By Cherie M. Fuzzell
The ability to make noncash payments using checks or debit cards is an essential tool for survival in the modern financial world. Yet approximately 106 million adult residents of the United States can't obtain checking accounts at traditional banks.
These consumers, often called unbanked or underbanked, are denied checking accounts because they have poor credit histories or have mismanaged their bank accounts.
Forced to live on a cash basis, unbanked consumers pay high transaction fees, waste time and incur personal risk when conducting basic financial transactions at check cashers and payday lenders. Furthermore, they are unable to make purchases online, book hotel or airline reservations, and must purchase money orders to pay bills.
While being unbanked can cost individuals over $1,000 annually, the solution for many consumers is not traditional bank accounts.
A percentage of consumers will always get into financial trouble by engaging in deliberate misconduct, but many are merely lacking the basic financial literacy skills necessary to manage checking or savings accounts in today's complex financial environment.
Thirty years ago, people deposited payroll checks at local banks and withdrew funds by cashing checks or making counter withdrawals, generally recording balances in paper ledgers after each transaction.
By comparison, funds held in a checking account today are deducted in numerous ways, including paper checks, electronic checks and automated clearing house (ACH) debits, ATM withdrawals, and PIN or signature debit card purchases.
Such transactions, and the fees associated with them, are reflected in customers' available balances at various times during the day and night, making it difficult for even educated consumers to manage checking accounts.
Online and mobile balance inquiries reflect only the charges that have been authorized and not other expenditures (such as paper checks, ACH debits and signature debit card purchases) that have not yet been deducted from available balances.
Relying on an "available balance" obtained from an ATM, or from an online or mobile banking inquiry, consumers routinely make expenditures that cause account balances to go negative - referred to by banks as an "overdraft or insufficient funds" status.
Banks charge a nonsufficient funds (NSF) fee for each transaction that causes a negative balance on an account and, in certain circumstances, for each day the account remains in a negative status.
These fees can be as high as $40 per transaction and are charged regardless of the amount of the overdraft or whether the bank honors or returns the item.
Banks will charge an aggregate of $38.5 billion in overdraft fees this year, representing over 75 percent of all consumer fees charged by banks. For a financially stretched consumer, these fees can easily add up to over $100 a month - exceeding the costs of being unbanked.
Thus, a traditional checking account is not the best solution for most unbanked consumers. Instead, many consumers would benefit from bank account alternatives offered by prepaid card providers.
These accounts offer consumers the ability to receive direct deposit of payroll or benefits and to withdraw funds through an ATM or make purchases online or at the POS.
As transactions are authorized in advance, customers have access to the true "available balance" in the account. The ability to overdraft the account is essentially eliminated as the customer will merely be declined at the ATM or POS if the attempted purchase exceeds the funds available.
While consumers may feel a temporary satisfaction at having credit or debit card purchases approved, the high cost of overdraft fees result in undesirable and costly consequences.
Cherie M. Fuzzell is the President and Chief Executive Officer at prepaid card processor and program manager FirstView Financial. To find out more about Firstview, go to www.firstviewfinancial.com.
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