to help bank the un- and underbanked.

Linking existing programs and strategies to bank the unbanked to mobile access technologies would yield increased opportunities for reaching the unbanked and underbanked. For example, Bank On programs, which are available in many cities and states across the country, offer low- or no-cost bank accounts to individuals who are unbanked as an incentive to bring them into the financial mainstream. Offering Bank On USA accounts through mobile phones could significantly reduce the number of unbanked and underbanked Americans.

The growth in digital technology and the use of technological advancements to expand banking options will continue to expand access to the financial mainstream. However, unless special care is taken to make sure that such access is also available to the un- and underbanked, this technology could potentially create an even greater divide between the banked and the unbanked, thereby decreasing opportunities for financial security among the un- and underbanked.

To learn more about mobile banking and its implications for low-income and un/underbanked communities view our webinar and read our law review article.

This post was coauthored by Alex Hoffman.

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For many Americans, a checking account is the basic building block of assets building and establishing a long-term financial history. Although the consumer benefits of full-service checking accounts are well known by banks, the country’s top five banks (Chase, Bank of America, Citibank, U.S. Bank, and Wells Fargo) are making it harder to maintain these accounts by attaching fees to the most basic banking transactions.

Prior to the collapse of the economy, banks focused heavily on building relationships with customers by offering incentives such as free checking. Free consumer checking accounts were issued with the expectation that they would develop into deeper banking relationships with customers who also needed mortgages, loans, and credit cards. However, the recent trend among big banks has been to try to recoup lost revenue, resulting from the government restrictions promulgated under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, by increasing the amount and type of fees on checking and other accounts. This is despite the fact that annual reports from each of the five major banks show a steady increase in profits since the $700 billion bank bailout in 2008.

A closer look at the new checking account fee structures adopted by the major banks shows that they provide incentives only for the most profitable account holders. According to Moneyrate.com’s 2012 rate survey, the average amount required to open a checking account was $408.76, up from $391.41 in 2011. The higher this minimum becomes, the more low-income customers are forced to go unbanked. In fact, the 2011 FDIC survey of the unbanked and underbanked showed that the number of unbanked households increased from the results of the 2009 survey. It also noted that, of those households that are underbanked (meaning that they have at least one account with a financial institution but also use alternative financial services), 29.3% do not have a savings account, while about 10% do not have a checking account.  

Banks have also increased monthly fees. Among banks that charge a monthly fee, the average cost was $12.08, up from $11.28. Yet, all major banks waive monthly maintenance fees if a customer has direct deposit, has multiple financial relationships with the banking institution, or has high account balances—the 2012 survey data showed banks required an average balance of $4,446.57 to get a monthly fee waived, up from $3,590.83. Most low-income account holders, however, do not qualify for fee waivers and can spend up to $145 a year just to maintain their accounts. Thus, banks are simultaneously making the fees harder to avoid for low-income clients, while offering wealthier account holders free full-service checking accounts.

Unsurprisingly, customers who do not have enough cash assets to qualify for a fee waiver or who cannot afford the new monthly fees associated with basic banking accounts are looking to new ways to manage their money. This has resulted in many low-income consumers switching to prepaid cards as an alternative to traditional banking. In 2001, an estimated $57 billion was loaded onto prepaid cards, and this figure is projected to grow 47% to $167 billion by 2014. Prepaid cards work like debit cards, except they do not require a bank account. Although originally offered by non-bank entities, four of the five major banks are now marketing prepaid cards as an attractive alternative to full service bank accounts, and advertising them as a low-cost alternative to traditional checking accounts. What most customers do not know is that prepaid cards are not as regulated as banks and leave customers vulnerable to financial insecurity. According to a study by the PEW Foundation, most of these cards carry between 7 and 15 different kinds of fees. Additionally, depending on how they are structured, many of these cards may not have FDIC insurance, which protects deposits up to $250,000.

The current state of customer-bank relations further highlights the need to provide low-income consumers with low-cost alternatives to traditional banking, while also providing the financial protections missing from prepaid cards. In response to these needs, in 2011 the FDIC launched a Model Safe Accounts Pilot. This pilot was a case study designed to evaluate the feasibility of financial institutions offering safe, low-cost transactional and savings accounts that are responsive to the needs of underserved consumers. Safe Accounts are checkless, card-based electronic accounts that allow withdrawals only through automat­ed teller machines, point-of-sale terminals, automated clearinghouse preauthorizations, and other automated means. The final report on the pilot, which was released in April of this year, showed that most institutions reported that the cost of offering Safe Accounts was roughly the same if not lower than the costs of offering other accounts because the pilot accounts do not have any paper check-related costs. 

