THE TECHNOLOGY TO ADVANCE
EQUAL FINANCIAL OPPORTUNITY
How emerging electronic payment technology can
provide financial services to underserved communities
Prepared for Master Your Card
By
Louise H. Yeung, Graduate Research Assistant
Shomon Shamsuddin, Graduate Research Assistant
J. Phillip Thompson, Ph.D.,
Massachusetts Institute of Technology
Associate Professor, Department of Urban Studies and Planning
Community Strategy Lab
July 2014
1 EXECUTIVE SUMMARY
Large populations of financially vulnerable Americans live in a culture of cash reliance that
costs them time and money they cannot afford to lose. Being financially underserved is a
significant barrier to upward mobility, asset accumulation, and wealth savings. Solutions to
this problem have largely focused on providing greater access to traditional banking and
advancing financial literacy, efforts that should certainly continue. However, electronic
payment technology delivers the ability to overcome existing barriers to traditional banking
and directly provides individuals with the advantages of greater financial inclusion and
strength.
Electronic payment technology offers a new way to navigate the market system to better
serve the needs of the poor. It has the ability to address many needs of financially
underserved communities, improve financial literacy, diminish reliance on alternative
financial institutions that charge a premium for cash and services, and increase confidence in
mainstream financial institutions. Yet, technology alone cannot solve the problem. It must
be linked with commercial products that are tailored to the needs of vulnerable populations;
policy changes that support industry standards for transparency and consumer protections;
and education programs that help consumers make informed choices, improve their financial
habits, and get the full value of electronic payment technology.
The more technology, financial and community leaders work together to understand existing
needs and available resources, the more creative and effective they will be in developing new
solutions that advance the financial health of our most vulnerable communities.
WHO IS FINANCIALLY UNDERSERVED?
There are 68 million Americans who pay the greatest price to manage their money because
of unequal access to financial systems. More than 55% of those making under $15,000 have
no bank affiliation, while more than a quarter of those making between $15,000 and $30,000
are likewise without a bank. There is also a disproportionate number of young people,
minorities, and immigrants who fall into this category, limiting their upward mobility.
Additionally, a geographical pattern exists, with more than 40% of both the unbanked and
underbanked groups living in the South.
•
•
•
•
•
17 million adults are unbanked and 51 million adults are underbanked, totaling more
than one out of every five Americans.
Minorities make up a disproportionately high percentage of America’s financially
underserved, with over 55% of all African American households, 48.7% of all Latino
households, and 36.4% of Native American households being either unbanked or
underbanked.
In households without checking accounts, the median income is $17,000.
The unbanked are 3.7 times more likely to incur check-cashing fees, which can be
exorbitant.
These are the same individuals and households that use alternative financial services such
as payday loans and remittance services with the accompanying fees.
2 USING TECHNOLOGY TO IMPROVE ACCESS TO MONEY
With the increase in electronic transactions and the use of payment card technology, our
society increasingly relies less on paper currency and checks. This trend represents an
opportunity for low- and moderate-income families to move away from the high fees and
hassles of check cashing and bill pay services, even though they may still have limited access
to banks.
KEY FINDINGS
Being Financially Underserved Costs Time and Money
The costs of being financially underserved include a higher vulnerability to crime, time, and
money lost to the process of cashing checks and making payments, limited access to goods
and services outside of one’s immediate neighborhood, and the costs and risks associated
with predatory lending. Unfortunately, low-income individuals and communities have the
most to lose because they can least afford the time, money, and vulnerability associated with
the cash economy.
Technology Solutions Help Overcome Traditional Barriers
In the U.S., financial services and tools have long been the exclusive purview of traditional
banks. Electronic payment technology and mobile banking services have emerged as new
ways of reducing the costs of being financially underserved. Advances in technology allow
consumers to access financial services with greater convenience and confidence—without
being required to navigate mainstream financial institutions.
Whether the issue is physical access, deep-seated distrust or financial literacy—there are
barriers to banking relationships for the financially underserved that can be solved by the
combination of access, education and personal experience with newly available financial
technologies. Now that prepaid cards and other electronic tools are entering the marketplace,
the first step to financial inclusion doesn't have to be a bank account. Prepaid cards in the
form of consumer-purchased debit cards, payroll cards or public benefit cards enable
individuals to fully participate in the modern economy without requiring a bank account.
Technology Offers Greater Value than Cash
The time investments associated with living in a cash economy can be eliminated or
significantly reduced through electronic payment technologies that allow individuals to
receive payments, pay bills, and transfer funds digitally. Financially underserved consumers
can also reduce the fees associated with using cash while expanding their range of choices of
goods and services, and reducing their risk of theft and loss by using electronic payment
cards.
Businesses Should Work with Community Groups
New technology holds many promises, but connecting the technology to the needs of
individual consumers and communities is sometimes difficult. For vulnerable and
underserved populations, the promise of technology feels out of reach because of cultural,
financial and logistical barriers that can be overcome by outreach and education programs on
the part of nonprofits and commercial technology providers. In the case of disconnected
3 consumers, nonprofits, labor groups and other community actors can play a crucial role in
connecting technology to needs. Products, services and educational resources can all be
developed and tailored to provide the greatest benefit and value to the financially
underserved when communities, nonprofits, and businesses work together.
No One Should Be Left Behind
Millions have been left out by traditional banks and many hardworking people are put at a
financial disadvantage by being stuck in a cash economy. For them, the convenience and
cost-savings of online shopping and transactions are out of reach; instead they resort to
using money orders and check-cashing stores, which are more expensive and lack the
security of electronic payments. Statistical evidence shows that these real financial
disadvantages are being felt by the poorest in our society, a group that needs to get the most
from its money and can least afford to miss the potential savings provided by greater
financial inclusion through electronic payment technology. Finding a way to ensure that poor
communities are not left behind is a social and economic justice issue that will only continue
to grow in importance as the world becomes more reliant on new technology.
4 I.
UNDERSTANDING THE COSTS OF CASH
Since the deregulation of the financial sector in the 1980s, the United States has seen an
upsurge in fringe financial institutions that offer alternatives to mainstream banking.1 These
fringe establishments offer services such as check cashing, payday lending, subprime lending,
pawnshop exchanges, and non-bank-issued money orders. In the 1990s, payday lending was
legalized in 31 states, leading to the establishment of more than 10,000 new payday lenders,
triple-digit growth of deferred-deposit entities, and a burgeoning predatory lending sector.
These alternative banking institutions have since become dominant players targeting lowincome consumer markets across the country. Subprime lending, for example, increased by
nearly 1,000% between 1993 and 1998.2 Offering fast access and few requirements for
service, fringe banks are highly convenient alternatives for customers that lack bank
accounts—but at the expense of higher fees for such transactions.
Over half of unbanked households and about 45% of underbanked households use
alternative financial institutions for basic everyday needs, and many more use them for
income supplements, household repairs or purchases, childcare, education, and health and
legal expenses.3 These fringe services typically charge high premiums for basic financial
services, leading to debt spirals and inhibiting households from accumulating savings and
building assets. The U.S. alternative banking industry is sizable, totaling $100 billion and
including over 48,000 establishments.4 The average payday loan borrower spends $375 per
year on loans and $520 on interest for eight loans per year.5
Being financially underserved is a widespread condition in today’s America. Nearly 30% of
U.S. households are unbanked or underbanked.6 Over a third of total households lack
checking accounts. Without access to mainstream banking, unbanked and underbanked
consumers rely on often-costly fringe services to conduct everyday financial transactions.
This report highlights the costs and burdens that financially underserved households bear
from being disenfranchised from mainstream banking. It also highlights ways in which new
technology can provide the underserved many of the benefits of banking without necessarily
solving the financial, physical and cultural barriers to becoming banked. It first disaggregates
the demographics of unbanked and underbanked populations to better understand the types
of people affected by fringe banking. After exploring factors that have led to underbanking,
the report then analyzes the monetary, time, and other premiums paid by financially
underserved populations. This report synthesizes many studies covering various aspects of
these topics to date—each with differing methodologies, sample sizes, and scope—
providing an overarching picture of the landscape of financially underserved communities.
Understanding the potential of electronic payment technology in its various forms can help
the underserved population by providing the tools of upward mobility regardless of banking
relationship status. WHO ARE THE FINANCIALLY UNDERSERVED?
An estimated 8-9% of U.S. households comprised of 17 million adults are unbanked.7, 8
Moreover; an additional 20% of U.S. households (or 51 million adults who live in 24 million
5 households) are underbanked.9 Unbanked households do not hold any type of checking or
savings account, while underbanked households have either checking or savings accounts,
but still rely upon alternative financial services.10 Underbanked households have been on the
rise in recent years, with more households reporting greater reliance on alternative financial
services since 2009.11 The costs of being financially underserved are not equal among all
demographic groups. Those who rely on alternative banking services tend to be
disproportionately low income, low educated, younger, and non-Asian minorities.12
Understanding the many factors influencing consumer financial circumstances informs
strategies for improving financial and economic inclusion.
Figure 1: Financially Underserved Rates by Select Demographics
Unmarried Female Head
Low-Income (<$15,000)
Underemployed
Foreign-born non-citizens
Unbanked
Hispanic
Underbanked
African Americans
All Households
0
10
20
30
40
50
60
Percent
Source: Pew Charitable Trusts. July 2012. Payday Lending in America: Who Borrows, Where They Borrow,
and Why? http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Pew_Payday_Lending_Report.pdf.
Race and Ethnicity
Black and Hispanic minorities make up a disproportionate number of financially
underserved consumers. Fully 26% of unbanked and underbanked households are African
American and another 19.6% are Hispanic. Looking within racial and ethnic categories, the
extent to which being financially underserved affects minority groups becomes even clearer:
over 55% of all African American households, 48.7% of all Hispanic households, and 36.4%
of all American Indian households are either unbanked or underbanked. In comparison, only
3% of Caucasians and Asian households are financially underserved.13 African Americans are
also three times as likely as Caucasians and two times as likely as other minorities to rely
upon payday lending.14 These are glaring disparities.
Immigrants make up a significant share of unbanked and underbanked households with
limited English language abilities, challenging financial situations, and negative cultural
attitudes toward banking. Foreign-born non-citizen households have rates of being
unbanked and underbanked that are 2.7 and 1.4 times higher than the average household,
respectively.15 Twenty-two percent of foreign-born citizens are unbanked and 28.9% are
underbanked. Foreign-born citizens are slightly less likely to be unbanked—but more likely
to be underbanked—than the average household. Only 5% of foreign-born citizens are
6 unbanked, while 22.4% are underbanked.16 Most unbanked immigrants are Hispanic.
Hispanic and other immigrant communities also differ from other minority unbanked and
underbanked populations in the barriers they face in accessing bank accounts as well as the
alternative financial products they tend to use. For instance, immigrants are far more likely to
use fringe products to send remittance payments back home.
Income
Income levels are a reliable predictor of banking status. Low-income households are the
most affected group, as approximately 40% of households earning less than $30,000 are
unbanked.17 The median income of households without checking accounts is $17,000.18
Rates of un- and underbanking are even more pronounced for minority low-income groups.
More than 66% of Black and 51% of Hispanic unbanked households are located in lowincome communities, compared to only 10% of White unbanked households.19
Geography
The distribution of the financially underserved is not even across the country. The highest
percentage of both unbanked (45.4%) and underbanked (43.1%) U.S. households reside in
the South.i These rates of banking status also correlate with rates of payday lending. Payday
lending occurs most frequently in Southern states and Great Plains states, with the highest
rates in Texas, Oklahoma, Arkansas, and Louisiana, where 8% of adults have utilized payday
loans.20
Figure 2: Rates of Payday Loan Usage among Adults by Region
2%
6%
3%
7%
6%
5%
8%
Source: Pew Charitable Trusts. July 2012. Payday Lending in America: Who Borrows, Where They Borrow,
and Why? http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Pew_Payday_Lending_Report.pdf.
