Many initiatives to address the challenges of the underbanked or unbanked aim to either broaden access to financial services or provide education that encourages sensible use of already available financial services. Although there is no doubt these are important elements of financial capability, there is a third element—often overlooked, however—that is also essential to improving the lot of the underserved.
In the benchmark FDIC survey, a defining characteristic of the underbanked is their use of “non-traditional” financial products, such as payday loans and check-cashing services. These products can be expensive compared to mainstream financial services, burdening consumers with costs to access their own money.
The cruel irony, of course, is that it’s a shortage of funds that drives many underserved to use these products, which only exacerbate the situation. Therefore, alongside efforts to increase financial literacy and financial access, we must also work to help the underbanked keep more of the money they already have.
The check-cashing trade group, FISCA, reports their industry provides more than $50 billion in check-cashing services annually. Fees of two percent or more for check-cashing services are common, and some states allow up to 5 percent of the value of each check cashed. For an unbanked Social Security recipient cashing a $700 check, fees might range from $14 to $35 per check—adding up to hundreds of dollars each year.
A prepaid card, on the other hand, offers significant savings. Payroll cards and government benefit cards are the most relevant examples. The largest government benefit card program is Direct Express®, sponsored by the US Treasury Department. Each month, millions of unbanked Americans receive Social Security, veterans’ benefits, and other government payments loaded directly onto a Direct Express card. This saves taxpayers millions of dollars each month, compared to the cost of making payments by check, and cardholders can access their funds free to make purchases, pay bills, or withdraw cash at tens of thousands of ATMs or virtually any bank branch in the country.
Not only has Direct Express brought millions of Americans into the financial mainstream, we estimate it saved Americans at least $100 million in check cashing fees in 2016. That’s based on about four million (mostly unbanked) payees per month, and assuming the lowest commonly available check-cashing fee of $3. Many people would undoubtedly pay more. The cost savings estimate swells to $500 million vs the almost universally allowed check-cashing fee of 2 percent. That’s between $100 million and $500 million each year that Direct Express cardholders can use to improve their lives and those of their families, rather than pay out to access their funds.
Direct Express also delivers a financial literacy curriculum to participants through a partnership with PayPerks, and the program’s mobile app improves access to account information to help cardholders better manage their money. One cardholder, Freddie, describes the benefits clearly in this video, highlighting savings, empowerment, and security.
As electronic payments like prepaid cards have become more widely available to the under-banked, Mastercard has issued standards to ensure cardholders always have a way to access their money at no cost, reflecting our belief that programs providing free access to funds must develop alongside efforts to broaden access to financial services and drive financial literacy. In combination, these three legs provide the firm support financial capability efforts require to make the most meaningful and positive difference for the underserved.