More recently, the California Reinvestment Coalition designed the SafeMoney account as another template for use by banking institutions across the country. SafeMoney accounts are geared toward low-income households and offer safe and affordable full-service checking account services for a flat monthly rate. SafeMoney accounts provide customers access to a debit card, money orders, bill pay, and remittances so that customers can do all of their financial transactions through one account, while also providing the necessary consumer protections missing from prepaid cards, such as liability from theft, fraud, or unauthorized use. SmartMoney accounts also prohibit overdraft fees and provide customers with real time information on account balances.

Unfortunately, “free checking” is likely a thing of the past; however, if the major banks utilize models such as the Safe Account or the SafeMoney account, low-income customers will have access to one of the basic building blocks of financial stability and economic mobility. 

This blog post was coauthored by Stephanie Patterson.

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The Federal Deposit Insurance Corporation (FDIC)’s recently released report, 2011 National Survey of Unbanked and Underbanked Households, updates the FDIC’s findings from its original 2009 report and has found large increases in the number of unbanked and underbanked households.

Specifically, the new report finds that 8.2% of all households in the U.S., 17 million adults, are unbanked; this is a 7% increase from 2009. In addition, 20% of all households, 51 million adults, are underbanked; this is a 16% increase from 2009. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services (AFS).

The report also examines the demographics of unbanked and underbanked populations. Young, minority, and low-income households were found to be the most likely to be unbanked and underbanked. African Americans have the highest unbanked and underbanked rate: 21.4% and 33.9% respectively. Hispanics also have a high unbanked and underbanked rate compared to the overall population: 20.1% and 28.6% respectively. Unmarried female-led households are also more likely to be unbanked (19.1%) and underbanked (29.5%) compared to the overall population (8% unbanked and 20.1% underbanked).

Most notably, the 2011 survey added questions about the types of accounts held by a household, as well as the reasons households do not have accounts. Twenty-nine percent of all households lack a savings account, while 10% lack a checking account. The most common reasons why households reported for not having a bank account is that they feel they do not have enough money for an account, or they do not need or want one. Yet, households that have previously had an account are less likely to report that they do not need or want an account relative to those that have never had one.

The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday lenders, rent-to-own stores, or pawn shops. This year’s report also revised the definition of AFS to include remittances, and revised questions related to the timeframes during which households used AFS. The number of households that have used AFS has increased. In 2009, only 36.3% of U.S. house­holds had used an AFS product, whereas in 2011, 40.9% of households had used AFS products. Specifically, almost two-thirds (64.9%) of unbanked households had used at least one AFS product in the last year, and close to half (45.5%) used AFS in the last 30 days. The proportion of households that use AFS is higher among younger, less educated, and lower-income populations, and higher proportions of black and Hispanic households use AFS than white households.

While overall AFS use has increased since 2009, the report found that transaction AFS services (non-bank money orders, non-bank check cashing, and non-bank remittances) were more widely used than AFS credit products (payday loans, pawn shops, rent-to-own stores, and refund anticipation loans). Among unbanked households, 45.8% used only transaction AFS, 2.7% used only credit AFS, and 14% used both transaction and credit AFS. Among underbanked households, 75.7% used only transaction AFS, 9.4% used only credit AFS, and 13.5% used both. For example, 1.6% of unbanked and 7.9% of underbanked households had used payday loans within the past 12 months. Such results are consistent with Pew’s recent report on payday lending, Who Borrows, Where They Borrow, and Why: Payday Lending in America.

In terms of non-bank remittances, 3.7% of all U.S. households, including 9.2% of unbanked and 14.4% of underbanked households, used a non-bank remittance in the last year. Not surprisingly, convenience (32.5%) and speed (23.5%) were the most common reasons why households use non-bank remittances. The fact that unbanked households do not have a banking relationship is another common reason why these households use AFS providers for remittances (29.5%). The Consumer Financial Protection Bureau (CFPB) did, however, issue final regulations requiring AFS remittance providers to enact certain consumer protections. Moreover, since banks have only recently started offering remittances, many households may not even know banks provide such services.