The South is classified in the U.S. Census as the following states: Alabama, Arkansas, Delaware, District of
Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South
Carolina, Tennessee, Texas, Virginia, and West Virginia.
i
7 Financially underserved Housholds (%)
Aside from concentrations in the South and Great Plains, rates of being unbanked or
underbanked are highest in urban areas. Over 80% of all unbanked households are in
metropolitan centers and, of those, most reside within major cities; but there is a great deal
of variation across cities, where rates of being financially underserved range from 21.3% in
Chicago to 37% in San Antonio.21
Figure 3: Financially Underserved Households by MSA
40
35
30
25
20
Underbanked
15
Unbanked
10
5
0
Metropolitan Statistical Area
Source: Federal Deposit Insurance Corporation (FDIC). 2012. 2011 FDIC National Survey of Unbanked and
Underbanked Households. http://www.fdic.gov/householdsurvey/ Research shows that the choice to be unbanked is often made jointly with the decision to
rely on fringe financial services.22 Thus, mirroring the geographic distribution of the
unbanked and underbanked, fringe financial institutions are also most densely concentrated
in low-income urban areas. They are located in wealthier neighborhoods as well, but at lower
densities. Different fringe services demonstrate different geographical distribution patterns.
For instance, payday lenders are more likely to be in the South. In fact, as of 2000, half of all
payday lenders were located in only six states: Mississippi, Missouri, Kentucky, Tennessee,
North Carolina, and South Carolina.23 Check cashers, on the other hand, are more
widespread and located in about one out of four neighborhoods nationwide.24 Check cashers,
pawnshops, and payday lenders are heavily concentrated in poor neighborhoods: about
three-quarters of all of these types of establishments are in low-income or lower-middleincome areas.25
History With Banking Services
Classifications of being unbanked or underbanked are not static. Consumers enter and exit
mainstream financial services at various points in their lives. Different household surveys
indicate that around 40-50% of unbanked households have previously held some sort of a
bank account in the past.26, 27 In a narrower study of the Detroit area, over 70% of unbanked
8 individuals who previously had accounts closed them by choice, as opposed to being forced
by banks to do so.28 Of the unbanked, three-quarters were interested in re-opening bank
accounts in the next year, further illustrating the degree to which changing financial
situations can affect banking choices.
Employment
Employment status is not a reliable indicator of banking status. Over half of households
without checking accounts include at least one individual who has full-time employment.29
Unemployed individuals, however, rely upon payday lenders at twice the rate of full- or parttime employed people.30 In terms of employment type, employed underbanked consumers
overwhelmingly work for small companies.31 The Brookings Institution estimates that if an
underbanked full-time employee switched to a low-cost checking account, he or she could
save an average of $1,000 annually over the course of a 40-year career.32
Education Level
Approximately 40% of unbanked consumers and 15% of underbanked consumers have less
than a high school education.33 Individuals with college degrees represent only 1.1% of the
underbanked.34
Household type
Nearly 30% of financially underserved households are single-family households.35 Singlemother households in particular have the highest rates of being unbanked (19%) and
underbanked (29.5%) than other household types. In comparison, only 8.2% of all
households are unbanked and 20.1% are underbanked.36
REASONS FOR BEING FINANCIALLY UNDERSERVED
People are unbanked or underbanked for a variety of reasons. Some factors are
circumstantial—for example, not meeting requirements or lacking access to open bank
accounts. Others choose to be unbanked or underbanked. From an institutional perspective,
some banks deliberately avoid particular markets due to perceptions that serving low-income
customers is very risky and can come with low return rates and profit margins as well as
fraud.37 This in turn disenfranchises some communities from mainstream banking, forcing
them to turn to fringe institutions.
Consumer (demand-side)
Surveys of the unbanked and underbanked reveal a variety of reasons for not having a bank
account. Consumers value the immediate and expedited process of loan or cash access at
fringe institutions. Surveys from the FDIC, Federal Reserve, and other researchers show
similar top reasons for being unbanked, although the relative rankings may vary slightly. Top
reasons include the following: not having enough money for a bank account; not needing or
wanting a bank account; inability to open an account because of a lack of identification, poor
credit, or no banking history; and distrust of financial institutions.38, 39 High fees and
minimum balances were also deterrents for approximately 5% of those surveyed, but were
not as important as the others factors listed above. These responses suggest that a significant
number of people are unbanked by choice—and, in large part, due to the convenience and
9 ease of using alternative financial services. The FDIC estimates that 85% of previously
banked households closed their accounts by choice, whereas only 15% did not have
accounts due to an institutional barrier beyond their direct control.40
Figure 4: Reasons Never-Banked Households are Unbanked
Do not have enough money
32.8%
Do not want or need a bank account
26.0%
Can't open account due to ID, credit, or banking history
7.6%
Don't like dealing with and/or don't trust banks
7.1%
Bank account fees or minimum balance requirements are too
4.0%
Previously had an account but bank closed it
4.0%
Do not know how to open or manage an account
1.5%
Banks do not have convenient hours or locations
1.5%
Banks do not offer needed products or services
0.2%
Other/None of the above
11.9%
Do not know/refused
3.5%
Source: Federal Deposit Insurance Corporation (FDIC). 2012. 2011 FDIC National Survey of Unbanked and
Underbanked Households. http://www.fdic.gov/householdsurvey/
Figure 5: Reasons Previously Banked Households are Unbanked
Do not have enough money
33.2%
Do not want or need a bank account
15.6%
Can't open account due to ID, credit, or banking history
5.5%
8.2%
Don't like dealing with and/or don't trust banks
Bank account fees or minimum balance requirements are too
7.1%
Previously had an account but bank closed it
9.5%
Do not know how to open or manage an account
1.1%
Banks do not have convenient hours or locations
1.4%
Banks do not offer needed products or services
0.7%
14.8%
Other/None of the above
Do not know/refused
2.7%
Source: Federal Deposit Insurance Corporation (FDIC). 2012. 2011 FDIC National Survey of Unbanked and
Underbanked Households. http://www.fdic.gov/householdsurvey/
It is important to remember that self-reported reasons for being financially underserved may
not entirely capture the actual factors at play. In particular, low levels of financial literacy can
lead to misperception about the costs of being banked versus unbanked. Thus, it is also
10 important to consider the same question from the flip side: why unbanked or underbanked
consumers chose to use alternative financial institutions. More than half of FDIC survey
respondents cite convenience as a primary reason for turning to alternative (non-bank)
financial service providers for check cashing, money orders, and remittances. Over 40% also
identify the speed and ease of obtaining money as a primary reason for patronizing payday
lenders and pawnshops.41 According to another survey of low-income urban neighborhoods,
about half of unbanked consumers conduct check cashing at mainstream banks without an
account at the bank, or at supermarkets because they were cheaper than check cashers.42
Both unbanked and underbanked respondents who did rely on check cashers
overwhelmingly cited convenience as the most important factor in their decision.43
Additional factors for the financially underserved:
Income and cost barriers
Bank accounts are not geared toward low-income consumers. Minimum balance
requirements and penalties for overdrawing and bounced checks can mean the cost of
maintaining a bank account is simply not worth it for many households. Consumers
commonly cited not having enough money as a top reason for not having a bank account.
High service fees were also a factor, but to a much lesser degree. While account maintenance
can indeed sometimes be costly, shame or reluctance can also factor into a perception that
low-income customers do not have enough money to be served by mainstream banks.44
Identification barriers
Although almost 60% of banks accept non-traditional forms of identification (such as nonU.S. passports, foreign consulate identification cards, or Individual Taxpayer Identification
Numbers), 7.6% of consumers report lack of identification as a barrier to banking. This is
particularly the case in Latino and immigrant communities.45 Hispanic households attributed
identification and credit history problems as the reason for being unbanked at over twice the
rate of Black or White households.
Language barriers
Latino communities are particularly hindered by language issues and are more likely than
other groups to not understand the terms of papers that they have signed or how to contest
predatory practices when they do arise.46 This was most acutely manifested during the 2009
mortgage crisis, in which a disproportionately high number of Latinos were affected by
predatory lending in large part due to a lack of understanding of loan terms.
Low financial education
Low financial literacy among unbanked and underbanked communities can be a major
barrier to navigating complicated banking options and services.47 More than 50% of
unbanked households have never had a checking or savings account, suggesting that they
have limited to no experience with banking. 48 Although only a small portion of people
directly attribute not being able to manage or open accounts as the primary reason for being
unbanked, increased awareness of banking options and benefits has had a significant effect
on encouraging people to open bank accounts.
11 Financial worthiness
Credit scores, which are used by lenders to assess the risk of lending to consumers, are used
to determine loan eligibility and loan terms. Those who are unable to pay credit card bills on
time, as well as those who have not accumulated any credit history upon which to be
evaluated, can have a difficult time accessing the financial services that they need.
ChexSystems, or a Chex score, is a similar but lesser known credit verification system that
banks use to determine whether to grant or deny bank accounts. Credit and Chex scores are
based on a highly complex series of variables that determine a borrower’s risk level and it
can be opaque to borrowers why they have low scores. Although it is less common for banks
to deny bank accounts than for people to choose not to have them, a sizeable number of
unbanked consumers (15%) do not have accounts because banks turned them away. A third
of the people who were denied bank accounts had bad credit, and over 15% had no credit
history at all.49
Cultural barriers
Language barriers and cultural preferences also factor into banking decisions. Unbanked
rates are further elevated for immigrant Spanish-speaking households.50 As with other
practices, banking habits can be very strongly engrained in communities and informed by
historical cultural preferences and experiences. Sixty percent of Latinos, for example, do not
have any sort of relationship with a bank. Given the historical financial marginalization and
discrimination against Blackii and Hispanic communities, past negative or limited experiences
with formal banking systems may lead to higher rates of distrust in financial institutions in
these groups than among Whites.51 Furthermore, the experiences of immigrant populations
with financial institutions in their countries of origin may contribute to a lack of interest or
confidence in banks generally.
For more complete perspective on the history of black wealth accumulation and predatory lending, see: Lewis
Neir III, Charles. 2007-2008. The Shadow of Credit: the Historical Origins of Racial Predatory Lending and its
Impact upon African American Wealth Accumulation. Journal of Law and Social Change, Vol. 11, 131-194.
ii
12 CASE STUDY 1: CONSUMER EXPERIENCES WITH PREDATORY LENDERS
Fringe lending institutions that engage in predatory lending practices can cause
significant emotional distress for customers. Initial interactions, however, are deceptively
pleasant. A study on consumer experiences with predatory lenders clearly documents the
process by which unsuspecting borrowers are lured into high-cost loans that they cannot
afford. When borrowers first speak to predatory loan officers, they are presented with a
“friendly veneer.” Borrowers are given a large volume of options through which to
receive money quickly. The officers are extremely polite and may even go out of their
way to accommodate personal favors for the borrowers and their families. These first
interactions build a strong sense of trust, security, and reassurance that there are ways to
fix their financial woes.
The process goes quickly. Some borrowers find themselves closing loans in less than 510 minutes. Many reported feeling rushed through the process and said that they did not
clearly understand the nature of all of the options or the terms of the loans that they
signed. The de facto “rules of engagement” discouraged borrowers from asking questions,
and once loans were closed, the friendly veneers went away. Loan officers became
distant and unwilling to help any further—a complete 180-degree change from their
original personas.
When it came time for payback installments, many were surprised that actual fees were
much higher than they were led to believe. In this “aggressive response” phase, lenders
frequently employed very aggressive payment collection tactics, such as constant phone
calls to people’s homes and work places. Lenders also used victim-blaming rhetoric and
other psychologically abusive and threatening language. In the event that emergencies or
other circumstances came up that prevented borrowers from making entire payments on
time—even if it was a first infraction—lenders were relentlessly unforgiving. There were
excessively high penalties for late payments and partial late payments. Moreover, people
were highly discouraged from paying off loans early even if they could. Borrowers
reported feeling powerless and were often sold other predatory products that were
purported to help their financial situations, such as mortgage refinancing, but only added
on more fees and debt. Continuous borrowing only compounded their loan problems,
causing dependencies on the lenders.
Source: Hill, Ronald Paul and John C. Kozup. 2007. Consumer Experiences with Predatory Lending
Practices. The Journal of Consumer Affairs, Vol. 41, No. 1, 29-46.
