Early in my military career, more years ago than I'd like to imagine, it was instilled in me to always be aware of my surroundings: Security was the key to my success in life and attention to minute detail was vital! A reasonable precept as we went out into the countryside in three man teams with little backup. This was a wearisome world I lived in, a world I left behind but which has left a considerable impact on my worldview. While I try to be optimistic about people, that they will, in the end, rise above their situation, I have a certain amount of distrust toward our economic and political establishments.
You can imagine my weariness, then, when a young lady we helped find a job showed us this great new credit card her employer tried to have her sign up for. I, and my associate, looked at this card and its disclosure statement with much skepticism. The statement I read looked much like this, and I was actually impressed that it did not seem outwardly sordid. Now, I am a researcher by nature. I enjoy chasing down the why of something I don’t understand and this card piqued my interest to say the least. In off hours I’ve researched what was going on here and have come to some potentially positive results.
In a previous post, I explained how expensive it is to lack a bank account. When ‘un-banked,’ one is seriously limited and a very tempting target for usurious lenders and check cashing institutions. The picture is really worse than this post presents. In this story published by the New York Times, we hear about banks all over the world taking advantage of poor from third to first world countries, giving small loans at exorbitant interest rates: up to 125 percent average annual rate. These loans, once hailed as an answer to poverty across the world have been twisted by the banking industry. Prepaid Credit Cards, once believed empowering to low income families, are now being used to take advantage of low income individuals. One example shows this:
Unmentioned are the fees Simmons’s company imposes for its card, including a $9.95 monthly charge, $3 for activation, $1 for every purchase if a PIN is used, $1 for online bill paying, and 50¢ to check the balance at an ATM. Direct deposits and online account management are free, as is a service that alerts customers when their balances are low.
Our modern banking practices, even when designed to do good, are twisted to take advantage of those who can little afford being used.
But there is hope, the fed is trying to answer usurious practices like these: There is a new pilot program the FDIC has put together using the findings of a report, which are very similar to the results mentioned in a similar report released by the Brookings Institute in 2004. A list of banks was made to participate in a study, titled the FDIC Model Safe Accounts Pilot, which will examine low-cost, electronic alternatives for safe transactional and savings accounts. These will hopefully serve the un- and under-banked sectors of our economy. The study will begin on January 1 of 2011.
The FDIC Model Safe Accounts Template describes features of electronic deposit accounts that are designed to meet the need of underserved and LMI consumers. Pilot banks will be strongly encouraged to market the products to those groups.
The largely electronic accounts limit acquisition and maintenance costs and transactional accounts will be checkless, allowing withdrawals only through automated teller machines, point-of-sale terminals, automated clearinghouse preauthorizations, and other automated means. There will be no overdraft or non-sufficient funds fees associated with the transactional accounts. All of the accounts will be FDIC-insured; be subject to applicable consumer protection laws, regulations, and guidance; and have reasonable rates and fess (sic!) that are proportional to their cost.
This is not new; other companies have been doing this for a while. We can start with the Mango Card, a card that allows individuals to put money onto a prepaid credit card and use it wherever that card is accepted. The mango card is what is called an open system prepaid card, a type of stored-value card, much like a gift card (which is a closed system prepaid card), except a customer can add money to it via direct deposit from their employer and it can be used anywhere. It does have a five dollar monthly fee, which can be avoided if the customer leaves $500 or more on it. But the important thing is it allows access to ATM’s (with a fee) and can help someone build credit and spending practices. The downside to this type of card is the potential excesses seen above.
Another card, the Revolution Card, is similar to the Mango Card, except that it allows greater freedom with money transfers and additional security. Important to this card is its use of a pin number, doing away with signatures for security. How this increases security is it allows someone to lose the card without fear of another using it and racking up charges. Additionally, it allows for the creation by the consumer of a one-time pin that can be used for secure online transfers of money. This puts it in direct competition with pay-pal. If someone steals the one-time pin, they cannot use it. Costs for a business to participate with this card are very low compared to credit cards, only 0.50 % transaction processing fee. The company savings, it boasts, can be passed on to consumers in the form of incentives which will encourage customer loyalty. This puts it in direct competition with the credit card industry.
Finally, we note the use of pre-paid cards by businesses to “streamline payroll disbursements, facilitate remittance payments by immigrants to relatives through ATM networks, and simplify the disbursement of funds from pretax flexible spending accounts for health care expenses.” This is where the young lady I was talking to comes into play. She received a payroll card from her employer which allowed her to use an account created by her employer that was designed to give access to her wages at ATM machines and for purchases anywhere credit cards are accepted. This reduced costs on both ends of the payroll: The young lady, who had no access to checking or savings, was able to bypass payday lenders and check cashing fees while the employer reduced payroll costs by eliminating the need to cut and mail checks. A win-win for both parties.
The FDIC’s pilot program is an attempt to spread this type of card to a broader range of low-income consumers, answering a problem that has plagued our economy for years: the un- and under-banked. The problem with pre-paid cards is they require a large upfront investment. Thus, to be used for payroll, a company needs be large. Small companies could not afford the cost. The Fed is seeing if, by getting larger banks to back these cards and promote them to a large, underrepresented population, they will turn a profit without harming those the program is meant to help. The belief is these banks have this infrastructure already in place with the credit card industry. Most banks have a debit card they offer, often backed by a major credit card company. It is, then, only a small step for them to implement these cards. Thus, they could eliminate or keep low fees that normally go with these cards. In addition, this card would eliminate the predatory small loans mentioned above. This is not ideal, there are still fees. But this is an unreasonable ideal in our society and these cards may be the best solution to the un- and under-banked sectors of our economy. The potential to help is there; the costs for those living in poverty might drop significantly. If it works there is some new hope for the New Year.
 Robert Schmidt and Patrick O’Connor, “Rap Impresario Simmons Wins Exemption on Debit-Card Fee,” Bloomberg.com (June 24, 2010). Found at: http://www.bloomberg.com/news/2010-06-24/hip-hop-entrepreneur-simmons-outflanks-big-banks-over-debit-card-fees.html, accessed December 27, 2010.
 “A Summary of the Roundtable Discussion on Stored-Value Cards and Other Prepaid Products,” The Federal reserve Board (January 12, 2005). Found at: http://www.federalreserve.gov/paymentsystems/storedvalue/, accessed December 27, 2010.