While the report provides an in-depth analysis about the current prevalence of underbanked and unbanked households and individuals across a range of demographics, the report does not provide a clear explanation of what leads to these outcomes. This could mislead people into blaming the victims instead of understanding the structural and societal problems that contribute to banking behaviors. The importance of this report lies in the wealth of data describing the unbanked and underbanked populations. As the report correctly notes, unbanked and underbanked households come from many different cultures, communities, and background, and understanding these differences will allow banks and advocates to tailor bank access programs to fit the needs of specific communities.

In terms of transactions, the FDIC should continue to encourage banks to capitalize on the opportunity to take business away from AFS businesses by offering consumers a safer, cheaper, and higher quality product, such as the FDIC’s Model Safe Account. More banks should also be encouraged to participate in Bank-On programs wherein local banks and communities partner to provide low-cost comprehensive bank accounts for the unbanked. Although the data show that the use of AFS transactions is more common than credit, the FDIC should require more banks to provide affordable and responsible small dollar loans, similar to the ones the FDIC piloted to illustrate how banks could profitably offer affordable small-dollar loans as an alternative to high-cost credit products, such as payday loans and fee-based overdraft protection.

Hopefully advocates and banking regulators can leverage this message in order to convince banks to reach out to greater numbers of people who are unbanked and underbanked. 

This blog post was coauthored by Alex Hoffman.

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According to a 2009 FDIC survey, about one in four U.S. households are unbanked or underbanked. Without access to conventional financial services, people turn to an alternative banking market of bill pay, prepaid debit cards, and check cashing services, as well as payday loans. The unbanked pay excessive fees for basic financial services, are susceptible to high-cost predatory lenders, and have trouble buying a home and other assets because they have little or no credit history.

The now-defunct U.S. Postal Savings System was set up in 1911 to get money out of hiding, attract the savings of immigrants accustomed to saving at post offices in their native countries, provide safe depositories for people who had lost confidence in private banks, and furnish depositories that had longer hours and were more convenient for working people than private banks provided. The minimum deposit was $1 and the maximum was $2,500. The postal system paid two percent interest on deposits annually. It issued U.S. Postal Savings Bonds in various denominations that paid annual interest, as well as Postal Savings Certificates and domestic money orders. Savings in the system spurted to $1.2 billion during the 1930s and jumped again during World War II, peaking in 1947 at almost $3.4 billion.

The U.S. Postal Savings System was shut down in 1967, not because it was inefficient but because it became unnecessary after the profitability of catering to the unbanked and underbanked became apparent to the private financial sector. Private banks then captured the market, raising their interest rates and offering the same governmental guarantees that the postal savings system had.

In 2008, when the FDIC studied banks’ initiatives to bank the unbanked it found that many of these initiatives were lacking. For instance, although “73% of banks were aware that significant un/underbanked populations were in their service areas, less than 18% of banks identified expanding services to un/underbanked individuals as a priority in their business strategy.”

Given banks’ unresponsiveness to the banking needs of the unbanked and underbanked communities, reinstating the postal banking system could be a win-win situation, providing jobs and income for the post office along with safe and inexpensive banking services for underserviced populations. Other countries have already begun expanding and/or adapting their existing postal systems to provide such banking services.

In China, for example, the People’s Bank of China (the central bank) helped to reestablish China’s Postal Savings Bureau in 1986 after a 34-year lapse. Savings deposits flooded in, showing an extraordinary growth rate of over 50% annually in the first half of the 1990s and over 24% annually in the second half. By 1998, postal savings accounted for 47% of China Post’s operating revenues; and 80% of China’s post offices provided postal savings services. Importantly, the Postal Savings Bureau has been able to leverage income and profits from the private sector to provide credit to finance local development. In 2007, the Postal Savings Bank of China was separated from the Postal Savings Bureau as a state-owned limited company, which continues to provide postal banking services.

Japan has also leveraged its postal system to provide banking services such that, by 2007, Japan Post was the largest holder of personal savings in the world, boasting combined assets for its savings bank and insurance arms of more than ¥380 trillion ($3.2 trillion). It was also the largest employer in Japan. As in China, Japan Post uses income from the private sector to fund the government at low interest rates.

Brazil instituted a postal banking system in 2002 based on a public/private model between the national postal service (ECT) and the Bank of Brazil. ECT (also known as Correios) is one of the largest state-owned companies in Latin America, with an international service network reaching more than 220 countries worldwide. 

