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Young Americans Likely to Be Unbanked Regardless of Income Level

This article was written by in Banking. 13 comments.


In discussing unbanked and underbanked American consumers, we tend to focus on low socioeconomic status communities. The mainstream opinion is that building wealth and long-term financial stability relies on the use of traditional banking and investing products and the knowledge to use these products effectively. The financial industry tends to avoid low socioeconomic status communities for a variety of reasons, but the bottom line is that these customers have not been proven to be profitable. Taking the place of these mainstream institutions are check-cashing facilities and payday loan outfits, designed to be very profitable while providing the immediate services required in these communities.

These “low-class” financial product purveyors are part of a growing industry. As with any burgeoning industry, there is beginning to be more research into its consumers. The unbanked and underbanked consumer is becoming better defined, and traditional banks see this as an opportunity to create products that directly compete with the successful check-cashing and payday loan market.

Check CashingWith this new research comes some interesting findings. Prepaid debit cards are products designed for consumers with low or no credit scores, a condition that is more common among low-income households, though there are many reasons anyone in any income bracket could have damaged or undefined credit. Think Finance has determined that the use of prepaid debit cards is the same regardless of income level. Among the consumers surveyed, a representative sample of the Millennial generation, someone earning up to $74,999 a year is just as likely to use a prepaid debit card as someone earning less than $25,000 a year.

The statistics pertaining the check-cashing services show a similar trend. For a fee of usually 1 to 4 percent, a check-cashing storefront can immediately give you cash. So can any bank branch, but you often need to open an account first, and that requires patience, the willingness to share your personal information and submit to a ChexSystems verification, and the openness to endless marketing. In many cases, it’s just easier to just pay the fee. 34 percent of Millennials with the lowest income make use of check-cashing services outside of traditional banks, only 5 percentage points higher than those with the highest income.

An article in USA Today addresses what might representative of the fact that the status of unbanked or underbanked is pervasive in this age group regardless of income:

Ammy Orozco, 30, who works as an executive assistant at a Check Cashing USA branch in Miami, has a checking and savings account with Bank of America but often chooses to cash checks at work instead. She says she’d rather pay to cash a check immediately than pay for gas to drive to the bank. She has also taken out payday loans in emergencies. She’s tried to get a loan from the bank, but it was “stressful.”

“They wouldn’t confirm right away… You’re there sitting and you need the money, and you’re like, is this going to happen or not?”

Millennials expect instant gratification and are willing to look past fees and unnecessary expenses in order to feed this desire, regardless of income. For a generation whose defining economic moment has been the Great Recession, the credit crunch, and high unemployment, as well as the media environment dominated by stories about bank executives behaving badly, poor use of taxpayers’ money, and class-action lawsuits pertaining to anti-consumer practices, it’s understandable that a mistrust of the mainstream financial industry keeps people away from banks regardless of income. Half of Americans are not saving for retirement, and while unemployment certainly plays a role, lack of trust in the industry and in markets in general is an important factor.

With the proliferation of services targeted to the unbanked and underbanked reaching a wider set of customers — that is, popularity and use has moved beyond low socioeconomic status communities — regulators have begun to take notice. (In other words, these products and their negative effects were acceptable when they took advantage of only the poor and whoever you might assume is more likely to live in poor neighborhoods, but now that the middle class is targeted, it’s an issue worthy of consideration.) The Consumer Financial Protection Bureau is looking into designing regulations for these products. Meanwhile, traditional financial institutions are taking advantage of this regulatory grey area to create products that compete with check-cashing storefronts and payday loan issuers, and to use these products as profit centers with the intent of eventually mainstreaming these customers into other profitable services.

Are you a Millennial who prefers immediate services like check cashing, payday loans, and prepaid debit cards instead of checking accounts, bank loans, and credit cards? This is not the primary audience of this website, but I’d love to hear some feedback from the millions of Americans who fit this description.

Photo: Daquella manera
USA Today

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Suze Orman’s New Prepaid Debit Card: The Approved Card

This article was written by in Credit, Featured. 56 comments.

As Ron Lieber reported in the New York Times, personal finance guru Suze Orman is launching her own debit card brand, the Approved Card, following in the footsteps of music mogul Russell Simmons and his Rush Cards. Suze Orman’s debit card will be a prepaid debit card, ensuring customers using the card can spend generally only what they have available.

As a benefit to customers, and in keeping with Suze Orman’s focus on helping consumers build stable credit histories, the card will offer unlimited, free credit reports. She also worked out a deal with Transunion whereby her branded debit card, unlike most other debit cards, will report consumer spending information to the bureau, theoretically helping customers build credit.