13 Institution (supply-side)
Limited services
The services that many mainstream banks offer are not designed to adequately accommodate
low-income people. Nearly 50% of banks require at least a $100 initial deposit to open the
most basic type of checking account.52 The costs of maintaining a checking account decline
as incomes rise, meaning it is more expensive for low-income consumers to maintain
checking accounts.53 Overdraft, checking, and other service fees can be prohibitively costly
for low-income earners. Low-income consumers are also more likely to be required by other
institutions to pay housing costs and bills with money orders rather than personal checks,
further reducing the utility of personal checking accounts.54
Geographical access
Many studies to date have focused on understanding the landscape of alternative financial
services (non-bank service providers) and why they choose to open locations where they do.
A common conception is that mainstream banks are relatively absent from low-income or
high-minority neighborhoods, leaving these communities no other alternative than to rely
upon alternative financial services. Although financial deregulation in the 1980s opened the
market for alternative service providers, geographic proximity is not the main barrier for the
unbanked and underbanked. In fact, mainstream banks have fairly full coverage across the
country. Moreover, the distribution of banks and credit unions throughout neighborhoods
of different income levels is quite equitable. Low-income, lower-middle-income, highermiddle-income, and high-income neighborhoods each contain about a quarter of all bank
and credit union branches, demonstrating that low-income neighborhoods do not lack
physical proximity to mainstream banking options. In fact, more banks and credit unions are
located in low-income neighborhoods than in high-income ones per capita.
Racial targeting
Although proximal access to mainstream banking may not be an issue, alternative financial
service institutions do tend to be more densely located in low-income minority
neighborhoods. The high degree of residential racial segregation in the country has allowed
predatory lenders to specifically target these communities for riskier loans. The degree of
racial segregation of a neighborhood is, in fact, a good predictor of the presence of
alternative financial institutions. This has, in effect, created two-tiered consumer markets.55, 56
In fact, alternative or fringe financial institutions tend to be located near mainstream banks
because co-location makes it easier to capture and serve underbanked consumers. 57
Underbanked customers that own bank accounts but may have difficulty accessing other
financial services can easily access nearby fringe establishments as they visit branches of
mainstream banks.58 Between 90% and 95% of payday lenders, check cashers, and
pawnshops are located within one mile of a bank or credit union.59, 60 Nearly 80% of these
providers even operate in the same neighborhoods as banks or credit unions—meaning they
directly compete with mainstream banks for their customer bases.61 Co-location also serves a
logistical function since payday lenders, for instance, often require post-dated checks, which
consumers can easily acquire at their primary bank branch.62
Research on mortgage loans showed that Black borrowers were less likely to receive loan
quotes, given less time with loan officers, given less information and guidance, and quoted
14 higher interest rates than White counterparts.63 Predatory lenders often specifically target
low-income Latino communities with Spanish-language newspaper and television ads, as well
as employ Spanish translators to help sell financial products.64 Despite abundant Spanishlanguage marketing, final paperwork and contracts are often in English, presenting a
disconnect between what consumers may be told and what they actually sign up for.65
Although it can be difficult to accurately pinpoint the causes for racial discrimination in
lending,iii analyses of lending rates to Blacks and Hispanics show significant evidence of
racial discrimination in lending practices.66 There is a perception among lending institutions
that lending to minority communities is more profitable than lending to Caucasians.
Minorities are consistently less likely to receive loan quotes and more likely to be charged
higher interest rates and given less information from—and time with—loan officers for
mortgage, car, and other loans.67
THE IMPACTS OF BEING FINANCIALLY UNDERSERVED
Given the variety of high fees associated with alternative financial services, underserved
consumers pay significant costs for access to cash. But being unbanked or underbanked can
take a significant toll on individuals beyond direct monetary impacts, the costs include a time
premium and health costs. As this section shows, disenfranchisement from the mainstream
banking system can come at a significant cost.
Financial impacts
Many studies have tried to determine the amount of money that the unbanked and
underbanked spend on various financial transactions. The estimated dollar costs of various
financial services are compiled below.
It should be noted, however, that these estimates might not capture the extent to which
unbanked or underbanked status can affect an individual household or borrower.
Concurrent use of multiple alternative banking services likely exacerbates the cumulative
effects of being unbanked. Often, unbanked and underbanked households use multiple
alternative financial products at the same time. While a majority of unbanked and
underbanked consumers use at least one type of alternative financial service, a greater
proportion of unbanked households use multiple fringe financial products. According to the
2011 FDIC survey of the unbanked, over 35% of unbanked households had used two or
more of such services in the last year, and 11.8% of unbanked households had even used
more than three alternative financial services in the past year. (In comparison, the overall
usage rate of fringe financial services in the country as a whole is less than 10%.68) Yet,
because data is not often available to pinpoint the suite of fringe financial products used by a
single household, it can be difficult to understand the financial, and even societal
interrelationships among these services. Moreover, a significant minority of unbanked
households report they do not use any alternative financial services, suggesting a reliance on
informal financial arrangements whose costs are not captured in the studies.69
For a more in-depth sociological analysis of factors leading to racial discrimination in lending, see Pager,
Devah and Hana Shepherd. 2008. The Sociology of Discrimination: Racial Discrimination in Employment,
Housing, Credit, and Consumer Markets. Annual Review of Sociology, Vol. 34, 181-209.
iii
15 ATM and check-cashing fees
The fees required to obtain immediate access to cash from ATMs or check-cashing services
may not be very high per transaction, but can add up to a significant total, particularly for
those in most financial need. Not only do low-income groups pay the highest (in absolute
terms) for accessing cash,70 the unbanked are 3.7 times more likely to incur fees accessing
cash. Check-cashing is one of the most commonly used alternative financial services for both
the unbanked and underbanked. Nearly half of unbanked households and about 30% of
underbanked households have used non-bank check-cashing services.71 The check-cashing
industry itself reports processing over $55 billion in checks a year.72 A large majority of these
checks (80%) are payroll checks, and government benefit checks make up almost all of the
remainder. The fees associated with those transactions, which cost about 1.5-3.5% of the
value of a withdrawal, add up to over $200 million in annual revenue.73
Money orders
Low-income households commonly use money orders for bill payments. The FDIC reports
non-bank money orders are the most popular alternative financial product for both
unbanked and underbanked households.74 Non-bank money orders are used relatively
frequently, with over a third of underbanked households reporting use of non-bank money
orders within the past month.
Predatory loans
Predatory lending is the practice of using intentionally deceitful or fraudulent tactics to
pressure borrowers into risky loans. Predatory lending can encompass a range of products
and services from car loans and mortgages to payday loans. While loans from fringe bankers
may promise lower rates than bank loans, they often come with hidden charges that make up
a significant percentage of—or even exceed—the actual loan amount. Sometimes consumers
do not fully realize the full terms of these high-cost loans, but other times they may see these
loans as the only option during times of financial hardship.
Although payday loans are ostensibly marketed as short-term loans in times of need for
quick access to cash, payday lenders depend on repeat customers to make profits.75 Over
three-quarters of all payday loans are loan renewals that are taken out within two weeks of
the closure of a previous loan. In terms of loan usage, 69% of borrowers use payday loans
for recurring expenses, such as utility and mortgage bills, and are indebted for an average of
five months a year.76
Predatory practices cumulatively cost $9.1 billion per year in the United States.77 Table 1
below disaggregates this total. Equity stripping entails attaching excessive fees to loans up
front as payment penalties or other hidden fees. Prepayment penalties for subprime loans
make up the largest cost of equity stripping and affect the largest number of households
annually. Predatory lenders are typically not forthcoming about hidden fees and penalties
when they are trying to close loans, giving consumers false impressions of low interest rates
and minimal payment responsibilities. Pushing multiple and unnecessary loan refinances with
high associated refinancing fees, also known as flipping, is another way to tack on excessive
fees. Hidden penalties and transaction fees can follow borrowers for years, even if principal
and interest amounts are paid off or loans are refinanced. Financed credit insurance, which
adds a several-year insurance policy term to the loan in case the borrower should die or
become disabled, is also a major vehicle for stripping equity. In this practice, the full cost of
16 insurance premiums are added to principal loan amounts, creating extremely steep interest
and inflating principal amounts far more than borrowers realize. Predatory lenders, who
receive on average a 30% commission for selling credit insurance, are often intentionally
deceitful when selling credit insurance: about 40% of borrowers do not even realize that they
have purchased the product. Equity stripping practices are five times more likely to occur in
Black neighborhoods than White ones.78
In addition to various means of equity stripping, predatory lenders also commonly charge
customers much higher interest rates than their credit scores and financial histories warrant.
Fannie Mae estimates that as many as 50% of subprime borrowers could have qualified for a
lower cost loan.79 Lender pressuring, often combined with low financial literacy, contributes
to borrower reliance on such high-cost loans.
Table 1: Costs of predatory lending practices
Source
Predatory practice
Equity stripping
Prepayment penalties
Financed credit
insurance
Upfront fees
Excess interest
Rate-risk disparities
Total
Annual cost
(billions)
$2.3
$2.1
Households
affected annually
850,000
500,000
$1.8
$2.9
$9.1
750,000
600,000
2,700,000
Source: Stein, Eric. 2001. Quantifying the Economic Cost of Predatory Lending. Coalition for Responsible
Lending.
Credit cards
Credit card usage has skyrocketed from $800 billion in 1990 to $1.7 trillion in 2006. In
comparison, cash usage has only increased moderately while check usage has declined.80
Recognizing huge untapped market potential, many financial institutions and banks have
developed advanced marketing strategies to capture low-income consumers at higher interest
rates. Unbanked and underbanked households utilize credit cards as alternatives to other
lenders for getting cash advances.81 Not all of this marketing is predatory in nature—some
lenders are exploring uses of credit cards that can minimize transaction costs or prevent
borrowers from incurring overspending.
Financial Worthiness
While low financial worthiness can be a reason why people are unbanked or underbanked,
diminished financial worthiness can also be an outcome of the costs of being financially
underserved. People who rely upon fringe financial services tend to have significantly higher
rates of credit card late fees.82 Over-reliance on high-cost and/or predatory services can
greatly lower borrowers’ credit or Chex scores, causing debt spirals and further restricting
access to cash.
Low asset accumulation
Disenfranchisement from mainstream financial services makes it more difficult for unbanked
and underbanked communities to accumulate assets. It is already difficult for low-income
households who live paycheck to paycheck to save for home purchasing, college,
17 emergencies, or retirement. But being unbanked or underbanked also means fewer options
for saving or converting savings into non-liquid assets.83 Of one surveyed group of lowincome households around Detroit, for instance, 42% had never saved and reported relying
heavily on borrowing from alternative financial institutions, as well as friends and families,
during times of financial hardship.84
According to one study, not only do Whites possess twelve times the wealth of Blacks, the
lowest-income Whites are still generally better off than relatively high-income Blacks.85 While
assets can take many liquid and non-liquid forms, homeownership is one of the most
important mechanisms of asset accumulation. Most unbanked households are renters,86 and
the general difficulty unbanked and underbanked households have in securing loans affects
homeownership rates. The recent U.S. housing bubble, which burst in 2008, was fueled by
the predatory targeting of subprime and risky mortgages to households that could not afford
them. As target market segments, Black and Latino communities were heavily affected by the
subprime mortgage crisis. Considerable literature exists on the relationship between race and
homeownership and equity. A foreclosure study by United for a Fair Economy estimated
that between 2000 and 2008, minorities spent up to $213 billion on subprime loans. The
study further projects that, given current trends, it would take 594 years for Blacks to achieve
equal levels of median household net wealth to Whites, and 5,423 years to achieve equal
homeownership rates as Whites.87 Home equity and ownership rates are also lower in
immigrant populations.
18 CASE STUDY 2: ASSET ACCUMULATION, HOME OWNERSHIP, AND DEBT
The loss or threat of loss of home ownership is a major issue for many unbanked and
underbanked people. Homes are typically the first major asset that people acquire to build
wealth, and the foreclosure crisis has hindered many low- and middle-income families not
only in the pursuit of home ownership, but other asset accumulation as well. United for a
Fair Economy and Vida Urbana (City Life), two organizations that work with minority
groups at the intersection of community development, economic inclusion, and social
equity, have seen many of their members fall victim to poor lending practices or bad credit
in the struggle to achieve homeownership.