In Switzerland, postal financial services are by far the most profitable activity of Swiss Post, which suffers heavy losses from its parcel delivery and only marginal profits from letter delivery operations.

Most recently countries such as Russia and India are exploring full-fledged lending services through their post offices. India’s Post Office Savings Bank (POSB) is India’s largest banking institution and its oldest, having been established in the latter half of the 19th century following the success of the postal savings bank system in England, the first nation to offer such an arrangement in 1861. Operated by the government of India, it provides small savings banking and financial services, but is now seeking to expand these services by obtaining a license for the creation of a full-fledged bank that would offer full lending and investing services. Similarly, Russia is also seeking to expand its post office services. The head of the highly successful state-owned Sberbank has stepped down to take on the task of revitalizing the Russian post office and create a post office bank that would operate in the Russian Post’s 40,000 local post offices. The post office will function as a banking institution and compete on equal footing not only with private banks.

On July 27, 2012, the National Association of Letter Carriers adopted a resolution at its National Convention in Minneapolis to investigate establishing a postal banking system. Bringing back postal banking could be a win-win-win, providing income for the post office, safe and inexpensive depository and checking services for the underbanked, and a reliable source of public funding for the government.  

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Having a bank account is foundational to building financial security. Unfortunately, the lower your income, the more likely you are to be financially insecure and the less likely you are to have a bank account. According to the FDIC, about 20 percent of households earning less than $30,000 are unbanked.

This can be especially problematic for families receiving public benefits, such as Temporary Assistance for Needy Families (TANF), who can face significant fees to access their benefits in the absence of a bank account. Today, most public benefits are issued either directly into a participant's existing bank account or onto an electronic benefit transaction (EBT) card, which functions in some ways as a debit card.

Low levels of account ownership among participants, however, make the EBT card the default option. According to a new report, only 12 percent of TANF recipients have their benefits deposited into a bank account. The rest, who have their benefits placed on EBT cards, are subject to transaction fees at ATMs when they wish to withdraw funds. Assuming these transaction fees are 85 cents, and most are actually higher, this amounts to $1.2 million a year diverted from poor families to financial institutions. This is in addition to the $10 million a year that states pay to the financial institutions for administering states’ public benefit program, as well as surcharges beneficiaries must pay for use of out of network ATMs, which amounted to almost $900,000 in the first quarter of 2011. Consequently, families can be subject to a range of fees, depending on the terms of the contract between the state and the financial institution managing the public benefits program.

Several things can be done to combat these fees. First, EBT cards could be made more like debit cards so they can function as bank accounts for families who don't have them. That way, every TANF recipient who gets an EBT card will effectively also be getting a bank account. One way to do this is by transitioning from current EBT cards, which are typically closed loop, to so-called electronic payment cards (EPC) which are EBT cards branded with the Visa or MasterCard logo that are accepted almost everywhere, and by making the cards reloadable so they can store money in addition to benefits.

The shift towards EPC systems is already occurring, but it too raises challenges. While an EPC system allows beneficiaries to use their cards virtually anywhere that a MasterCard or VISA logo is displayed, and decreases the stigma associated with being recognized as a public assistance beneficiary because EPCs have the appearance of commercially recognized credit cards, there are potential negative ramifications for low-income families. Most importantly, effective consumer protection measures must be implemented because benefit recipients are more likely than general consumers to need these protections. Currently, the Electronic Funds Transfer Act and Regulations (Regulation E), which provide several consumer protections through error resolution and disclosure regulations, do not cover state-based EPC programs and privately issued prepaid cards receiving benefits through direct deposit. Public benefit recipients are already living at the margins and cannot afford to suffer out-of-pocket losses from potential consumer fraud or other problems that may arise under the EPC systems.  

Another option is to simply eliminate fees for EBT card transactions. State and federal governments shouldn't be subsidizing financial institutions with resources dedicated to helping very low-income families. Contracts with banks that administer the accounts should mandate a no-fee structure, or states could reimburse participants for fees they incur. As many states’ contracts are almost ready for renewal, this may be the appropriate time for states to take action.

A third option is for states to encourage savings by including a savings "bucket" as part of the card features and eliminating assets tests in public benefit programs that explicitly restrict the amount of savings a family can have and be eligible for the program.

