Fringe transaction products
- 1 DROM: FRINGE FINANCE TRANSACTION PRODUCTS AND SERVICES
- 1.1 MAKING BANK ON THE UNBANKED
- 1.2 CHECK CASHING OUTLETS (CCOS)
- 1.3 PREPAID CARDS
- 1.4 GENERAL PURPOSE RELOADABLE (GPR) CARDS
- 1.5 ELECTRONIC BENEFIT TRANSFER (EBT) CARDS AND PAYROLL CARDS
- 1.6 SURVIVAL STRATEGIES AND RESOURCES
- 1.7 RESOURCES:
DROM: FRINGE FINANCE TRANSACTION PRODUCTS AND SERVICES
MAKING BANK ON THE UNBANKED
As James Baldwin once said, "Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor." This is true now more than ever.
It's called the "poverty tax"-the surcharge people pay for not having savings or access to "prime" credit and being consigned to "fringe finance." Fringe finance refers to the array of "alternative" financial services (AFS) offered by providers that operate outside of federally insured banks. Gary Rivlin, author of Broke USA: From Pawnshops to Poverty, Inc., How the Working Poor Became Big Business, does the math; adding up the profits from the AFS sector and dividing by the 40 million households that survive on $30,000 a year or less, the industry receives an average of $2,500 from every low-income household. That's a poverty tax of around 10%. If current trends continue, it will only rise-unless we reject these predatory financial products and services.
The next two chapters break down the major perils of fringe finance into those related to transactions and those related to credit. This chapter deals with transaction products and services: check cashing and prepaid cards. Chapter VIII covers credit products and services: payday loans, auto-title and pawn loans, rent-to-own financing and refund anticipation loans (RALs). Among households without access to a bank account, 62% have used an AFS transaction product or service and 27% have used an AFS credit product or service. About 23% have used both.
Both chapters offer analysis and information to help you identify the common tricks and traps of fringe finance so that you can avoid them. We consider alternatives to the most expensive products and services, as well as how to save money if you're "locked in" or have no other options. There is no one-size-fits-all strategy for personal finance.
We conclude Chapter VIII by outlining some general survival strategies aimed to minimize or eliminate our dependence on the current debt-finance system. Venture capital, however, expects the stunning rates of financial extraction in the poverty industry to rise, and it has created funds to invest in start-ups and small firms with big growth potential in the fringe finance sector. The "market" that investors want to tap is the unbanked (people without checking or savings accounts) and the underbanked (people who rely on both "traditional" and "alternative" financial products). Why are venture capitalists so interested in this market? In a blog post titled "Not Unbanked: Untapped," a venture fund manager explains, "It is fair to say that most of these products are generally more expensive than what most of 'us' pay. APRs [annual percentage rates of interest] higher than 30% (if not 300%); transaction costs of $2+; money-transfer costs of $10+; access to payroll check for 2-4%." The payment services segment of AFS has seen some of the most spectacular growth in recent years, where prepaid cards are making inroads and recording profits that rival the always-profitable check cashing outlets.
This is the predicament of the poor in our debt-finance system: it costs poor people significantly more to use money-to spend it, to save it, to invest it, to borrow it, to send it "back home"-and you have less money to begin with. If you're poor, the more you engage with the debt-finance system, the more wealth you lose and the more indebted you become. Meanwhile, AFS owners and investors, who enjoy lower financing costs and have more money to begin with, profit from your loss and acquire pieces of your debt; Wall Street comes to own pieces of your future. These are the workings of a two-tiered financial system: on the bottom are relatively high-cost services marketed to the growing and changing ranks of the unbanked and the underbanked.
The unbanked includes the working poor, the unemployed, the homeless, the undocumented, those who do not speak English fluently, those who are or have been incarcerated, those with mental or physical health issues, older people, those working off the books, those hiding from creditors or the "authorities," those whose homes were stolen by Wall Street, and anyone else to whom "traditional" financial institutions won't lend.
Demographically speaking, the unbanked population is very broad and very diverse, but it is disproportionately comprised of low-income households (71% of unbanked households earn below $30,000 a year), households of color, immigrant households and individuals with negative banking histories. (Of course, these categories aren't mutually exclusive.) People of color are more likely to be unbanked. In general, Latino/a and Black people are respectively six and seven times more likely to be unbanked than whites. Households with an annual income under $30,000 are thirteen times more likely to be unbanked than those with an income between $50,000 and $75,000. People of color are more likely to have low and/or unreliable income, making it more difficult to save enough money to meet minimum opening-balance requirements at banks. There's another significant commonality: people of color, low-income individuals and immigrants tend to distrust banks. For some households, this mistrust goes back generations. Losing one's home or hard-earned property-especially in a society focused on wealth accumulation-is traumatic. The effects can ripple over generations of a family, shaping how future generations interact with financial institutions. Poor people, immigrants and people of color also tend to believe that traditional financial institutions aren't for them; they believe that they don't meet the requirements or that banks don't fill their needs. Inconvenient locations and hours of operation often present further barriers for low-income households. These barriers tend to reinforce each other and result in alienation from the mainstream financial system.
