Social change work is hard and frustrating and wonderful and terrible; it is also, at times, funny, quirky and just plain fascinating. With this blog we hope to capture all that goes into what we do at Capital Good Fund, and we invite you to join the conversation!

Thursday, August 21, 2014

A Golden Opportunity, But Not For Long

The Golden Opportunity
For our friends in the banking sector--traditional banks as well as credit unions--the next few years represent a golden opportunity to find new customers, deliver them equitable services and turn them into sustainable sources of profit moving forward.  Why?  Two fundamental reasons: first, "28 percent of the U.S. population, or about 88 million people, are either unbanked (they have no checking or savings account) or underbanked (they have some relationship with an insured financial instution but still rely" on alternative, or predtaory, service providers (Forbes).  Second, the marketplace is rapidly changing, with pre-paid cards swooping in to take advantage of bank branch closures and fewer free checking accounts.

On the face of it, pre-paid cards are both simpler and cheaper than checking accounts.  No checks to deal with, no visits to the nearest bank branch, and it is impossible to overdraft because you can only spend whatever money you "load" onto the card.  But in reality many of them are quite costly.  Consider, for instance, one of the most popular cards, offered by Green Dot.  The fees include $4.95 to get the card in a retail store (it's free online); $5.95 monthly charge, unless you have a balance of $1,000 or make 30 purchases per month; $2.50 when you withdraw from an out-of-network ATM; and $4.95 to reload the card in a store.  These fees can quickly add up to tens of dollar per month, and are tantamount to a tax on money that has already been taxed.

The Pitfalls Of Pre-Paid Cards
Another disadvantage of pre-paid cards is that you aren't building a relationship with a financial instution, something that becomes critical when you are looking for a car or business loan, or a mortgage.  They tend to lack some of the security features of a debit card (such as fraud protections) and, finally, often don't offer checks.  This means that you must either pay for things with the card or with cash; how else will you pay your landlord, for example?  What's more, the lack of checks forces many people to run around town every month to pay bills in-person--utilities, cell phone, cable, etc.  For those barely able to afford a tank of gas, the financial burden can become overwhelming.  At the same time, however, new players are beginning to offer better and cheaper cards; one of the best examples is the AMEX Serve Card, whose fees are quite low.

So why aren't banks swooping in to secure these potential customers?  According to an article in The Guardian, it's because "banks...are leaving poor Americans behind.  Many Americans are not banks' ideal customers--not enough money, not enough transaction--and they are punished for it with a barrage of fees."  The same article points out that credit unions, which are owned by their depositors and aretherefore more responsive to their needs, are taking advantage: "In the last year, credit union membership [added] 2.85 million new members."  One obvious reason is that "about 72% of the nation's 50 largest credit unions...offer free checking...As for banks, that number dropped from 76% in 2009 to 38% in 2013."

Wake Up & Smell The Opportunity!
Still, credit unions have drawbacks, namely smaller networks of branches and ATMs and, in many cases, less robust online banking options.  Which is why we strongly encourage all depository financial instutions to wake up and seize the moment.  Recognize that if you don't compete on price and features, you will lose customers to the pre-paid cards, and once you lose them, you've likely lost them for life.  Recognize that even if you lose money on them in the short-term, in the long-run the investment will pay off.  And finally, recognize that a strong banking sector is essential to a strong and equitable economy, and it's incumbent on you to play a role in ensuring that mainstream financial services are available to all Americans.

All this said, banks aren't for everyone, nor will they ever be.  Below you can find out more information about pre-paid cards.

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