Finally, there should be a broader overall effort to increase access to affordable banking options for low-income consumers. For example the FDIC’s Safe Accounts pilot, which offered basic, low-fee accounts through partnerships with several financial institutions, could be adopted more widely. At the end of the one-year pilot, retention rates for new accounts were high, 80 percent for transaction accounts and 95 percent for savings accounts, and banks reported that the cost of offering the account was comparable to that of other accounts. These outcomes suggest that there is a demand for these products and that this model could provide a sustainable way to expand availability in a way that works for consumers and financial institutions.

Senator David Frockt (D-WA) and Representative Bill Hinkle (R-WA) advocated for the need to connect TANF recipients to bank accounts to enable recipients to make safe financial transactions, build savings, and avoid EBT fees. It is clear that efforts to address the financial security of low-income families can be an area with many opportunities for bipartisan agreement. It's exciting to see that both sides of the political party recognize this important issue. 

To learn more about EBT and EPC systems in general, listen to the Shriver Center’s webinar, The Next Frontier in Public Benefits: Electronic Benefit Cards, and read the Clearinghouse Review article, The Next Frontier in Public Benefits: Electronic Benefit Cards.

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Over 30 million Americans are unbanked (meaning they lack a traditional checking or savings account and rely on costly alternative financial services), and 83% of American adults have a mobile phone. The Shriver Center will host a webinar with a panel of experts to discuss the relationship between this new technological approach to banking and what it may mean to banking the unbanked.

Mobile banking was first introduced in developing countries as a way to provide banking services to communities that lacked formal financial institutions. In recent years, mobile banking has taken a more prominent role in the technology world here in America as a tool for improving financial access to the unbanked.

This exciting new field may provide opportunities for increasing financial access among the millions of unbanked individuals. This webinar will provide an overview of the history of mobile banking as well as current developments in the products and services available. Panelists will also discuss the ability and effectiveness of using mobile banking to reach the unbanked and the regulations and consumer protections that need to be implemented in order to ensure this new technology safe and successful.

Panelists will include Marianne Crowe of the Federal Reserve Bank of Boston, Rob Levy of the Center for Financial Services Innovation, and Michelle Jun of Consumers Union.

Readers are invited to register for this free webinar. The webinar will take place on August 16th, 1:30pm CST.

Also, check back later this summer for the publication of the July-August issue of the Clearinghouse Review for a more in-depth look at mobile banking.   

This blog post was coauthored by Alison Terkel.

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In 2004, Wal-Mart began installing “Money Centers” for shoppers to cash checks, pay bills and make wire transfers.  None of these products, however, help unbanked customers gain access to bank accounts and avoid unnecessary fees. 

Recently, Wal-Mart launched another new program to compete with online giant, Amazon, that, to no surprise, does nothing to benefit the unbanked except lure them into buying more Wal-Mart products.   Amazon was trumping Wal-Mart in online sales due to lower prices and the ability to avoid paying sales taxes in some states. The new initiative, “Pay with Cash,” is targeted at customers without a credit card who wish to shop online.  Under the program, consumers can select items from Wal-Mart’s website then pick them up at their local Wal-Mart store and pay with cash. The program, which goes live next month, is targeted at the 20% of Wal-Mart shoppers who do not have bank accounts or credit cards and are currently unable to online shop.  

Wal-Mart is also trying to compete in the rapidly evolving consumer payment market where new technologies allow customers to “scan and scram,” meaning they scan a bar code of an item at a Wal-Mart, or any other store, and are able to see where it is sold cheaper, most likely online.  Amazon even offers its own application, “Price Check” to entice brick-and-mortar shoppers to make purchases online. 

While Wal-Mart may be helping streamline the process of online shopping for the unbanked, the company is not doing them any favors when it comes to access to mainstream financial services and inclusion. To the contrary, Wal-Mart is making it easier for people to stay unbanked, rack up high fees in the fringe financial system, and miss out on building assets and credit, which is crucial in getting ahead in today’s economy. 

Initiatives such as BankOn USA exist to meet the need that Wal-Mart and others like it are ignoring.  In BankOn programs, financial institutions partner with community organizations to provide low-cost checking and savings accounts along with financial education in order to bring the un/underbanked into the financial mainstream and prepare them for success.  While Wal-Mart’s “Pay with Cash” program may help it remain competitive in the online retail market, it is not a way to improve the economic lives of the customers they serve. 

This blog post was coauthored by Alison Terkel.

