I have fond memories of working as a bank teller in a small town during my college years, serving customers and hearing their stories. I’ll never forget my first Friday. It seemed like I’d cashed a thousand checks and it’s a miracle I balanced my drawer. But nothing was more satisfying than handing a smiling worker the cash they’d earned over a long, hard week.
A few weeks into the job, I began to wonder why I was handing people money, rather than putting it into their deposit and savings account. It seemed dangerous to walk around with that many bills in their wallet. I realized two things. First, many of these people didn’t have a bank account because they didn’t trust banks, or the bank didn’t trust them enough to give them one. Second, those cash outs were deposit money, walking right out of the bank.
That was the early 2000’s, and that same story has been told for more than a decade. In 2013, out of approximately 243 million adult Americans, 25 million were unbanked, meaning that they were not served by a bank or similar financial institution (2013 Census and FDIC data). That means that upwards of 10% of wage earning Americans submitted to a steep check-cashing fee at a convenience or liquor store in order to cash a payroll check from an out-of-town financial institution.
Perhaps more astounding, 68 million adults were underbanked – they had a bank account, but chose to obtain financial services and products from a non-bank. That equates to 28% of the American adult population opting out of traditional consumer banking.
Banks are Turning to Prepaid Cards
Things are changing. Realizing that many of the unbanked and underbanked are living paycheck to paycheck, banks are turning to the prepaid card model in order to serve these potential customers. Once considered an extension of predatory lending, due to hidden fees and lack of regulation, community banks have begun to see prepaid cards as a way to serve a previously inaccessible clientele, and a way to earn non-interest income. Carefully monitored, prepaid cards are a win-win.
The change comes as a result of stronger competition and improved government oversight. The Consumer Finance Protection Bureau (CFPB) plans to require prepaid cards be subject to the same transparency and accommodations afforded to debit and credit card holders. In 2012, there were 159 million prepaid cards in force (approximately 20% of general purpose payment cards). With this new oversight, the number should continue to grow. In fact, the CFPB expects consumers to load almost $100 billion on prepaid cards in 2014.
These proposals are a victory for community banks because the cards are a mechanism to nurture new customer relationships – and, at the end of the day, to keep money from walking out of the bank.
Prepaid cards are gaining traction in the marketplace as a reliable resource for serving the unbanked and underbanked. Is your bank taking advantage of the opportunity?