For many of the unbanked, the experience of second-tier status in the financial system mirrors their experience with the two-tiered justice system. Those who are socially marginalized in one way or another are more likely to occupy the bottom tier of the financial system, which makes it more likely they'll get caught up in the criminal justice system.
The criminalization of poverty, the criminalization of immigration, as well as racial and ethnic profiling, are well-documented trends that push people to the fringes of finance. In at least a third of U.S. states, being in debt can now land you in jail.6 In Washington State, for example, an African American man with mental health issues was incarcerated for two weeks for failing to pay $60 worth of "legal financial obligations" (LFOs). His jail stay, meanwhile, cost Spokane County over $1,500.
And let's not forget: the deregulation that led to the emergence of a two-tiered financial system and that enables the 1% to go on looting and indebting the poor was orchestrated by our so-called "elected" representatives.
CHECK CASHING OUTLETS (CCOS)
For nine million households in the United States, cashing paychecks at a bank or credit union is not an option.8 The unbanked do not have bank accounts for any number of the reasons discussed earlier. For many people, a check cashing outlet (CCO) appears to be the only option to transform their paycheck into cash.
According to the Federal Reserve, CCOs generally charge between 1.5% and 3.5% to cash a check, so for a $500 check, that's somewhere between $7.50 and $17.50 taken away from you. This is actually a conservative estimate; the Consumer Federation pegs average fees at 4.11%, so it might end up being a cut of $20.55. With a checking account, by contrast, this service would be free. If you're unbanked and you make $500 every week, in one year you might spend $400 if you're relatively lucky, but possibly over $1,000, just so you can spend your own money. The average unbanked person with a fulltime job can expect to spend more than $40,000 on such fees in their lifetime. That is, throughout the course of one's life, more than an entire year's worth of work goes exclusively towards turning one's salary into cash.
Between 2000 and 2005, the number of CCOs in the country has doubled, but fees haven't gone down. In fact, the price has gone up; they grew 75.6% on average between 1997 and 2006. Companies like Wal-Mart, Kmart and Best Buy have also tapped into this market by offering check cashing at their stores. Although they charge less to cash a check than the regular outlets, we should harbor no illusions about their motivation; the hope is that people suddenly equipped with cash will spend it right where they are.
In addition to exorbitant check cashing fees, there are fees for money transfers. Immigrants hoping to send money outside of the United States may lose as much as 20% of the amount in the process. While the Consumer Financial Protection Bureau recently introduced new disclosure rules aimed at stopping sudden and unexpected penalties, there's really nothing that limits the overall fee. By contrast, banks and credit unions charge substantially less for this and other services. Services that could cost up to $500 annually at a CCO could cost between $30 and $60 at a traditional financial institution.
As expensive as CCOs may be, and as much as they target people with lower incomes, if they all pulled up stakes and left, what would happen?
Several alternatives may be available. You could make an arrangement with a friend, family member, or even your employer-that is, someone with access to a checking account-in which you would write your check over to them and they would give you the full amount in cash. If you have exhausted other options and must resort to a CCO, it is important to know how to use it in a way that minimizes harm. For example, ask ahead of time for the fee in dollar amounts as opposed to the percentage. And be sure afterwards to obtain and save an itemized receipt. Costs may vary not just from one CCO to the next, but by the time of day and other factors. You can compare receipts to determine the optimal approach.
In an essay on the poverty tax, Gary Rivlin recalls, "A few years back, I attended the annual Check Cashers Convention, where I sat in on a 90-minute presentation dubbed, Effective Marketing Strategies to Dominate Your Market. Speaking to a standingroom only crowd, a consultant named Jim Higgins shared his tips for turning the $1,000-a-year check cashing or payday customer into one worth $2,000 to $4,000 a year. Pens scribbled furiously as he tossed out ideas. Raffle off an iPod. Consider Scratch 'n Win contests. Institute the kind of customer reward programs that has worked so well for the airlines. And for those who are only semi-regulars offer a 'cash 3, get 1 free deal. After all, Higgins told the crowd, These are people not used to getting anything free. These are people not used to getting anything, really.'