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The name “Wal-Mart” has become somewhat of a lightning rod for those who value buying local and supporting small business and labor rights. Recently Wal-Mart has entered into an even more contentious business—the banking industry—and the lightening has increased.

As reported in a previous blog, Wal-Mart, along with other large retailers, has jumped on the bandwagon to provide financial services. Wal-Mart’s new MoneyCenters offer a variety of products, such as its prepaid  MoneyCard. Customers like Wal-Mart’s late hours, as well as the MoneyCard’s  flat $3 monthly operating fee and no overdraft fees. As one Wal-Mart executive put it, Wal-Mart has been building à la carte financial services, becoming a force among the unbanked and “unhappily banked.” The MoneyCard acts just like a credit card, except that it is prepaid, and can be used to purchase goods and services. Wal-Mart’s MoneyCenters also provide services such as check cashing, international money transfers, direct deposit, and bill paying all at a competitive rate.

In July 2005, Wal-Mart submitted an application for a bank charter with the Federal Deposit Insurance Corporation (FDIC). Subsequently, the FDIC received over 1,500 letters about the application, with the majority of respondents vehemently opposing Wal-Mart's foray into banking. Ultimately Wal-Mart withdrew its request for a bank charter in early 2007 after a great deal of opposition from banks and legislators, including Rep. Barney Frank (D-MA) who introduced a bill aimed at preventing nonfinancial commercial institutions, more specifically big box stores, from operating banks.

Wal-Mart’s financial products aren’t without faults. Customers may not realize that they may need a Social Security number to apply for the card, thereby excluding immigrant populations who rely on other forms of identification such as Matricula Consular Cards or ITINs. Matricula Consular cards are photo identification cards issued by Mexican consulates to Mexican nationals living outside the county. Individual Taxpayer Identification Numbers, or ITINs, are issued to foreign nationals by the Internal Revenue Service as a tax processing number and can also be used as a valid form of identification at some banks. For more information on ITINs, check out the upcoming issue of the Clearinghouse Review.

The MoneyCard also has hidden fees, aside from the $3 monthly rate, such as charges for balance inquiries and ATM withdrawals and other fees that are not clearly stated. These are the same types of fees and transparency issues that caused people to flee from banks in the first place. Moreover, prepaid products, such as the MoneyCard, act as electronic cash. Therefore they do not build credit, nor do they help people save or build assets. Additionally, prepaid cards, unlike credit cards, are not covered by Regulation E of the Electronic Funds Transfer Act (EFTA) and therefore often do not have the same protections as debit or credit cards, such as:

• a cap on losses when cards are lost or stolen or when unauthorized charges are made;
• assurances that missing money will promptly be re-credited; or
• clear and conspicuous disclosures of all fees before signing up.

Wal-Mart is not the only one trying to cash in on the 30 million Americans who remain unbanked or underbanked. Target recently entered the field with an American Express prepaid card, and Kmart and BestBuy have their own Visa and Mastercard prepaid cards. Target’s prepaid AmEx card has fees similar to Wal-Mart’s MoneyCard, such as a $3 fee to load money onto the card, and a $3 fee per ATM withdrawal after the first free ATM withdrawal per month. Target’s card does not, however, have a monthly fee. Thus far, Wal-Mart has the lowest monthly fee and the lowest activation fee of such retailer cards. After all, Wal-Mart’s slogan is “saving money, living better.”

While these prepaid cards may provide an easy way for people to begin accessing financial services, they do not help customers save for the future or build credit, because they are not linked to either bank or savings accounts. Instead, programs such as BankOn, which promote real savings and responsible financial education, are ultimately better options. Bank On programs are voluntary, public/private partnerships between local or state governments, financial institutions, and community-based organizations that provide low-income un- and underbanked people with free or low-cost starter or “second chance” bank accounts and access to financial education. This innovative program, which began in San Francisco, California, has spread to cities and states across the country that want to help reduce barriers to banking, such as allowing ITIN numbers to be used to open accounts, and increasing access to the financial mainstream for consumers.

Although prepaid cards like the Wal-Mart MoneyCard may, in some cases, be a good first step (assuming that fees are both reasonable and clearly disclosed), they do not encourage the same saving mentality that opening a BankOn account does. Until such a mental shift occurs, the 30 million un/underbanked Americans will still be economically disenfranchised.   

This blog post was coauthored by Alison Terkel.

