The unbanked are defined as consumers who do not have access to traditional savings or checking accounts. Therefore, they are seen as a primary market for alternative banking products, such as prepaid cards. But who are the unbanked, and have they actually benefited from using prepaid cards?
The Center for Financial Services Innovation sought to answer those questions with its report entitled A Tool for Getting by or Getting Ahead?: Consumers' Views on Prepaid Cards. Authored by Sarah Gordon, Nonprofit Relationship Manager, CFSI, along with Jennifer Romich and Eric Waithaka, researchers at the University of Washington, the report puts the unbanked at approximately 18.5 million households in the United States.
The researchers interviewed 22 unbanked individuals in person - 12 AccountNow Inc. cardholders in Chicago and 10 NetSpend Corp. card users in Seattle. Most of the respondents were:
Additionally, 11 interviewees were African-American, 10 were Caucasian and one respondent was of "mixed heritage." The report found that AccountNow customers were more likely to be married or "cohabiting" (and with more children) than NetSpend card users.
The interviewers delved into why respondents were unbanked. Answers ranged from confusion with bank regulations, to frustration with bank fees that led to cycles of negative balances, to bad money management skills on the part of the individuals. But the study discovered a common theme why respondents chose to abandon banks. Problems with banks "were not unique or isolated incidents," the study said. "Nearly all of the interviewees discussed incidents in which they had disputes with their banking institutions, and the manner in which the bank, or its officials, handled the incidents left them with a great mistrust of conventional checking and savings accounts."
When respondents turned to prepaid cards to bridge the banking gap, they found suitable card programs in different ways, as a consequence of the companies' differing distribution channels, the report stated. Since AccountNow is purely a Web-based company, customers located AccountNow via the Internet, according to the report. NetSpend, on the other hand, distributes its cards to check cashing businesses and supermarkets nationwide. Therefore, brick-and-mortar outlets are where NetSpend recruits its users.
The report highlighted seven advantages of prepaid cards for unbanked consumers:
2. Convenience: Consumers can purchase goods and services from a diversity of locations (with open-loop, network-branded cards).
3. Accessibility: Funds available 24 hours a day.
4. Immediate liquidity: Funds loaded onto prepaid cards are immediately available to cardholders.
5. Transparency and predictability: It is difficult to overdraft on prepaid cards and they tend to come with fewer fees.
6. Financial value: It is cheaper to use prepaid cards than to cash checks or purchase money orders.
7. Budgeting: Prepaid cards help consumers discipline their spending habits.
Responses from the 22 subjects seemed to confirm these advantages. "Nearly all of the interviewees said their cards had made their lives easier," the report said.
Furthermore, the social stigma attached to using check cashers or money orders was eliminated by open-loop, network-branded cards. One respondent "talked about the symbolic value of being able to get a Visa-branded card despite 'deplorable' credit caused by personal and medical problems," the report said.
Interviewees generally recognized that fees associated with prepaid cards were lower than other cards and services. Also, cardholders said the fees they were charged were fair.
When respondents were asked what types of larger financial goals prepaid cards would help them achieve, seven of the 22 said "entrepreneurship or career change," five said to buy a home or save for a down payment and five more said to save up for general or emergency use. Only one of the 22 said prepaid cards would help that person qualify for a credit card.
The interviewers asked all respondents whether they used the bill pay function. "Over half of the interviewees cited the possible loss of control over their financial management as the major reason they did not use bill pay," the report said.
The report concluded that prepaid cards are "definitely useful for these customers' day-to-day money management needs." But for larger financial goals, the usefulness of prepaid cards is still not known.
"The bill payment reporting and savings products here represent a step toward that end but are not yet fully embraced by consumers," the report said. "All goals will require effort and spending discipline on behalf of the customers in addition to well-designed financial products and services."
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