One Latina woman, a renter in her mid-50s, had lived with her 2 children in her
townhouse in a middle class neighborhood for 19 years. She made between $30,000 and
$40,000 a year. She was shocked to learn that, despite always paying her rent on time, the
property was foreclosed and she was being kicked out of her house. The landlord, who
owned several properties in the area, had defaulted on payments and, in order to protect
the home in which he resided, had to give up his other properties. Unless she could
purchase the house, she would be evicted.
Her search for another home proved to be very difficult: her children attended a magnet
school that had geographic restrictions, limiting her options for finding a new home. Most
apartments and homes in eligible neighborhoods were out of her price range, and
landlords of the affordable units in those areas required perfect or near-perfect credit of
their tenants. The stress of eviction and potential homelessness affected her mental health
and her ability to keep up with payments. She learned about City Life, which provides
resources and counseling for people in such situations; and she learned of many other
people in similar situations, which helped with the embarrassment of being evicted. City
Life helped her find strong support from others in the community. Until then, she had
been so embarrassed by her situation that she tried to hide it from her friends and coworkers. Through financial and legal education seminars held twice a week, she learned her
rights as a tenant and how to fight to stay in her home. She said that you never saw white
people at these meetings—the attendees were all Hispanic or Black. Any White people
there were either supporters or organizers – none of them were losing houses. Although
the woman ended up being able to stay in her home, she continues to worry about her
housing stability and how her credit rating may affect her opportunities down the road.
(continued on next page)
19 (continued from previous page)
Within her community, she has seen a lot of people fall victim to predatory mortgage
lenders. The lenders would ask how much borrowers wanted to spend on a house.
Borrowers might say $130,000 or so, but these lenders would convince them that they
should go for homes costing double that amount, such that monthly mortgage payments
began to resemble down payments for these households.
Since the initial fallout of the housing crisis in 2008, many things have changed. More
people have organized to fight these predatory practices and educate each other about
their rights. There are more people who have gone to court to protect their rights, and
there is a stronger sense of community. This sense of community is clearly shown in
another recent case of a man who was facing eviction in a neighboring area. He had lived
in his house for over 15 years and was paying for his mortgage through a variable rate
loan. For 12 years, his mortgage payments were around $900 a month; then suddenly,
without warning, his monthly mortgage payment increased to $2,500, and soon he was
unable to make the payments without supplementary income. He came to City Life for
help. His counselor discovered that ownership of the mortgage was divided between 4
different entities because the lender had sold portions of the debt to different banks—
part of what had caused the mortgage payment increase. A year later, the payments
increased further to $3,000 a month. The debt collector said that he was three years
behind on payments. The man, who had been pressured into a variable rate loan in the
first place, was on the verge of being kicked out of his house. At one point, the police
were even called to try to remove him from the premises, but about 250 members of the
community arrived to block his property. Eventually, the man was able to take his case to
court; but it would not have been possible without his network of support.
Source: Interview with Jeanette Huezo, United for a Fair Economy, on August 29, 2013 20 Time-costs
Despite the convenient initial exchange to obtain a fringe financial service, the financially
underserved end up spending a significant amount of time on financial transactions. While
the average adult spends 28 minutes per month accessing cash, or 5.6 hours per year, the
unbanked are 50% more likely to pay higher time-costs for cash access.88
Reliance on other non-financial establishments for financial services
With limited access to financial services, the underserved also rely on non-financial
institutions to make financial ends meet. Store credit and rent-to-own centers, which are not
bound by the same regulatory standards as mainstream or even alternative financial
institutions, can have significant impacts on consumer finances. Low credit availability is
positively correlated with the use of store credit as a substitute for cash, credit, and
bankcards.89 Store cards tend to have higher interest and delinquency rates than bankcards,
and many stores engage in tactics that encourage consumers to take on more debt.90 Similarly,
rent-to-own establishments can gouge borrowers with excessively high interest rates and fees
for renting everyday appliances that they may need. According to the 2011 FDIC survey of
underbanking, 12% of unbanked household and 13% of underbanked households had used
rent-to-own services in the past.91
Mental and physical health
Sudden medical conditions can cause a household to unexpectedly deplete their funds and
become unbanked or underbanked.92 Rising healthcare costs are responsible for significant
debt for many U.S. households, and may in part drive borrowers to alternative financial
institutions to make ends meet. Even in the 1990s, medical costs factored into nearly 20% of
bankruptcy cases.93 Minority communities tend to feel the impact of financial hardship more
profoundly. It is 13% more likely for banked Black families, 11% more likely for banked
Hispanic families, and 5% more likely for banked Asian American families to become
unbanked than White families due to sudden medical illnesses. 94
Uninsured and underinsured populations were, unsurprisingly, most likely to have high
medical debt. Medical debt was also found to be most common among Hispanics, who also
have the highest rates of being unbanked of all immigrant groups.95 An in-depth study of
medical debt among Hispanics found that respondents were commonly confused about the
terms of their healthcare coverage, paid for medical bills with multiple predatory loans, and
had anxiety about the debt that followed. Most of the medical debt was due to emergency
room visits, although other uses of predatory loans ranged from non-emergency necessities,
like diabetes treatment, to more common items, like buying contact lenses. Most
respondents reported having foregone prior health treatments when they first noticed
problematic symptoms due to lack of available funds at the time. Putting off early or
preventative treatment only escalated the severity and costs of treatment when they did seek
help.96 In addition to their presenting medical conditions, these respondents described
feeling anxious and stressed over medical costs. As one patient put it “I’m traumatized by
bills.” Some even required medication for anxiety, though they could not always afford it.
But the relationship between health and finances can go both ways. Researchers have also
found that financial hardship can take a significant toll on mental and physical health.97 The
relentless and high-pressure tactics of debt collectors—particularly from predatory lenders—
21 for even small infractions can cause significant stress and anxiety and lead to stress-induced
illnesses over time.98 In another study of in-debt borrowers, roughly half of respondents
reported experiencing health troubles and over 20% felt that their ailments were serious
enough to warrant visiting the doctor.99 Many debtors also stop medical treatments in order
to make loan payments. A nationwide study found that individuals facing mortgage
delinquency were 8.7% more likely to discontinue the use of medication.100
Relying upon alternative financial services can also affect health in more subtle ways. For
example, dealing with debt can reduce borrowers’ ability to make healthy choices, such as
seeking preventative treatments, buying nutritious foods, or exercising.101 Financial problems
also increase the likelihood of mental health conditions. People who are unable to make
mortgage payments, for instance, were nearly nine times more likely to have depression.102, 103
Crime
Examining the ecology of alternative financial institutions reveals a correlation between
alternative financial services and neighborhood crime. Because alternative financial
institutions are disproportionately located in low-income and minority communities that
tend to have higher crime rates, it is difficult to pinpoint the degree to which alternative
banking contributes to crime, but there are many theories about the relationship between
underbanking and crime. Neighborhoods with a high concentration of check cashers, payday
lenders, and pawnshops are more likely to be targeted for crime because of the greater
likelihood that homes and businesses may have cash on hand.104 Others theorize that payday
lenders and other alternative financial establishments are indicators of general neighborhood
disorganization and decline. The disintegration of local institutions, economic distress, and
societal instability in turn drive higher rates of neighborhood crime.105
22 CASE STUDY 3: THE ROLE OF CREDIT UNIONS
Local credit unions have become major players in providing better service and financial
education to the unbanked and underbanked. The Latino Community Credit Union
One of the pioneers in this field is the Latino Community Credit Union (LCCU), based
out of North Carolina. With 11 branches across the state, over 55,000 members, and
$128 million in total assets, the LCCU has been very effective in reducing the number
of unbanked Latinos and many other groups in the state. The credit union was
founded in the 1990s by Latino community leaders in Durham, in response to a wave
of robberies and muggings targeting Latino immigrants in the city. These immigrants,
who came to the United States primarily for opportunities in the construction industry,
were not used to banking practices. They were seen as targets because they carried a lot
of cash, and crime was highest on and immediately after payday. Community leaders
tried to address the crime and other community issues through a variety of means, but
found that they could do much of this by setting up a credit union. There was a lot of
interest, but not a lot of technical know-how, so they partnered with the North
Carolina State Employees Credit Union to handle much of the back-office work, such
as accounting, security, and data. They hired members of the Latino community to
staff the credit union and get it up and running. Initial deposits and investments came
from a number of other credit unions in the state (North Carolina State Employees
Credit Union was their largest lender). The demand grew very quickly, mainly via word of mouth and without any paid
advertising, the way it is to this day. The LCCU was able to reach many documented
and undocumented immigrants and U.S.-born Latinos through churches, community
groups, and personal referrals. They do not require or verify documentation of
citizenship. Over 75% of LCCU members were previously unbanked and had never
had any relationship with financial institutions prior to their affiliation with the LCCU.
Over 95% are low-income. Most do not have a formal credit history, but the LCCU
uses alternative methods to determine credit worthiness, such as rent and utility
payments. They offer the same standard low interest rate to all members across the
board, unlike the usual practice of risk-based lending.
To date, the LCCU has provided over $210 million in financing and helped 1,700 firsttime homeowners acquire houses. (continued on next page)
23 (continued from previous page)
(continued from previous page)
These personal financing issues also have larger community-wide effects, reinforcing
neighborhood
blightthey
and also
disinvestment
thesuite
poorest
places that
could
the
As the LCCU grew,
expanded in
their
of services.
They
nowbenefit
not only
most
from
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This is part
of thepersonal,
reason that
EPCUAH,
like the
provide
comprehensive
financial services,
including
auto,
and mortgage
loans
LCCU,
focuses
not
just
on
financial
services
but
also
a
wider
array
of
issues
including
as well as a remittance program, they also offer financial education and have graduated
affordable
over 2,600 housing.
people from their program since 2006.
Similar
to the LCCU,
the Elcalled
PasoDirecto
Credit Union
for Affordable
Housing
Their remittance
program,
a México,
is one of the
first of (EPCUAH)
its kind in the
looks
beyond
their
customers’
credit
scores.
They
also
look
at
past
payment
histories
United States to provide a low-cost way to send money home. Partnering with
a
for
rent
and
utilities
and
do
a
more
qualitative
assessment
of
the
causes
of
any
late
Mexican bank, the LCCU allows members to directly transfer money into another
payments.
Most times,
extenuating
circumstances
emergencies
or Mexico
job loss
person’s account
in Mexico.
An expanded
versionlike
for medical
other countries
besides
were
direct
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thatamost
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is
called
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alsofound
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or friends
back home
considerations
show
the
limitations
of
credit
scores,
which
rely
on
a
narrower
set of
can access and withdraw money through this debit card and LCCU members can
easily
standards
and
do
not
consider
reasons
for
late
payments.
reload and check the balance from the United States. It costs $1 a month to maintain
and has an automatic overdraft protection feature that prevents the card user from
Recognizing
tothan
capital
is limited by
withdrawing that
moreaccess
money
is preloaded
onlow
the credit
card. scores and disproportionately
high costs of things such as health care for low-income families, EPCUAH has taken
several
to lower
barriers
financialHousing
access. They help set members up with
The Elmeasures
Paso Credit
Union
for Atoffordable
credit union accounts and walk them through every single step of what owning a bank
account
entails.
TheyUnion
hold for
60 to
70 financial
education
workshops
year (about once
The El Paso
Credit
Affordable
Housing
(EPCUAH)
is aaTexas-based
credit
or
twice
a
week)
to
teach
members
about
how
the
financial
system
works
and
what
union focused on serving members who need financial counseling, are facing
their
optionsorarehave
for been
various
typesof
ofpredatory
loans. These
workshops
also cover
foreclosure,
victims
lending.
Recognizing
a gapthe
in financial
fundamentals
of
banking,
as
well
as
how
to
increase
credit
scores.