Suze OrmanWhile a consumer’s ability to use debit card spending as a way to build credit, I can understand why the reporting agencies don’t normally consider debit card activity to be relevant to a credit score. With a debit card, you can pay only what you have in the bank, or in the case of a prepaid debit card, only what you have on deposit. Debit cards do not provide a consumer with the opportunity to be tested with credit, and there is no monthly bill to pay. The type of behavior required to use a debit card successfully does not equate with the behavior required when borrowing money.

Prepaid debit cards are notorious for their fees. Suze has pledged to keep the Approved Card’s fees low, but the card still features a $3 monthly fee, taken from the balance deposited on the card. Prepaid debit card fees are paid by consumers who have no interest in a traditional checking account held at a bank, or, for whatever reason, can’t qualify for a bank account. This unbanked population consists primarily of households in the lowest socioeconomic status and of minorities. This puts these products in the same category as payday loans and check cashing outfits. Services the middle class doesn’t need or can find for free are more expensive in less affluent communities.

While the fees for Suze’s product may be less than those for competing products, there could be a view that this product, just like others like it, takes advantage of consumers who have fewer options for payment options. View the fee schedule here; there are quite a few fees that most consumers who haven’t used prepaid debit cards might consider extraordinary.

Does Suze risk credibility by offering her own financial product? She has established her Suze Orman brand as a no-nonsense voice in helping people make smarter financial decisions. Her television and radio shows have attracted a wide audience, particularly through the recent recession. She has been a spokesperson for General Motors and TD Ameritrade, aiding the executives of those companies in associating their brands with wise personal finance decisions.

While the New York Times article indicates that Suze will not mention her Approved Card in her shows to avoid a conflict of interest, isn’t in reasonable to expect that every time she mentions prepaid debit cards, she could be creating or strengthening a cognitive link in the listener or reader between her advice and her own product?

On the other hand, Suze sells books, seminars, and kits, and her media appearances help to move her products and, eventually, generate some of the income she receives each year. (I would assume that most of her income comes from sponsorship, show production, and media appearances rather than from her products.) A prepaid debit card is not really much different from the other products she sells. Diversifying income streams is a great way to increase the probability of long-term success.

What do you think about Suze Orman’s new Approved Card and the potential conflict of interest arising from her public appearances and media presence?

Update: As news spread of the Approved Card throughout the blogosphere, the card’s terms and likely ineffectiveness in improving users’ credit scores led to outrage. Suze Orman responded to critics via Twitter by calling them idiots and ignorant. Critics of the card were mostly fair — at least they were level-headed and, for the most part, they avoided personal attacks on Suze — but it’s easy for privileged bloggers like us to misunderstand the needs of those in low socio-economic communities, where the banking industry is mistrusted more than middle class “Main Street” communities mistrust Wall Street.

Yes, as I’ve mentioned above, there is something about fee-ridden prepaid debit cards that enables investors and the wealthy to take advantage of people who either don’t or believe they don’t have better financial options. There is also a cost to businesses who take on risks by offering services to a segment of society that may have financial trouble, and fees help defray that risk. Compared to other prepaid debit cards, the Approved Card isn’t horrible. It certainly isn’t the worst. If Suze’s name weren’t attached to the product, bloggers might put the card towards the top of the list of best prepaid debit cards. But her public identity and crusade for positive financial education makes the product antithetical.

At the same time, it’s not much different than the seminars that most of the top financial gurus run, charging tons of money with promises to help people earn more money, get rich through real estate, or sell a multi-level marketing scheme. The business is in the selling, and convincing the most vulnerable people that you are there to help them (for a price). Not that that’s good, at all — it’s just expected.

Photo: david_shankbone
New York Times

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Wal-Mart Offering Check Cashing Services

This article was written by in Banking. 9 comments.

Many Wal-Mart locations around the country now have Money Center departments. These developments create an incredibly convenient way to take your paycheck into the store, have it cashed at the Money Center, and use your cash for your shopping trip. With Wal-Mart’s trend to become a one-stop shop for all household needs, including groceries, each Wal-Mart location is becoming its own small mall — or even village.

The Wal-Mart Money Centers are not full banks. They offer check cashing services, bill payments, outgoing wires, and reloadable debit cards. There are no checking accounts or savings accounts. Wal-Mart abandoned its plans to become a bank, and in doing so, is able to offer certain financial services while not being held to the same regulations as Chase, Bank of America, or your local bank branch. On the spectrum of financial institutions, Wal-Mart Money Centers are closer to establishments like payday loan companies and check cashing storefronts, who charge high fees and cater to lower-income communities and the unbanked population, than the centers are to banks.

Wal-MartCheck cashing fee. The good news is that the fees for cashing your paycheck or government check are generally much lower than the fees at shadier establishments. At the Wal-Mart Money Center, you can cash your check for a 1 percent fee with a maximum fee of $3. Of course, you can cash your checks for free at a bank.