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As of April 2011, the savings rate in the U.S. was only 4.9%. Moreover, a 2009 Federal Deposit Insurance Corporation (FDIC) survey revealed that approximately 30 million American households are either unbanked or underbanked. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services. The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday loans, rent-to-own agreements, and pawn shops. Given the current economic climate, it is more important than ever for policy makers to concentrate their efforts on getting more people “banked” and saving.

One interesting proposal getting more people, particularly low-income consumers, saving are prize linked savings accounts. These accounts are bank accounts that allow savers to win cash prizes in proportion to how much they save. It is akin to buying a lottery ticket, except that one will always get back the money one has saved.

As some supporters of these types of accounts explain, if gamblers and lottery spenders allocated their funds to prize-linked savings instead, it would lead to increased aggregate savings. In 2007, U.S. residents spent around $90 billion on legalized forms of gambling. The appeal of participating in a lottery suggests that providing an incentive similar to lottery may be an effective tool to recruit more savers. Researchers including Peter Tufano of the Harvard Business School have shown that this program could work in the U.S. Tufano’s research in Indiana predicted that the unbanked would have the greatest interest in prize-linked savings. Following the study in Indiana, Tufano and his team at D2D Fund launched a larger scale prize-linked savings project in 2008 with the Michigan Credit Union League and the Filene Research Institute in Michigan. The product named “Save to Win” allowed savers the opportunity to win monthly cash prizes or a $100,000 grand prize at the end of a year for every $25 deposited. At the end of the pilot year, over 11,500 savers had saved over $8.5 million in Save to Win accounts.

While prize-linked saving programs are available in over twenty countries around the world, including the U.K., Sweden, and South Africa, they are not widely available in the U.S. due to state law and federal regulations. Current law in Michigan, Alaska, Georgia, and Arizona allow for savings promotion raffles, but options are limited in other states. That is because most states in the U.S. prohibit privately run lotteries, and prize-linked savings is considered illegal under such provision. In order to test this new idea to promote saving, Rhode Island, Maine, Maryland, Nebraska, Washington, and North Carolina have passed legislation to enable prize-linked savings programs. Although unsuccessful, legislators in Arkansas, Mississippi, Iowa, and New Mexico have also made similar attempts. However, federal law prohibiting non-credit unions from operating a prize-linked raffle complicates the legislative campaigns in various states.

Even though prize-linked savings may raise aggregate savings among low-to-moderate income families, they do not solve the problem of getting more people to use mainstream bank services that provide more protection for their funds. Moreover, we must keep in mind that one innovative idea alone will not solve the chronic problems of the U.S. economy.

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Given the recession, it is not surprising that the number of bank branches in the United States decreased for the first time in 15 years last year. Closures have been particularly prevalent in low-income neighborhoods. As banks closed branches in poorer areas in response to shrinking profit margins, they opened new branches in wealthier ones. Between 2008 and 2010, the number of branches in areas with median household incomes below $50,000 fell by 396. During the same period, 82 new branches were added in neighborhoods where household income was above $100,000. Although the American Bankers’ Association has disputed the statistical significance of this data, citing the fact that there are over 95,000 bank branches nationwide, this does not disprove that there is a pattern.  

For example, Birmingham-based Regions Financial, with a pool of only 2,000 branches, closed 107 branches in low- and moderate-income neighborhoods between 2008 and 2010, but closed only one in a high-income neighborhood. Similarly, Bank of America closed 25 branches in lower-income areas while opening 14 in wealthier areas. Citigroup also closed two branches in the poorest areas they served and opened three in the wealthiest. In fact, Citigroup has made very little effort to hide its intention to focus on wealthy markets. At a Wall Street investor conference last November, Manuel Medina-Mora, head of Global Consumer Business, revealed that Citigroup would expand its retail banking primarily in “affluent segments in major cities.”

Branch closures have been more prevalent in low income neighborhoods despite Community Reinvestment Act regulations in place since 1977, requiring financial institutions to serve poor and middle-class credit markets. These regulations also require financial institutions to notify regulators of branch closings. Federal regulators, however, seem to have turned a blind eye to bank branch closure patterns. 

According to John Taylor, President of the National Community Reinvestment Coalition, “You don’t have to be a statistician to see that there’s a dual financial system in America, one for essentially middle- and high-income consumers, and another one for the people that can least afford it.” If bank branches continue to close in low-income neighborhoods, the options available to low-income families will continue to dwindle.