They
also
services in the region, 8 credit unions pooled their resources to establish the offer
EPCUAH
workshops
to
inform
people
of
their
options
when
they
are
in
financial
trouble.
in 2001. Many EPCUAH members have had negative experiences with lenders and
banks that have stripped their equity and prevented them from amassing savings or
EPCUAH
assets. provides one-on-one counseling services for housing and credit, during
which they help develop detailed action plans for borrowers to find realtors and
identify
They also
offeronefreeor
taxtwo-week
preparation
for
Many oftheir
theirfinancial
membersoptions
subsistfor
forborrowing.
years on a series
of small
loans.
anyone
less cannot
(this includes
their members)
run 23
Withoutmaking
proper$51,000
savings,or
many
afford most
basic of
appliances
and turnand
to Rent-AVolunteer Income Tax Assistance sites that typically prepare 6,000 returns a year and
Centers for rent-to-own products like TVs, beds, and even tires. EPCUAH has seen
bring-in
$11 million
to low-income
EPCUAH
then advises
several members
go in
to refunds
Rent-A-Centers
to renthouseholds.
car tires, which
can be expensive
to its
pay
members
on
how
to
best
save
or
invest
that
money.
EPCUAH
estimates
that
these
for upfront but enable them to get to landscaping and other types of jobs that require
services
families $1.5With
million
in tax preparation
vehicularsave
transportation.
extremely
high interestfees.
rates, these centers perpetuate
the cycle of debt by capitalizing on the basic needs of its customers. Sources:
Interview
(continued onwith
nextErika
page) Bell, Vice President of Strategies & Services, Latino Community
Credit Union, August 13, 2013
Interview with Larry Garcia, El Paso Credit Union for Affordable Housing, August 19,
2013
24 II. SERVING THE UNDERSERVED:
THE PROMISE OF NEW TECHNOLOGY
THE USE OF ELECTRONIC PAYMENT TECHNOLOGY IN
FINANCIALLY UNDERSERVERD COMMUNITIES
Electronic payment and banking technologies have emerged as new tools for reducing the
costs of being unbanked or underbanked. Technology allows unbanked consumers to access
the digital economy and use mainstream financial tools without requiring a banking
relationship. Electronic payment technology allows consumers to interact with employers,
governments, and financial institutions and conduct financial transactions without bank
accounts, paper checks or money orders. Electronic and mobile services can be used for
money management, peer-to-peer (P2P) money transfers, bill payments, and retail
transactions. These products and services are available through traditional banks, prepaid
cards, payroll cards, government benefit cards, credit card issuers, retail stores, credit unions,
and nonprofit financial organizations, which all offer various forms of electronic financial
services.
Electronic payment technologies include a range of products, from mobile payment and
banking to payroll and prepaid cards. While some services are meant to improve the
efficiency of financial transactions for those who already have bank accounts, others are
meant to serve those with no access to formal banks. Electronic banking technologies
targeted toward financially underserved populations are relatively new, but are growing
rapidly. This section discusses recent trends in electronic payment technology, provides an
overview of electronic and mobile services for payments and banking that are already
available on the market, and highlights examples of some service providers in operation
today.
MOBILE BANKING
Despite being predominantly lower-income households, a significant portion of the
financially underserved has mobile phones. The Federal Reserve Board’s 2013 analysis of
mobile phone usage among consumer groups showed that 87% of U.S. adults own mobile
phones. Within unbanked and underbanked communities, 90% (or 46 million adults) of the
underbanked and 59% (or 10 million adults) of the unbanked have access to mobile phones.
Rates of smartphone ownership (around 50%) are relatively the same among all mobile
phone owners regardless of banking status.106 As Table 3 illustrates, there is significant
potential for unbanked and underbanked consumers to tap into electronic payment
technology to reduce reliance on high-cost fringe services.
25 Chart 6: Estimated Mobile Phone Access among
the Unbanked and Underbanked
Underbanked Adults
Mobile phone
Smart phone
Unbanked Adults
0 5 10 15 20 25 30 35 40 45 50 No mobile phone
Millions of people
Data calculated using FDIC 2012 and Federal Reserve Board
Overall, mobile banking is a common, but growing tool. Between December 2011 and
November 2012, mobile banking rates increased by 7% for mobile phone users and 6% for
smartphone users in just one year.107 Mobile payment usage remains lower than mobile
banking, but still experienced 4% growth among mobile phone users and 1% growth for
smartphone users during that time period. While only 28% of all U.S. banks offer mobile
banking services, these services are much more widespread among large banks, where 88%
offer mobile banking options.108 Most banks with such services, however, have not used
mobile banking to specifically target the unbanked, demonstrating that significant
opportunities to engage underbanked communities through mobile banking remain
untapped. Such technologies can increase the convenience and efficiency of conducting
financial transactions, addressing some of the major barriers that financially underserved
households identify for not using traditional banking services.
Significant efforts to apply mobile banking tools to unbanked communities are also taking
place overseas. U.S. institutions interested in addressing unbanked consumers through
mobile banking may find that international efforts can shed more light on innovative and
best practices. Internationally, there is a strong positive correlation between per capita GDP
and usage of financial services. Over half of the global adult population (2.5 billion adults)
does not use formal banking services. Sixty-two percent of these adults reside in the Global
South, where financial, governance, and broadband infrastructure are relatively
underdeveloped, yet mobile phone usage is high.109
Bridging connections between international mobile and brick-and-mortar financial services is
particularly important for U.S. households that send remittances back home. The Pew
Hispanic Center reports that 42% of foreign-born Latinos (about six million adults) send
regular remittance payments, and 70% of those rely on Western Union, MoneyGram, and
other such companies to wire those funds.110 If designed effectively, mobile financial
platforms can offer the unbanked and underbanked remittance and other financial
transactions at far lower costs than the alternative establishments they currently use.
Mobile bill payments
Many mobile banking services, including some of the products covered above, allow
customers to pay certain bills via mobile phones. Many entities are re-thinking how they can
26 move from paper bills to mobile payments, thereby reducing labor, transaction, and material
costs of billing.
In the spring of 2013, US Bank introduced a photo mobile bill pay service allowing users to
capture photos of bill stubs with cell phone cameras, add billing accounts to their mobile
devices, and pay those bills from mobile US Bank accounts.111 While this service is part of a
major U.S. bank and requires having a pre-existing bank account, there are many other
mobile bill payment options that can bypass banks and these services do not need to be
initiated through banks themselves. Payment-collecting institutions, including government
agencies, have also been leaders in mobile bill payment. Many researchers have floated the
idea of moving to electronic direct deposits of Earned Income Tax Credit (EITC) funds.112
In 2012, the Dubai Smart Government Department in the United Arab Emirates launched a
mobile app for paying government bills and fines. Dubbed mPay, the app currently has
13,000 users who have made AED 15 million ($4 million USD) of payments to the Dubai
Police, Dubai Electricity and Water Authority, Roads and Transportation Authority, and
Emirates Telecommunications for various bills and fines.113
Partnerships with mobile carriers
Because mobile banking inherently entails the use of cell phones, some mobile banking
services have originated from partnerships with mobile carriers. One of the most effective
mobile platforms to come out of mobile carriers is M-Pesa, a branchless banking and
microfinancing service currently operating in five countries. Originally the brainchild of the
UK’s Commonwealth Telecommunications Organisation and a poverty alleviation
organization called Gamos, M-Pesa is operated by Safaricom and Vodacom, the largest
mobile networks in Kenya and Tanzania. Users can deposit, withdraw, or transfer funds, as
well as receive and repay low interest rate loans, giving microfinance lenders a competitive
advantage in the market. Without the need to connect funds to existing bank accounts, MPesa quickly became the primary financial service for many previously unbanked consumers
in East Africa. It has since expanded from Kenya and Tanzania to Afghanistan, South Africa,
and India.
Mobile banking through mobile operators is not very prevalent in the United States,
although AT&T smartphones now all come preloaded with Isis, a mobile wallet company
described in more detail in the following section.
Mobile operators can also help the unbanked and underbanked access electronic and mobile
financial networks by providing customers with a direct carrier billing option to pay other
types of bills. Rather than receiving separate bills for purchases or other transactions,
customers enrolled in direct carrier billing will be charged these costs as part of a monthly
mobile phone bill. Direct carrier billing can generally only be used for digital purchases and
is mostly commonly available for charity donations or online store purchasing, but can have
the potential to cover a wider array of transactions in the future.114
27 OTHER ELECTRONIC FINANCIAL SERVICES
Electronic financial and payment technologies underlie a variety of products and services at
varying levels of accessibility to the unbanked. It is important to note that these services are
not mutually exclusive and many are and can be integrated.
Mobile money
Mobile money is a form of virtual currency that can be used to make financial transfers or
transactions. Mobile money can be connected to actual funds in bank or credit card accounts,
but some platforms allow users to store financial credits and values separate from any
existing accounts from financial institutions. Platforms based on mobile money can come in
many shapes and sizes and include a wide variety of functions, payment methods, and
money storage systems. Some primary types of platforms and examples of current providers
are described below.
Mobile wallets
Aimed at reducing the cost and increasing the convenience of financial transactions, mobile
wallets allow consumers to pay for goods and services through mobile phone devices
without having to rely upon cash, checks, or bank cards. Mobile wallets, which store virtual
versions of existing payment instruments (typically bank and credit cards, but also coupons,
store cards, prepaid cards, payroll cards, benefit cards and transit tickets), can offer a range
of services. Some of these services include money transfer to friends and family, money
management, retail purchasing, and loyalty and retail discount programs. The virtual funds
contained in mobile wallets are secured by unique PIN and ID numbers that must be
entered before completing a transaction. The security verification and fraud monitoring that
accompanies mobile wallets makes them safer to carry than physical wallets, whose contents
can more easily be spent or misused in the case of theft.
Usually, mobile wallets entail partnerships with a set of payment cards, such as major credit
cards, prepaid cards of some form, retail stores, and banks. Some products, such as Google
Wallet and Isis (a mobile wallet available in Austin and Salt Lake City), only work by
connecting existing bank and credit card accounts to mobile apps, and therefore cannot be
used to serve the unbanked. But not all mobile wallets require cards tied to bank accounts.
Mobile wallets can also be tied to prepaid cards, expanding options for financially
underserved populations to access financial services without having to open bank accounts.
PayToo is one such mobile wallet that can accommodate unbanked consumers. Unlike many
other mobile wallets, PayToo does not rely upon bank or credit card accounts (although
those with bank or credit card accounts can connect their accounts to the mobile wallet).
Customers can make direct cash or check deposits to their PayToo accounts. The funds are
then available for withdrawal at over one million ATMs across the world with a PayToo card
or at physical PayToo cash-out stations; via free money transferring and wiring in 200
currencies to other PayToo accounts or regular bank accounts; for shopping at participating
retail stores; and even for VoIP calling. Their international presence allows customers to also
easily send remittances to home countries.
28 PayToo has rolled out other specific programs for unbanked customers, including a
partnership with Grand Prix Motors, a New York-based car company.115 Through this
partnership, customers who may otherwise face difficulty or high fees in securing auto loans
are able to access credit to buy, trade, or lease new and used vehicles. Grand Prix Motors
even provides at-home vehicle delivery for customers who do not live near their four
dealerships that accept the mobile wallet.
GCASH is another mobile wallet service in the Philippines that can serve the underbanked.
While it requires customers have a bank account, like many other mobile wallets, GCASH
customers can transfer funds, pay bills, and send remittances or donations through both
mobile and computer platforms. GCASH is accepted by 7,000 vendors in the Philippines
and can be used for most major utility, credit card, and phone bills. With no service fees for
basic banking, and a 1% fee for peer-to-peer money transferring, GCASH is very affordable
but has recently instituted a P50 ($1.16 USD) monthly account maintenance fee.
Prepaid cards
Mobile money can also be extended to unbanked consumers through prepaid cards. Prepaid
cards are a rapidly growing financial mechanism for the financially underserved. They
emerged in the 1980s in the form of prepaid phone cards, and broadened to include a wider
range of store cards and open-system cards in the 1990s. The use of prepaid cards grew in
part due to the transition of the food stamp program to government-issued electronic
benefits transfer cards.116 Between 2006 and 2009, overall prepaid card usage grew by over
20% per year. The amount of those transactions also grew by an average of 22.9% each year.
In 2009 alone, consumers made six billion transactions worth a total of $140 billion.117 Rates
of prepaid card usage specifically among the underserved grew from 12% in 2009 to 18%
two years later in 2011. Rates were even higher for unbanked individuals who previously
held bank accounts, jumping from 19% in 2009 to 27% in 2011.118
One example of a prepaid card is the Walmart Mobile Money Card, a reloadable prepaid
card that allows customers to receive direct deposit payments, conduct online money
transfers, reload the card, and manage funds via mobile phone. The phone app also allows
customers to locate nearest Walmart locations, where they can also access services at the
physical stores. Since funds are stored through the money card, no bank accounts are
required to use the product. Walmart does not require proof of citizenship to open a money
card. Moreover, since many rely upon Walmart for basic check-cashing services, the store is
well positioned to bring unbanked and underbanked markets into mobile banking.119 A more
detailed analysis of prepaid cards follows in the “Comparison of Cards” section.