Prepaid debit card fee. The fee to reload and maintain your prepaid debit card is lower than fees for prepaid debit cards elsewhere. Wal-Mart uses GreenDot prepaid debit cards, but at reduced rates of $3 to load and $3 per month to maintain. This is a system designed to charge people with low credit scores or a poor history with banks fees to use their own money. These are fees that middle-income banking customers doesn’t need to pay, particularly now that big banks have backed away from charging monthly debit card fees.

According to Wal-Mart’s own survey, 60 percent of the customers using the Money Center have bank accounts. These customers are most likely more interested in the convenience, and willing to accept the fees in exchange for getting access to their money at the same location they shop. The remaining 40 percent must be the reason Wal-Mart chose to offer its own check cashing service rather than extending a potentially lucrative contract to a bank that could theoretically operate a branch in every Wal-Mart location.

Are these new services good for the people of Wal-Mart? I’m having trouble finding a significant drawback. I believe it would be better if Wal-Mart were to offer more traditional banking services, but this system is more profitable. The temptation to spend more money when you receive cash from your employer’s paycheck in the store where you’ll be spending money could be an invitation to spend more than necessary, but if you’re spending with cash, at least you’ll be limited to spending only what you have on hand. At the same time, Wal-Mart’s Money Centers offer a better choice than payday loans and check cashing storefronts for lower-income families or the 40 percent of customers who do not have bank accounts, and could possibly help these households transition to a bank in the future.

I do not see Wal-Mart centers as an alternative to banks for most existing banking customers. There is anger towards Wall Street and the banking system, and initiatives like Bank Transfer Day encourage people to move away from the big banks towards credit unions and community banks. The Wal-Mart Money Center is not a replacement for a big bank, and moving a family from managing finances through a bank to managing finances on an all-cash basis through an outfit like these could be detrimental to long-term financial stability.

Photo: aforero
New York Times

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7 Tips for Using Student Credit Cards

This article was written by in Credit. 9 comments.

If you’ve just received your first student credit card, congratulations. Perhaps you’ve used pre-paid debit cards in the past, or maybe this is your first time with plastic. Credit cards are just tools for spending the money that you do have, and are not inherently good or evil. If you use them well, they will open doors for your finances, but if you abuse the credit offered to you, credit cards could lead you down the dark path of unmanageable debt.

Here are some suggestions for students to consider when handling their first credit cards.

1. Get a job!

Normally, I direct people towards skipping a job during college to focus on academics. The best financial advice to give a student today is to get out of college quickly to prevent you from incurring another year of student loan debt or paying another year of tuition. My girlfriend in college graduated with a double major in three and a half years (and paid for one semester by selling Beanie Babies on eBay — but that’s another story). She was involved in many social activities, as well, but her goal was to graduate as quickly as possible. I, on the other hand, loaded up my schedule with courses unnecessary for my major, dabbled in several different minors before settling on one, and had to spend one semester student teaching — I graduated after four and a half years.

If you’re going to want to spend money during college, though, and take real vacations during your breaks rather than work, and you don’t have generous relatives to fund college debauchery, you’re going to need a job. The best types of college jobs are those that allow you to use the time on the job to study for your classes. A popular option for a quiet job is a position at the university’s library. When I was in college, I worked for a short time at the department of music’s media library. When I was in college, the World Wide Web was fairly new, so I also got my first taste of working for myself: I was a consultant to university staff, helping them build personal websites, on which they could publish material pertaining to their academic area.

With a job, you’ll be able to justify using a credit card for spending — as long as you spend within certain guidelines.

2. Get a budget!

This would have helped me when I was in school, but as I look back, I realize I had no concept of money at that time. You have to know how much money you have coming in, how much your regular expenses cost, and how much you have remaining each month for personal items. Living on campus makes this process easier. If you opt for a meal plan, you’ve wrapped one of your biggest expenses, food, into your college tuition bill. You could save a lot of money by opting out of the meal plan and choosing to prepare your own meals. This could be a great skill to learn, but realistically, most students don’t do this.

Budgets are most effective when they are relevant and flexible. Here is how to design and stick to a flexible budget.

3. Get a checking account!

You should have a free checking account before you consider using a credit card. Deposit your income, whether from a job or from generous relatives, into your checking account, and use that money to pay your credit cards. If you haven’t already, find a bank with branches that are convenient to both you and your parents, so whether you’re home or at school you can easily access your money. If you’d prefer to work online only, the proximity of a branch may not be important, but keep in mind depositing money can be a little more difficult when dealing with an online-only checking account.

