Imagine Gail, a 30-year-old mother of two school-age children. Gail is on ChexSystems and has a low credit score as the result of actions taken by an abusive former husband who controlled the household budget and joint accounts. (About 80 percent of banks use ChexSystems to screen applicants for past fraud or overdrawn accounts.) Now divorced, Gail goes to her local bank to open a checking account in her own name, but is denied.
Instead of turning away Gail as a customer, the banker offers Gail the bank's new prepaid card. For a small monthly fee, Gail can have her paychecks directly deposited to the prepaid account and use the card like cash at most local businesses. Her account will have FDIC insurance and the same consumer protections as are afforded credit card customers under Regulation E. The banker gives Gail a short, easy-to-read form that lists all of the fees connected to use of the prepaid card and links to other customer service information. The form states that this account has no cash advance or overdraft features. In addition, prepaid customers can get unlimited free balance inquiries at a wide variety of locations to keep track of spending. So far, so good.
Gail asks the banker, "How can I use my prepaid card to pay my rent and other bills that I cannot pay via online transfer?" Answer: "You can't. You have to buy money orders here (for less) or at the currency exchange (for more)." So, Gail will have to add the costs of those money orders to the monthly prepaid card fees to see what the total package really costs. (See Reinvestment Partners' recent paper on the real costs of prepaid).
"I want to save for an emergency fund and put a little money aside each month for holiday gifts, special occasions, and my children's college education. Eventually, I'd like to save enough for a down payment on a home," Gail tells the banker. "Can I automatically transfer a certain amount each week or month from my prepaid account to an interest-bearing savings account?" The banker responds, "No, we are not set up for that." So, Gail will continue to save in her coffee can at home, but will often raid it for daily expenses.
Frustrated, Gail asks, "How long do I have to stay in this prepaid account with no bill pay or savings features before I can move up into a real checking account and savings account?" Banker: "I don't know. We haven't thought about that."
"I am trying to do the right thing by being responsible with my limited resources and saving for the future, but this bank is making it hard. I feel like a second-class citizen," says Gail.
Is this how banks in your area are offering prepaid cards and treating customers?
Gail is fictional, but these issues are very real. Lately, banks and prepaid trade associations have asked Woodstock Institute for our views on bank-issued prepaid cards and we have shared our concerns. As with other products that frequently, but not exclusively, target lower-wealth and underserved populations, Woodstock Institute is concerned about whether banks will treat new prepaid card customers as a separate class of people in a "silo" from which they rarely escape, or whether banks will offer prepaid as part of a larger "suite" of products and services that prepaid customers are encouraged to use and move up into.
As banks continue to develop products and train staff in the burgeoning prepaid market, we urge them (and their regulators) to carefully think about and plan for how this product fits into the bank's larger suite of products and services that customers use across the lifespan. Regulators should ask bank prepaid issuers: "What specific plans do you have in place for moving prepaid customers up the economic ladder into other products and services that safely and affordably serve the breadth of their current and future financial needs?"
Let me know what you think.