Payroll cards
Similar in concept to mobile money cards, some employers have been experimenting with
providing wages via payroll cards to reduce unbanked and underbanked employees’ reliance
on payday lenders and check-cashers. (See, for example, the case study on the Rosebud
Reservation.) Such cards have been made available by teams using the electronic payment
networks of MasterCard, Visa, and Discover. Walmart and the City of San Francisco are two
notable employers that have instituted payroll card systems for employees.120
While they are designed to reduce fees and increase consumer convenience, payroll cards can
also include significant hidden fees for out-of-network transactions, checking account
29 balances, receiving paper statements, or inactivity. They also have varying ranges of features,
including options for online bill paying or electronic alerts. The prevalence of payroll cards
has been on the rise, with one prediction by the Aite Group that payroll card use will
increase by 20% from 2002 to 2017.121
Some employers have been criticized for forcing all employees to switch to payroll cards that
have associated fees. In order to protect consumers against such abuse, one technology
provider in this space, MasterCard, has developed seven principles that help to ensure
payroll cards are not abused and can benefit both employers and employees. These
principles are: (1) allowing employees the choice to opt in or out of payroll card systems; (2)
maintaining at least one free transfer per payroll period (whether to cash, a bank account, or
another type of card); (3) free access to balance information; (4) guaranteeing zero-liability in
the case of fraud; (5) protecting funds and personal information in case cards are lost or
stolen; (6) providing consumer education on how to use the card and avoid fees; and (7)
using simple and clear language with easy-to-read information on fees and terms of the card.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending has radically transformed loan opportunities for many people
around the world by creating a new method for making and receiving personal loans. P2P
lending makes loans more accessible to the unbanked by circumventing financial institutions
that typically serve as providers or intermediaries of lending. Instead, individual lenders and
borrowers are connected through online platforms. P2P lending entails virtual community
building, typically around social issues, that connects borrowers with a wide network of
investors. Features on many P2P platforms, such as profile postings and message boards, are
aimed at fostering a sense of community such that investors can learn about borrowers’
livelihoods and needs on a more personal level. P2P loans also tend to be small-scale, and
many investors can contribute to a single project, decreasing investment risks for any single
lender.
Many P2P lending platforms are aimed at international development lending. Kiva is one of
the largest international P2P nonprofits. Founded in 2005, Kiva’s mission is to alleviate
global poverty through P2P microfinancing. As part of Kiva’s model, vetted local
microfinance institutions located around the world serve as Kiva Field Partners to identify,
assess, and select individuals or communities seeking funds for local initiatives. Once
selected, borrowers post descriptions of their loan needs to the Kiva website, where
investors can browse and select projects to which they would like to contribute. Most
borrowers request funds for a range of needs, including capital investments in start-ups
(such as buying agricultural supplies to start small-scale commercial agriculture), undertaking
local infrastructure construction or improvement projects (such as building wells, latrines, or
water treatment facilities), and financing education for promising rural students.
Lenders receive periodic progress updates on projects they have funded and receive the
loans back in the form of Kiva Credit, which can either be re-invested or withdrawn from
the Kiva platform. Kiva has a 99.03% rate of repayment, and requires Field Partners to
adhere to the Client Protection Principles code of conduct for loan collection, although Field
Partners are generally given the discretion to use loan collection methods of their choosing.
Throughout the process, Kiva is responsible for conducting due diligence on governance,
management, personnel, auditing, liquidity, and transparency for Field Partners, as well as
30 continued monitoring and rating of Field Partner operations. Table 2 provides a snapshot of
Kiva’s performance to date.
Table 2: Kiva lending snapshot
Total amount lent
$480,475,550
Number of loans made
616,569
Kiva lenders
1,000,875
Borrowers funded
1,141,060
Field Partners
225
Countries where Field Partners are located
72
Repayment rate
99.03%
Average loan amount
$409.38
Average number of loans made per lender
9.93
In April 2012, Kiva launched a new pilot program called Kiva Zip for membership-based
direct lending through mobile money. Currently, the program is only available in Kenya and
the United States. It allows for the instant transfer of as little as $5 of funds with 0% interest.
Kiva Zip differs from the regular Kiva platform in that Zip members can be borrowers,
lenders, or trustees. Trustees are individuals who identify and endorse borrowers based on
creditworthiness, character, and other criteria. Unlike the more rigid credit scores, Kiva Zip
creditworthiness assessments are more holistic to account for people who have no credit
history or do not participate in formal banking services. So far, the program has been fairly
successful: in the first year of operation, Kiva Zip conducted over $1 million of transactions.
The repayment rates are 91.3% in Kenya and 85.5% in the United States.
The community-building aspects of P2P lending are very apparent in Kiva and Kiva Zip’s
platforms. Kiva investors make an average of about ten loans, and the trustee function of
Kiva Zip is based upon creating a member-based network that relies on personal vouching
for borrowers.
While Kiva is a major player in the P2P sector, there are also many other platforms available.
Prosper offers an alternative model in which investors can specify the type of loan they
would like to make from a set of criteria and select borrowers that match those requirements.
Prosper does not have a social justice mission. The types of loans funded on Prosper include
debt consolidation, home improvement, auto, small business, child adoption, engagement
ring, wedding, green, military, and personal loans. As the intermediary, Prosper requires
documents, such as proof of employment, sources of income, and credit bureau data to
provide tiered levels of borrower verification. Prosper also rates borrowers through Prosper
Ratings, which indicate the risk level of lending to individual borrowers based on credit
worthiness. Prosper’s current interest rates range from 6.73%-35.36% APR, depending on a
borrower’s Prosper Rating. Currently, Prosper includes 1.9 million members and has funded
$650 million in loans.
Lending Club is another platform that aims to develop alternatives to mainstream banks.
Lending Club allows members to directly invest in and borrow from each other, eliminating
the banking system from the equation. There are no prepayment penalties or hidden fees. It
31 also allows investors to directly capture interest on loans. To date, $2.6 billion in loans have
been funded through Lending Club, generating $232 million in interest to investors.
P2P lending can be a particularly effective forum for the unbanked by facilitating belowmarket-rate loans within a group of people. Because P2P lending does not have to rely upon
credit score, it can allow unbanked and underbanked borrowers to access funds they might
not otherwise be able to through mainstream banking, or that they could have gotten at a
high cost through subprime lenders. Lending through these platforms is highly contingent
on creating a sense of community. P2P lending may be a way to more effectively allow
communities that already exist—for example, religious groups, organizations, and friends—
to conduct low-cost transactions. Alternatively, P2P platforms can actively foster a virtual
community by personalizing loan requests. Even P2P lenders that use credit scores often
supplement credit scores with alternative determinations of financial worthiness, such as
trustee vouching in Kiva Zip.
This can be a challenge, however, for borrowers with limited resources or literacy. Attracting
a high volume of small lenders can require a significant degree of marketing savvy. Writing
compelling descriptions of project ideas or borrower profiles is a skill. Many borrowers also
supplement text with videos and photos. As such, P2P lending can fall into a trap of
favoring borrowers with more access to resources.
Because loan amounts come from many sources and are usually not very large, risk is spread
across multiple lenders. At the same time, assessing credit worthiness can be tricky. Prosper,
for instance, excluded lowest-quality borrowers after many could not pay back the loans.
After doing so, default rates have since improved.
32 CASE STUDY 4: ELECTRONIC BANKING IN THE ROSEBUD RESERVATION
The Rosebud Sioux Indian Reservation, home of the Sicangu Oyate Lakota (Rosebud Sioux
Tribe) in South Dakota, is a place with many economic challenges. Within the population of
9,612 residents, nearly half are below the poverty line and 60-85% are unemployed, depending
upon the season. Located in one of the poorest counties in the United States, the Rosebud
Sioux Tribe has a per capita income of $11,010. The two main employers on the Reservation
are the Rosebud Sioux Tribal Government (which employs over 800 residents) and Sinte
Gleska University (which employs over 200 residents).
The entire reservation has only one bank branch—a Wells Fargo—leaving 80% of the
residents completely unbanked. It is common for a majority of residents who work for the
tribe or the university to participate in a two-week loan agreement with payday lenders. These
lenders only lend if the employee has signed an agreement assigning the first portion of their
pay to the payday lender with potential loans capped at 50% of the employees pay (employees
have always already earned one week of pay in the next cycle at payday). Employers pay the
loan principal and fees directly to the lenders before paying the remaining pay to the employee
on a paper check, which the employee must take to the one available check casher who charges
$3 per $100. Because the payday lender is always paid directly from the employer first, it is a
riskless loan, yet recipients face an interest rate of $15 to $20 per $100 loan for a two-week
loan period, with one lender as high as $35 per $100 loan for the two weeks. This represents
annual interest rates from 400% to 900% for a zero default loan.
Tribal government and tribal college employees have thus become trapped in a cash economy
with a vicious lending cycle. Although records show 100% rates of repayment for these payday
loans, this information remains unreported and does not help to increase employees’ credit
scores. With no formal banking histories and low or no credit scores, it is difficult for these
residents to use alternative means of accessing, transferring, or accumulating wealth.
MasterCard has been working with the Sicangu Oyate Lakota to explore whether payroll cards
and electronic banking can drive financial empowerment. Payment through a payroll card
program would not only replace paper checks, allowing employees to bypass expensive payday
lenders and check cashers, but also provide a mechanism for conducting electronic
transactions.
(continued on next page)
33 (continued from previous page)
Access to electronic payments will enable Rosebud Sioux tribal members to complete
transactions online, like paying electric and water bills without requiring the purchase of a money
order or traveling long distances to pay in-person with cash. Other obvious benefits, which
individuals with electronic payment capabilities take for granted, include getting access to online
shopping, where merchandise and tickets for travel are often sold at discounted prices. Many on
the Reservation are technologically savvy and possess smartphones with Internet access.
Moreover, there are established patterns of peer-to-peer and within-family cash transactions,
making it a ripe context for launching an electronic banking initiative.
Under this new program, residents would not only see more money coming into their pockets,
but also gain tools for improved long-term financial capacity. Recognizing the challenges of
implementing and sustaining such an initiative, MasterCard is placing a strong emphasis on
integrating financial literacy into multiple aspects of the program. MasterCard has already helped
organize initial financial literacy seminars to build trust within the reservation and acculturate
them to banking practices, including budgeting and saving.
The program is estimated to generate about $1.5 million in savings and very significant rate
reductions for about 1,000 Rosebud households. This translates to $2,470 in annual savings per
employee, or over 22% in savings of the average per capita income.
The payroll card is designed to work for people without bank accounts, but can also serve as a
pathway to understanding and obtaining a checking or savings account later down the road.
Whereas the card can still be the place to hold discretionary income, it can be supplemented by a
bank account when consumers have accumulated more savings.
MasterCard hopes that creating a strong and comprehensive framework that focuses on both
services and behavior changes can transform the financial landscape of the Sicangu Oyate Lakota
and other Native American tribes. Short- and long-term program evaluation will analyze how and
where consumers are using the payroll cards, as well as card balances, to better understand
whether and how patterns have shifted and whether the program decreased reliance on check
cashers and high-rate payday lenders.
The company has already begun to identify further opportunities for expanding the program,
should it be effective. MasterCard is interested, for instance, in establishing the program for other
tribes, including the Coalition of Large Tribes to help bring more Native Americans out of
poverty.
Source:
Interview with James Stanley, Vice President, Prepaid Sector, MasterCard, April 18, 2014.
34 CHALLENGES OF ELECTRONIC FINANCIAL TOOLS AND BANKING FOR THE
FINANCIALLY UNDERSERVED
Although electronic payment technology and mobile banking have great potential to help
alleviate the burdens of the financially underserved, many logistical and operational
challenges remain. Because they are meant to supplant participation in mainstream banking,
effective electronic or mobile financial platforms should allow the financially underserved to
use a range of services for financial transactions and overall money management. The
following are some key considerations and challenges in applying electronic payment
technology and mobile banking to these communities.