First there were credit cards. Then came debit cards. Now there are prepaid cards-and they're suddenly everywhere. Think about it this way: with credit cards you pay later, with debit cards you pay now, and with prepaid cards you pay early. Credit cards extend credit to consumers for free (with a grace period). Debit cards give consumers free access to funds in their bank accounts. Prepaid cards charge consumers to access their own funds. So when you use a prepaid card you are essentially paying money to make an interest-free loan to the issuer, who then lends your money to other customers.
Charging us for the use of our own money is what banks do. They also provide useful services: the ability to store our money, to access cash, to pay for things without cash and to turn checks into cash. Prepaid cards-now used by 13% of Americans-do the same, although they're not attached to bank accounts. Branded with the logos of American Express, Discover, MasterCard or Visa, they look like other plastic payment cards and provide ATM access and the ability to make purchases. "General purpose reloadable" (GPR) cards let you add funds. However, prepaid cards are usually more costly, less convenient and less secure than comparable services from banks and they tend to have poor disclosure policies and "gotcha" fees, replicating some of the most aggravating bank practices. Nonetheless, compared with a check cashing outlet, getting cash from a prepaid card is usually cheaper. When it comes to making payments, prepaid cards are typically more expensive than credit or debit cards, but not necessarily. Factor in overdraft charges, and debit cards cost more. Factor in high ongoing balances, high interest rates and late payment penalties, and credit cards may cost considerably more than prepaid cards.
There is no one-size-fits-all strategy for personal financial transactions. What's more, the rules governing the prepaid card industry are still in flux. In 2010 the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) took effect, tightening regulations for credit cards and traditional debit cards.20 The new Consumer Financial Protection Bureau (CFPB) is presently considering how to bring the prepaid card market into the federal regulatory framework. In the meantime, barriers to cash continue to grow; transactions for an increasing range of basic services are impossible without plastic. Soon many of us will have no choice but to use these cards when employers, government benefits administrators and even colleges and universities begin to adopt them.
There are a variety of prepaid cards, including gift cards, payroll cards, government benefits cards and general purpose reloadable (GPR) cards. Purchasable, usable and sometimes reloadable without identity verification, many prepaid cards offer the advantage of anonymity, which is why they've become the preferred means of laundering money and the de facto currency of the prison system. For users interested in symbolically projecting their status, branded cards serve as a means of self-expression. The cards are linked to celebrities, heroes and social causes, and tend to be the most predatory corner of the market.
Consumer advocates consider prepaid cards just the latest addition to the array of high-cost and inferior financial products for which the poor pay more. Rather than help marginalized groups enter the financial mainstream, prepaid cards highlight and intensify financial segregation. The predicament of Millennials, who appear to be the industry's latest target, is especially alarming. Not long after the CARD Act restricted credit card companies' access to college campuses and to customers under twenty-one, prepaid cards began moving in, looking to establish "partnerships." Now with prepaid cards serving as student IDs, enrolling in college also means enrolling in a bank.
GENERAL PURPOSE RELOADABLE (GPR) CARDS
GPR cards are the kind that you buy and set up yourself, like a gift card with fees. They range from competitively priced, no-frills cards to premium-priced celebrity cards, which are sold as symbols of achievement or aspiration as much as financial tools. Beyond utility, the latter promise respect, empowerment and freedom. Of course, prepaid cards are not unique in this sense: everything we consume says something about who we are and what we believe. The problem with most celebrity cards is not simply that they don't deliver what's promised, but that they're designed to deliver exactly the opposite of what's promised: financial marginalization.
Consumers Union found many different types of fees for a range of prepaid cards. In addition to monthly fees, they found fees for activation, point-of-sale transaction, cash withdrawal, balance inquiry, transaction statements, customer service, bill payment, adding funds, dormancy, account closure and overdraft.22 Making matters worse, only a few of the fees charged by card issuers are disclosed prior to signing up for the card. Retail displays often contain only purchase prices and initial load amounts, and card company websites frequently require users to click on sign-up pages or registration forms in order to obtain fee information.
Consumer Action, which surveyed twenty-eight different prepaid cards, found that twenty of them carry a monthly maintenance fee, the highest being $14.95. Fees for out-of-network ATM withdrawals range from $1.95 to $3. A few cards charge users to reload money. Ten of the cards surveyed charge 50 cents to $2 to talk to a customer service agent and two of them charge 50 cents for automated help.