4. Get automated!

The two best types of financial automation are direct deposit and credit card payment. If you have a job, see if the employer will allow your paycheck to be sent electronically to your bank. Not all college jobs are “on the books” in my experience, and direct deposit isn’t an option when you’re dealing with cash. If, however, you do receive a check, look into direct deposit. All you need to provide is your bank’s routing number and your account numbers, though some employers ask for a voided check.

All modern credit cards let you schedule payments online. For each credit card I use, I schedule the bill to be paid in full from my checking account a few days before the payment is due. The few days between the payment date and the due date allow me to research and fix any payment problems if necessary while taking advantage of as much as the grace period as necessary. Linking a checking account to a credit card to facilitate this automated payment is not always instantaneous. There may be a delay of up to a month between the time you begin the process of linking the account and the date your link is ready for automated payments. Keep that in mind and don’t forget to make any manual payments if necessary.

5. Think about your spending.

College life is full of a variety of temptations, and spending more than you earn is just one of those temptations. The risks might seem minor in comparison to some activities, but getting into debt during college (beyond any student loan if you have any) can be something you pay for over the course of the rest of your life. Personal finance boils down to simple math: you survive when you spend less than you earn. Simple math doesn’t always make its way into the brain when you are out shopping with your friends or planning a vacation. Credit cards help make the spending process seem automatic. When you take cash out of your wallet, there’s a psychological barrier that stops you from handing money over willingly. You don’t want to part with cold, hard cash.

A credit card doesn’t feel like money. A swipe, a bump, or a click of a mouse button are all that’s needed to pay for something you’d like. The psychological effect is not as strong. While you may hesitate before spending cash, swiping a card almost feels fun. Recognize that spending with a credit card is easier in general, and you’re likely to spend more. With this knowledge, you can work to counteract the effect by training yourself to create your own barrier. Before you swipe the credit card, think. Consider whether this is something you need and if you could wait another month before making the purchase.

6. Don’t use your credit card for your friends.

Generosity is a commendable personality train. You may seem like you’re being generous when you go out with your friends and offer to collect cash from everyone to pay for dinner with your credit card. With this technique, leaving a group outing could result in hundreds of dollars more in your wallet and almost as much charged to your credit card. Unless you can deposit that cash into your checking account, you may be tempted to spend it. It may be true that sneaky people could probably find out a way to owe less for dinner than they should have by collecting cash from everyone, it’s not a good policy.

Invariably, there’s someone at the dinner table who did not bring cash to pay for dinner. It’s always good to cover for your friends when possible. In the end, with a good group of friends, these types of problems tend to even out over time unless someone starts to display a pattern of mooching. Despite the psychological barrier preventing people from spending too much cash, just having that cash in the wallet can be too tempting for some.

7. Use your credit card infrequently.

Even if you pay your bill automatically on time and in full every month, keep the card away. There is a world of exciting things to do that require no spending at all, whether with cash or a credit card. For example, use your free time to explore what your town or city has to offer. Ride a bike and workout at home rather than signing up for a gym membership — a recurring charge on your credit card.

A student credit card can be a good tool for building credit at a young age while learning the responsibilities that go along with managing money. I’ve seen people graduate college with thousands of dollars of debt and beg the world to help pay the bills, but in the end, you’re the only one who will be held responsible. If your plans for the future include having a family, buying a house, working at a job you love regardless of the income, or retiring from your job, you owe it to yourself to start managing your money well now rather than waiting until after you’re out of college.

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Decline Your Own Credit Card With MasterCard’s Help

by Flexo

If you can’t control your own credit card spending, MasterCard is partnering with Citi to come to your rescue. The two companies are announcing a new credit card featuring a service called inControl. This will allow card holders to customize spending limits by category, by country, or by several other criteria. The service is already ... Continue reading this article…

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Paid Insufficient, My Old Friend

by Smithee

Last week on Facebook I was celebrating the new law that stops banks from auto-enrolling new customers into overdraft programs, making it merely optional instead. A more conservative friend from college expressed his dislike of the law, asking me (I’m paraphrasing) “What happened to personal responsibility in this country? Why is it a good thing ... Continue reading this article…

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Best of Consumerism Commentary, August 2009

by Flexo

Join the community All content on Consumerism Commentary is free. One of the best methods of reading this free content and staying up-to-date with the latest articles and posts is through RSS subscription. By subscribing to the Consumerism Commentary RSS feed with feed-reading software such as Google Reader or aggregators such as My Yahoo, you’ll ... Continue reading this article…

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More From Visa About Debit Cards

by Flexo

Last month, a representative from Visa offered to answer a few questions for Consumerism Commentary readers about debit cards. It many ways, I find debit cards to be inferior to credit cards, but Visa claims the cards linked directly to bank accounts have some redeeming qualities. Here are three additional questions I asked Visa and ... Continue reading this article…

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