Even after the economy improves and the consequences of the mortgage bust subside, closures are likely to continue in the long run due to increased use of online and automated banking systems. Bank branches in lower-income neighborhoods will be at particular risk because new regulations, including those limiting overdraft fees, have stripped banks of major revenue sources earned from products marketed towards low-income clients. Without brick-and-mortar branches, efforts to foster a “culture of savings” in low-income neighborhoods may have very little impact. Additionally, bank closures in poor areas will most likely increase the use of predatory lenders (check-cashing centers, payday loan providers and pawnshops).

Thus, if regulators continue to be too timid to confront those banks violating the Community Reinvestment Act, if not in fact, then in spirit, access to mainstream credit will continue to be an uphill battle for poor families.

This post was coauthored by Melanie Jacobs.

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Retail giants such as Wal-Mart, Kmart, and Best Buy are jumping on the bandwagon to provide financial services in their stores to millions of unbanked Americans. These retailers are bringing a $320 billion industry of alternative financial services out of the shadow of the formal bank system under the radar of federal regulators.

A 2009 Federal Deposit Insurance Corporation (FDIC) survey revealed that approximately 30 million American households are either unbanked or underbanked. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services. The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops. Susan Ehrlich, President of Financial Services for Kmart, who was recently named to the Federal Reserve’s Consumer Advisory Board, explained that, “if the only viable alternatives for so many consumers are payday lenders and cash-checking operations, there is a lot of room for a national retailer to step in and help them manage their money.” While this seems to be part of the reason why these retail giants are entering the market to provide check cashing services, the main incentive seems to be the hopes that the customer will use some of the cash in the store.

Kmart, for example, is piloting financial centers where consumers can cash checks and pay bills in 23 Kmart stores in Illinois, Los Angeles, Puerto Rico, and Wisconsin. At the beginning of the recession, Kmart reintroduced a layaway program in its stores at Christmastime, and the program was so successful that Kmart began offering it year-round.

Another retailer, Best Buy, has also entered this market, launching a bill-payment service in a handful of markets. According to the FDIC’s survey, while many of the unbanked think that they don't make enough money to warrant a bank account, others simply don't trust banks or come from cash-based cultures. Best Buy’s bill-payment kiosks, operated by Tio Networks, cater to Hispanic shoppers who are often wary of banks. Despite this, many are willing to sign up for complicated cell phone plans at Best Buy, and executives say it was a short step to paying the bills in the store as well.

The biggest player of all retailers offering financial services is Wal-Mart. According to a September 2010 US Banker story, Wal-Mart has MoneyCenters in about 40% of its nearly 3,000 SuperCenters. Through economies of scale, Wal-Mart is able to offer lower fees—$3 for check cashing and another $3 for prepaid cards—than other smaller players that have dominated the market in the past.

Wal-Mart’s presence in financial services is not limited to its own stores. The company’s Sam’s Club subsidiary has a partnership with Superior Financial Group, a nonbank lender, to offer online loans of up to $25,000 to small-business owners at a 7.5% interest rate over 10 years. Moreover, Wal-Mart recently acquired an equity interest in Green Dot, a marketer of prepaid cards that filed an application to be a bank holding company after acquiring Bonneville Bancorp of Provo, Utah. Wal-Mart is also partnering with Jackson Hewitt to offer tax filing advice to in-store consumers.

As more and more retailers are attempting to take advantage of the number of unbanked and underbanked consumers, it is important to note that, while these retailers may offer less expensive, convenient alternatives to check cashiers and payday lenders, ultimately these services will not bring such consumers into the mainstream financial services industry. Instead, programs and products such as Bank On are required. Bank On San Francisco—the first of its kind in America—brought together city leaders, local community organizations, and 15 banks and credit unions to promote available financial products and services to bank the unbanked. As a result, it brought more than 70,000 previously unbanked San Franciscans to the financial mainstream within five years. Now nearly 70 cities/states/municipalities use the Bank On model to provide access to mainstream financial services for low-income consumers. Moreover, the President’s FY 2011 budget proposal included funding for a Bank On USA Initiative, which the U.S. Treasury has begun to develop. This initiative would promote access to affordable and appropriate financial services and basic consumer credit products for underserved households. To ensure that such access occurs we must talk to Congress and ask them to include funding for the Bank On USA initiative in FY 2011.

This article was coauthored by Ji Won Kim.

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