•
Technological access: Because access to the Internet is a critical component of most
types of mobile banking, many unbanked and underbanked people will not be able to
use mobile banking services. Prepaid cards can remain a viable resource if account
balances are managed via text messaging rather than full online integration, thus still
providing a bridge to the digital economy.
•
Cooperation: As the many examples of existing electronic financial services show,
some of the most effective services have come out of strong partnerships among
banks, mobile operators, third party payment providers, and government agencies,
who do not necessarily interact with each other on a regular basis. Creating
opportunities for these disparate groups to develop solutions for the unbanked and
underbanked requires innovative thinking about how to strengthen service provision
and extensive logistical coordination.
•
Institutional adaptation: Implementing electronic and mobile banking across banking
institutions, government agencies, and retail institutions will require significant
updates to web and technological infrastructure, as well as regulatory changes to
govern a new process for conducting commerce and financial transactions. For
example, using mobile transfers to deliver EITC payments will require new systems
of data collection and record-keeping from the federal government that may take
years to establish. Thus, while there are countless places that might benefit from
electronic payment and mobile banking options, it may take significant capital and
labor investments to make this mobile banking a more widespread and convenient
option for the unbanked and underbanked.
•
Education and outreach: Efforts to spread awareness and build financial literacy will still
be necessary to reach those who have access to the required technology. Electronic
payments and mobile banking are still relatively nascent ideas—even for the general
public. Working with people with low literacy rates or who lack of familiarity with
mobile technology will be a challenge. Key to engaging higher rates of unbanked and
underbanked consumers will be developing clear, user-friendly interfaces for
electronic payments and mobile banking that are intuitive and easy to use.
•
Security: Entrusting personal finances to digital and mobile platforms that may be
targeted by hacking and fraud is no trivial commitment. Issues of securing personal
35 financial information on the Cloud are not unique to unbanked and underbanked
consumer segments; but because levels of distrust in financial institutions tend to be
higher among the unbanked and underbanked, service providers must take extra care
to build trust with these communities through fraud protection.
36 III. COMPARISON OF CARDS
Prepaid cards constitute a large and growing segment of consumer transactions, particularly
among minority, low-income, and other underserved communities. In 2009, six billion
prepaid card transactions were conducted in the U.S., valued at more than $140 billion.122
The use of prepaid cards rose by 18% in 2011; by contrast, ownership of traditional checking
accounts, savings accounts, credit cards, and debit cards decreased during the same period.123
There is a wide range of prepaid cards with different features that target financially
underserved consumers. In the U.S., 8.2% of households are unbanked, while 20.1% are
underbanked.124 These groups may not use bank accounts for a number of reasons, including
insufficient funds or liquidity to open or maintain an account, lack of banks in their
community, distrust of financial institutions, or a lack of information. In addition, some
people may not be able to qualify for a standard credit card, or otherwise have bad credit or
no credit history.
Accordingly, prepaid cards available on the market differ in terms of the services offered and
the value to consumers. In the context of prepaid cards, value covers the dimensions of
price and convenience. The common service that prepaid cards provide is that they enable
cardholders to make electronic financial transactions for purchases and bill payment. In
addition, many cards permit users to obtain cash from ATMs.
This report presents findings on the cost of obtaining and using popular prepaid debit cards.
The study is based on an analysis of over 20 prepaid cards offered by major financial
institutions, one government benefit prepaid card, and seven prepaid cards that are endorsed
by celebrities.
REPORT
Scope
This study is not intended to be a comprehensive list of all prepaid cards available to
consumers. Indeed, new cards are constantly appearing on the market, so a complete list may
not be possible. Instead, this report examines select cards across categories that are broadly
representative of the range of cards available to consumers. The intent is to provide an
accurate snapshot of the types of cards that are commonly used by consumers.
Evaluation Criteria
Prepaid cards can be evaluated across multiple dimensions from the standpoint of
consumers, financial service providers, and businesses. This analysis adopts the perspective
of consumers to compare and evaluate available cards. The study employs commonly used
criteria, including price and convenience.
Price consists of the range of fees involved in a) card activation, b) card use, and c) card
maintenance. Additional fees can be charged for reloading money onto a card, withdrawing
cash from an ATM, inquiring about the available balance, and making a purchase without
37 sufficient funds on the card. It is important to note that the actual price will vary for
consumers based on how frequently they use a prepaid card and what services it is used for.
Convenience includes factors such as the ease at which cards can be acquired and used.
Consumers are interested in obtaining cards in a simple and straightforward manner. In
addition, cardholders may have questions or experience problems that require assistance
from customer service representatives.
ASSESSMENT
In evaluating the best prepaid cards for consumers, this study considers cards in two
categories: 1) standard cards, typically offered by major financial institutions, and 2) cards
endorsed by celebrities. In general, standard cards are better for consumers than celebrityendorsed cards, many of which charge high fees. The report also includes an extended
description of a government-sponsored prepaid card that is exclusively available to recipients
of federal benefits.
Standard Cards
Overall, the American Express Prepaid Card and the American Express Bluebird Prepaid
Card feature some of the lowest fees on the market. For both of these cards, there is no fee
for card activation, monthly account maintenance, or account inactivity. In addition,
cardholders are not charged a fee for declined purchases, calls to customer service, or paper
account statements. ATM withdrawal fees are relatively low, relative to other cards.
Cardholders can add funds to their cards online or by phone using direct deposit, an existing
checking or savings account, or cash. There is one drawback for cardholders who want to
load funds using cash: card users must purchase a Green Dot MoneyPak or Vanilla Prepaid
Reload card for a fee of $3.95-$4.95. The major disadvantage of these cards is that American
Express is not as widely accepted by retailers as MasterCard or Visa.
The Americas Card, H&R Block Emerald Prepaid MasterCard, and Western Union
MoneyWise Prepaid card are also very good choices for most consumers. These cards are
similar to the American Express cards in that there are no fees for card activation or
monthly account maintenance. Fees for ATM withdrawals are comparable. However, these
cards will deduct between $2.50 and $3.00 per month from cardholder accounts for
prolonged periods of inactivity.
The AchieveCard Prepaid MasterCard, Stagecoach Prepaid Card, and Netspend Visa Prepaid
Debit card all feature no card activation fees or monthly maintenance fees. ATM withdrawal
fees are also similar to the cards mentioned above. The major difference is that these cards
charge higher fees for periods of account inactivity or, in the case of the AchieveCard, will
close the account altogether.
Celebrity Cards
Despite their popularity, celebrity cards are a bad choice for most consumers because of the
high fees charged. Among the celebrity cards considered in this study, only the MYPLASH
38 Teen Card and SpendSmart Teen Card do not charge activation fees. All of the celebrity
cards charge account maintenance fees, which can reach up to $9.95 per month. ATM
transaction fees are similar to those charged by standard prepaid cards. A notable exception
is the MAGIC Prepaid MasterCard, which allows cardholders to use in-network ATMs for
free. Many of the cards do not offer live customer support to deal with problems, or charge
fees for this service.
Government Card
The U.S. Treasury Department now offers its own debit card, called the Direct Express card.
The card is available only to individuals who receive federal benefits or their representative
payees. The Direct Express card was developed in response to new rules that require the
Treasury Department to make all federal benefit payments electronically. (Examples of
federal benefits include Social Security payments, Supplemental Security Income, and
Veterans Administration compensation.)
Federal benefit recipients may receive their payments by direct deposit to a bank or credit
union account. For those recipients that do not have a bank account, the Treasury
Department offers the option to receive payments through the Direct Express card. (Benefit
recipients who have a bank or credit union account are still eligible to receive their payments
through the Direct Express card.)
The Direct Express card was developed in partnership with Xerox and is issued by Comerica
Bank. The card carries the MasterCard logo and operates like a standard prepaid debit card
on the MasterCard network. Cardholders can make purchases, pay bills, and obtain cash
from ATMs or financial institutions, provided that the vendor accepts Debit MasterCard.
The Direct Express card is the cheapest card available. There are no fees for card activation,
monthly account maintenance, or cash-back with purchase. Cardholders are not charged a
fee for ATM balance inquiries, ATM denials, or calls to customer service. In addition, the
card offers many other services free of charge, including deposit notification and low balance
notification by phone, e-mail, or text message. (Monthly paper statements are available for a
fee of $0.75).
Cardholders are entitled to one free ATM cash withdrawal in the U.S. for each deposit to
their Direct Express card account. Additional ATM cash withdrawals in the U.S. are charged
at $0.90 per withdrawal. (ATM cash withdrawals outside of the U.S. are charged a $3.00 fee
plus 3% of the withdrawn amount.)
To sign up for this service, benefit recipients must call the Treasury Department or visit the
Direct Express website and provide their 12-digit federal benefit check number and the
amount of their most recent federal benefit check.
COMPARISONS TO CASH
Analysts have attempted to compare the cost to individuals of using prepaid cards with the
expenses incurred using traditional bank accounts and the costs associated with exclusively
39 cash transactions. Recent reports show that financially underserved individuals are four times
as likely to pay fees to access their money and pay higher fees to access cash than those with
access to formal banking services.125 Most studies employ broad general assumptions about
consumer behavior and transaction activity that vary widely from study to study.126 The
assumptions embedded in comparisons also differ from actual observed consumer behavior
and transaction activity.127 For example, actual financial costs for consumers exhibit a
bimodal distribution so discussions of average costs can be misleading.128 In addition, simple
comparisons of the costs of different transaction formats assume that consumers would
behave the same way, whether they had a prepaid card or a checking account or used cash,
instead of altering their transaction activity in response to the different costs associated with
these formats. Finally, these studies focus on financial transaction costs, which overlooks
many important factors, including time, convenience, sense of security, and personal safety.
In light of these problems, observers should be extremely cautious in interpreting simple
comparisons of the costs of different transaction formats. Below are guidelines for assessing
costs and evaluating the figures from comparison studies. Based on actual transactions, the
typical prepaid card costs consumers about $12 per month, with a range of $5-$50 per
month, but these figures may not include activation and reload fee costs.129 The range
reflects the different types of cards available, types of transactions, and duration of active
card use. Consumers who exclusively use cash face many fees: check cashing fees can range
from 2% for institutional payroll checks to 9% for personal checks; bill payment fees are
typically $1-$2; and money order fees are generally 1%. In terms of other costs, studies find
that consumers spend nearly a half-hour each month traveling to locations to access cash.130
40 IV. CONCLUSION
The monetary, time, and social costs of being financially underserved have significant
impacts on already financially vulnerable populations—and the culture of cash reliance
continues to be a significant barrier to upward mobility, asset accumulation, and wealth
savings.
The amount of people who remain financially underserved in the country will not change
without major incentives or changes in financial institutions and commercial markets. Short
of a revolutionary overhaul of the current financial system, electronic payment technology
offers a new way to work within the current market system to better serve the needs of the
poor. Electronic payment services present a number of promising tools from payroll cards to
mobile wallets that can mitigate the costs of being financially underserved and provide
millions of Americans services that have only traditionally been available through formal
banking institutions. When applied creatively to address the needs of financially underserved
populations, electronic payment technologies improve financial literacy and management
practices and reduce the need to rely on cash or alternative financial institutions.
Widespread adoption of electronic payment technologies must also be accompanied by
consumer education programs that can improve financial habits, as well as policy changes
that can enforce industry standards, ensure transparent disclosures, and protect consumers
from fraud. Innovative applications of electronic payment technologies have already begun
to reduce the many costs of cash. Continued active collaboration between payment
technology companies, regulators, local service providers, and community institutions and
advocates, such as the relationships demonstrated in the case studies throughout this report,
are needed to help individuals adapt to the changing technological landscape and to increase
wealth and strengthen financial opportunities for communities across the country.
41 APPENDIX A: EXAMPLES OF NEW TECHNOLOGIES
Given how competitive cards are on the higher end of the spectrum, there are key areas
where electronic payment companies can develop partnerships with organizations and
institutions able to make creative use of electronic payment technology in new areas such as
crowd financing and bulk purchasing, supporting sustainable businesses, online education,
selling locally manufactured 3D printed products, and so on. Some examples of such new
technologies are featured below.
