An unintended consequence of recent financial regulations is that people are being pushed out of the market for mainstream financial services. When checking account fees go up, for example, those who cannot afford the increase often close their accounts and seek alternatives. Many of these people will adopt cash-based lifestyles that can be even more costly than a traditional checking account and lead to a vicious cycle of fees.
Even those who can afford the fees may not be able to open a checking account. Banks usually rely on a screening process that looks at an individual's past dealings with other banks. A poor record may prevent some customers from being able to open an account.
This issue is particularly important in Gwinnett County because Hispanics, a fast-growing population in the area, are more likely to be unbanked. According to the FDIC's 2009 National Survey of Unbanked and Underbanked Households, 45 percent of Hispanic households in Georgia do not have a checking account.This is significantly higher than the 12 percent of Georgia households without a bank account.
Those who rely on cash face a burdensome lifestyle and many aspects of managing their money cost more.For example, these consumers are often forced to do the following: burn gas to pick up a paycheck because they don't have an account where it can be direct deposited; pay check cashing fees to check cashers or convenience stores; purchase money orders and stamps to pay bills; and pay more for products because they cannot purchase items online.
Luckily, there are alternatives for those who have been pushed out of the system. Prepaid cards can be a means of empowering these consumers, allowing them to enjoy the benefits of the global economy without maintaining a checking account. A recent study by management consulting firm Bretton Woods Inc. confirms that prepaid cards are cheaper than many checking accounts. According to the study, the average person using check cashing services and money orders spends between $9 and $48 each month on fees. In contrast, prepaid card users spend between $8 and $20, which also covers the cost of replacing funds on the card if it is lost or stolen. The convenience of having an electronic payment method is a significant benefit as well, and some cards even allow funds to be direct deposited from an employer.
Many prepaid cards also provide protections that consumers using cash would not otherwise enjoy. Carrying cash leaves people vulnerable to loss, theft and violence, but prepaid cards can be easily replaced and, in most cases, cardholders are not held liable if their card is stolen. Additionally, prepaid cards provide an important means of recourse -- similar to credit cards -- if a merchant fails to deliver promised goods or services.
It is unfortunate that the very people least able to afford cash-based lifestyles are the ones who are often most affected. Financial institutions must look for creative ways to serve those who have been most impacted by the recent recession and continue to struggle under an anemic economic recovery.
More education is needed about products like prepaid cards that can help connect people to the broader economy and restore a sense of dignity. Educational programs like MasterCard's Master Your Card program in Georgia are worthy of emulation. The public education campaign is helping consumers, businesses and governments understand how payment cards can work for them. The campaign's website, www.MasterYourCardGA.org, provides details about the benefits of prepaid cards, as well as what fees to expect.
Often the main obstacle to achieving financial empowerment is lack of information. The more educated consumers are about the choices they have, including prepaid cards, the more financially independent and successful they will become. Any tool that helps empower hard-working folks is worth highlighting. And as folks build a better life for themselves and their families, not only do they themselves benefit, but ultimately their communities and the larger economy benefits as well.
Mario H. Lopez is president of the Hispanic Leadership Fund, a non-partisan advocacy organization dedicated to strengthening working families by promoting common-sense public policy solutions rooted in free enterprise, limited government, and individual freedom.