1. B CORPORATION (www.bcorporation.net)
B Lab is a non-profit dedicated to using the power of business to address social and
environmental problems. Their website states, “B Corp certification is to sustainable
business what Fair Trade certification is to coffee or USDA Organic certification is to milk.
B Corps are certified by the nonprofit B Lab to meet rigorous standards of social and
environmental performance, accountability, and transparency. Today, there is a growing
community of more than 840 Certified B Corps from 27 countries and 60 industries.
B Lab is the entity that certifies B Corporations. B Lab is building a global movement to
“compete not only to be best in the world, but best for the world.” Those companies have
over 30,000 mission-aligned employees and over 20 million committed followers and
consumers. B Lab is engaging member businesses through its “B the Change” campaign to
celebrate and reward people who support using business as a force for good. We met with
the co-founder of B Lab, Andrew Kassoy, to discuss the development of a new MasterCard
product. Andrew would like to create a mission-aligned credit card that can engage all of
those people in thinking more deeply about their consumption, employment, and investment
decisions. B Lab would market the card to their existing business partners and through them
to their costumers.
2. NEW MANUFACTURING (INCLUDING FAB LAB)
Digital technology is entering its third wave. The first wave was the transition from huge
computers the size of U-Haul trucks to today’s laptop computers. The second wave focused
on social media. The third phase is focusing on manufacturing. The developments in this
area are at least as dramatic as the first two, although this revolution is at a very early stage.
To get an idea of the range of applications of digital technology for manufacturing, please
see the MIT Fab Lab website (http://fab.cba.mit.edu/about/faq/). The technology that has
grabbed the most headlines is 3D printing. 3D printing, also called additive manufacturing, is
a process for making solid three-dimensional objects by the successive laying of material in
different shapes. A materials printer usually works through commands coming from a
computer. The market for 3D printers jumped 30% last year to $2.2 billion. Threedimensional printing is currently being used in many industries, from food to architecture,
construction, automotive, aerospace, footwear, engineering, and many other areas. The
Economist wrote that “additive-manufacturing machines, popularly known as threedimensional (3D) printers…run unattended day and night, seven days a week. Though it is
not yet ready for use in mass production (building things up is slower than trimming them
42 down), 3D printing is excellent for making prototypes, customized jobs and short
production runs, for there is no need to retool each time the specification changes. All that
need be done is to alter the software that controls the print heads. Western countries led the
development of 3D printing, and Barack Obama has praised the technique as a way to revive
America's manufacturing industries. It may yet do so.”
Many argue that 3D printing will become a large mass market because of the dramatically
lower cost of producing objects via open source (or non-open source) 3D printing. For
example, broken parts on appliances that cost $40 to purchase from retailers like Sears can
be produced with 3D machines for less than $1. Houses can be constructed using digital
technology (sending instructions to a router rather than a 3D machine) that fits together like
Legos, not requiring nails or screws, and requiring only a mallet to assemble. The cost of
such houses may be one tenth or less than current construction costs, while offering
superior quality.
The new technology in manufacturing is sometimes called “distributed manufacturing”
because the barriers to entry into this kind of production are so low that manufacturing can
take place at a community level (in garages and basements). An opportunity for MasterCard
could be to partner with an emerging force in the field such as FabLab to eventually become
the preferred platform for 3D manufacturers to sell their products.
3. GREEN BANKING
In addition to the Rosebud program, there are also networks of “green banks” that might be
promising partners for MasterCard in developing its brand as a progressive community
partner. The Global Alliance for Banking on Values, for example, is committed to using
finance to deliver sustainable development for underserved people, communities, and the
environment. The network includes dozens of banks worldwide. A representative of this
group works with CoLab and is interested in meeting MasterCard at MIT.
4. CROWD FINANCING
Crowd funding websites such as kiva.org, kickstarter.com, and prosper.com are proliferating.
They typically use credit cards or PayPal to solicit contributions, investments, or loans for
projects or businesses. What could be developed through MasterCard technology are raising
funds for discrete group-based projects, such as raising equity for building food markets in
low-income communities, working with labor unions and churches with large immigrant
populations to fundraise for projects in their home countries, or many other potential group
projects.
An organization using this approach to organize community block purchasing (thereby
securing better prices for consumers) is called Groundswell
(http://www.groundswell.org/about/). We met with Will Byrne, one of the founders of
Groundswell, who would be interested in pursing potential partnerships with MasterCard.
43 5. ONLINE EDUCATION
Another rapidly moving area of digital expansion is online education. For example, edX is a
non-profit created by Harvard and MIT that has expanded to a growing number of leading
universities (https://www.edx.org/how-it-works). EdX promises to “bring the best of
higher education to students around the world. EdX offers MOOCs and interactive online
classes in subjects including law, history, science, engineering, business, the social sciences,
computer science, public health, and artificial intelligence (AI).” EdX is expanding so rapidly
that they anticipate reaching millions of students through online courses in the near future.
MIT and the other universities have not yet decided on revenue models. However, most
universities are leaning towards charging a low fee for online courses while enhancing their
revenues by reaching far, far greater numbers of students than they currently reach. It is not
hard to imagine MasterCard partnering with universities to offer payment services for online
education through a MasterCard platform. Such conversations could be initiated with MIT.
6. LOW-WAGE WORKERS
Large organizations of low-wage workers such as janitors, homecare workers, security guards,
or restaurant workers include trade unions such as SEIU, HERE, and AFSCME as well as
emerging “worker center” organizations such as National Day Laborers Organizing Network
(NDLON), the Domestic Workers Alliance (DWA), and the Restaurant Opportunities
Center (ROC). The members of these groups are precisely those who are frequently
victimized by predatory financial services. It is likely that many of these organizations would
be interested in partnering with MasterCard to sign up employers to use MasterCard’s
platform to enable their members to avoid costly financial services while improving their
credit status. Many of the leaders of these organizations are already engaged in a
collaborative process coordinated by being coordinated by the Community Innovators Lab
at MIT (CoLab) to improve their effectiveness. CoLab could serve as a platform for
MasterCard to collaborate with these groups to generate joint projects and agreements.
7. REMITTANCES
Remittances from the U.S. constitute a major source of income for many nations in the
Caribbean and Central America. Remittances to Haiti, for example, are close to $2 billion a
year. The elected leader of Haitians in the U.S. is a Miami attorney named Maggie Austin. It
might be possible to partner with the Diaspora network to use the MasterCard platform as a
preferred means of transferring money to Haiti. If successful in Haiti, it could be replicated
elsewhere. An added benefit for Diaspora might be to use the MasterCard platform to
crowd-source funding for development projects or other initiatives in Haiti.
8. NATURA
Natura Cosméticos S.A. is the Brazilian manufacturer and marketer of cosmetic and personal
care products, household products, and solar filters. The company sells products through
representatives in many countries across the world, but primarily markets its products
through 700,000 sales consultants in Brazil and 300,000 sales consultants in Mexico and
Colombia. Natura is very committed to environmental sustainability. Istoé Magazine named
44 Natura “the most valuable brand in Brazil [in] 2008” and, according to the company, its
business motto is “ethics and aesthetics.” Natura’s CEO is an active participant in a
transformative leadership program connected to CoLab at MIT. In addition to ecological
sustainability, he is interested in improving the material welfare of his network of sales
consultants and their communities. One potential partnership for MasterCard might be to
connect with Natura. Natura could potentially use MasterCard to process transactions
through their consultants. The MasterCard platform might then potentially serve as a
crowdsourcing mechanism to enable “green” improvements in neighborhoods where the
consultants live.
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1
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99 Jacoby, Melissa. 2002. Does Indebtedness Influence Health? A Preliminary Inquiry. Journal of Law, Medicine,
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100 Alley from Squires
101 Jacoby, Melissa. 2002. Does Indebtedness Influence Health? A Preliminary Inquiry. Journal of Law,
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102 Jones, Antwan, Gregory Squires, and Cynthia Ronzio. Foreclosures and Health in Metropolitan Areas: Does
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104 Kubrin, Charis, Gregory Squires, Stephen Graves, and Graham Ousey. 2011. Does fringe banking
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105 Kubrin, Charis, Gregory Squires, Stephen Graves, and Graham Ousey. 2011. Does fringe banking
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106 Federal Reserve Board. 2013. Consumer and Mobile Financial Services Report.
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107 Federal Reserve Board. 2013. Consumer and Mobile Financial Services Report.
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108 http://www.financial-mobility.com/articles/banking-the-unbanked-with-mobile-cash.html
109 http://www.microfinancegateway.org/gm/document-1.9.40671/25.pdf
110 http://pewhispanic.org/files/reports/23.pdf
111 http://bucks.blogs.nytimes.com/2013/03/14/next-in-mobile-banking-photo-bill-payments/?_r=0
112 Sherrie L. W. Rhine, William H. Greene and Maude Toussaint-Comeau. 2006. The Review of Economics
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113 http://www.futuregov.asia/articles/2013/oct/07/dubai-revamps-government-bill-payment-mobile-app/
114 http://www.bostonfed.org/bankinfo/payment-strategies/publications/2012/mobile-phone-technology.pdf
115 http://www.prnewswire.com/news-releases/unbanked-consumers-access-to-auto-leasing-or-financingthanks-to-the-paytoo-mobile-wallet-205962561.html
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117 St. Louis Federal Reserve. 2011. Cards, Cards and More Cards: The Evolution to Prepaid Cards.
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118 Valenti, Joe. 2013. End of Cash: The Rise of Prepaid Cards, Their Potential, and Their Pitfalls.
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49 http://www.financial-mobility.com/articles/banking-the-unbanked-with-mobile-cash.html
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122 “Report to the Congress on Government-Administered, General-Use Prepaid Cards.” (2012). Board of
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123 “Prepaid Cards and Products in 2012: Enabling Financial Access for Underbanked and Gen Y Consumers.”
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124 “Prepaid Cards and Products in 2012: Enabling Financial Access for Underbanked and Gen Y Consumers.”
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125 Chakravorti, Bhaskar and Benjamin Mazzotta. 2013. The Cost of Cash in the United States. The Institute
for Business in the Global Economy, The Fletcher School, Tufts University. 126 For example, see: “Adding it All Up: How Prepaid Card Fees Compare to Checking Account Fees.” (2011).
Consumers Union.; “Analysis of Reloadable Prepaid Cards in an Environment of Rising Consumer Banking
Fees: Comparative Analysis of Reloadable Prepaid Cards to Basic Checking Accounts and Check-Cashing.”
(2011). Bretton Woods, Inc. ;“Loaded with Uncertainty: Are Prepaid Cards a Smart Alternative to Checking
Accounts?” (2012). Pew Charitable Trusts.; “Analysis of General Purpose Reloadable Prepaid Cards: A
Comparative Analysis of GPR Cards Using Program Manager and Issuer Data.” (2013). Bretton Woods, Inc.
127 Wilshusen, Stephanie M., Robert M. Hunt, James van Opstal, and Rachel Schneider. (2012). “Consumers’
Use of Prepaid Cards: A Transaction-Based Analysis.” Discussion Paper. Federal Reserve Bank of Philadelphia.
128 Wilshusen, Stephanie M., Robert M. Hunt, James van Opstal, and Rachel Schneider. (2012). “Consumers’
Use of Prepaid Cards: A Transaction-Based Analysis.” Discussion Paper. Federal Reserve Bank of Philadelphia.
Based on a combination of actual data and assumptions, one recent study finds that prepaid cards cost
consumers one to three times the cost of cash. See “Analysis of General Purpose Reloadable Prepaid Cards: A
Comparative Cost Analysis of GPR Cards Using Program Manager and Issuer Data.” (2013). Bretton Woods,
Inc. 129 Wilshusen, Stephanie M., Robert M. Hunt, James van Opstal, and Rachel Schneider. (2012). “Consumers’
Use of Prepaid Cards: A Transaction-Based Analysis.” Discussion Paper. Federal Reserve Bank of Philadelphia. 130 Chakravorti, Bhaskar and Benjamin Mazzotta. 2013. The Cost of Cash in the United States. The Institute
for Business in the Global Economy, The Fletcher School, Tufts University. 119
120
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