Like the worst practices in subprime mortgage lending, private student loans and payday lending, the marketing and sales strategies of the celebrity prepaid card business are predatory; the best predators have a deep appreciation for the needs of their prey. "Well-banked" celebrities like Russell Simmons and Suze Orman are marketers of prepaid cards that target financially marginalized people. While their marketing suggests they are running charities, Simmons and Orman are managing private companies whose unequivocal objective is to profit from providing financial services to poor people. They deceptively present their enterprises as altruistic projects striving for collective emancipation. Yes, this is how capitalism works.
ELECTRONIC BENEFIT TRANSFER (EBT) CARDS AND PAYROLL CARDS
Over the past 15 years, the federal government and state governments have been gradually replacing paper benefits checks with Electronic Benefit Transfer (EBT) cards. For the unbanked, the shift to electronic payments means no check cashing fees, less need to carry cash, faster payments, the ability to make purchases or pay bills electronically and no ChexSystems screen. But overall, costs and benefits will vary depending on the fees and terms that apply to the particular prepaid card designated for your benefits program. These are administered by different federal and state government agencies, which contract with various prepaid card issuers. California and New Jersey are considered to have negotiated relatively good contracts for their unemployed workers (providing free and ample access to cash and transaction information with no penalty fees).23 Tennessee workers, on the other hand, get slammed with the highest junk fees courtesy of JPMorgan Chase, the bank contracted to service that state's unemployment compensation (UC) prepaid card program.
For recipients of Social Security, Supplemental Security Income (SSI), or Veterans Affairs (VA) compensation, the Direct Express prepaid debit card has much lower fees than other prepaid cards and comes with strong consumer protections. Card accounts are insured by the Federal Deposit Insurance Company (FDIC) and are subject to federal consumer protection regulations (i.e., Regulation E).
The prepaid card programs administered by the states to disburse UC, as well as Temporary Assistance to Needy Families (TANF) and food stamps (Supplemental Nutritional Assistance Program), are more problematic. They're generally less beneficial for recipients and more beneficial for banks and states. Forty states now use a prepaid card for paying some or all UC recipients. A survey by the National Consumer Law Center found significant shortcomings in fee structures, access to card information and payment options. Across the board, fees charged to benefit recipients are being used to cover the administrative costs of delivering UC benefits-in violation of federal law. Cards may charge ATM balance inquiry fees, denied transaction fees, $10 to $20 overdraft fees and inactivity fees. On top of this, card issuers such as Bank of America, Citibank and JPMorgan Chase earn interchange fees as well as interest on the funds on deposit. Last year, card fees and ATM surcharges cost California welfare recipients over $17 million.
The bottom line: for those who have a bank account, prepaid cards offer little, if any, advantage over direct deposit. Benefit recipients with checking accounts will save money and time with direct deposit. Those who do not have that option-who lack access to a bank account or who live in one of the six states that have eliminated the direct deposit option-will be forced into the prepaid payroll card program(s) contracted to disburse your particular benefit(s). Since you have no choice about which card to use, familiarize yourself with the terms and fees that apply to the card designated for your program. This information should arrive in paper form with your EBT card. You can also look up the details of the particular prepaid payroll program online.
SURVIVAL STRATEGIES AND RESOURCES
At a time when it's hard to use your own cash (if you're lucky enough to have any), prepaid cards can offer cash-like features such as anonymity, liquidity and mobility. They'll also save you money compared with high-cost check cashing. Prepaid cards have also been sold as a way to reduce our reliance on the big banks. But Suze Orman probably came closer to the truth when she said her card is like having a bank in your pocket. Regardless of whose face is on the card, you can be sure Wall Street is getting its cut.
ARTICLES AND BOOKS
The Brookings Institution, "The Higher Prices Facing Lower Income Customers," The Brookings Institution, August 18, 2006 (tinyurl.com/DROMBrookings). Candice Choi, "Reporter Spends Month Living Without a Bank, Finds Sky-High Fees," Huffington Post, December 11, 2010 (tinyurl.com/DROMChoi). Sharon Hermanson and George Gaberlavage, The Alternative Financial Services Industry, AARP Public Policy Institute, August 2001 (tinyurl.com/DROMHermanson). Dick Mendel, "Double Jeopardy: Why the Poor Pay More," National Federation of Community Development Credit Unions, February 2005 (tinyurl.com/DROMMendel). National Survey of Unbanked and Underbanked Households, Federal Deposit Insurance Corporation, December 2009 (tinyurl.com/DROMFDIC02). Gary Rivlin, Broke USA: From Pawnshops to Poverty, Inc., How the Working Poor Became Big Business, (New York, NY: HarperCollins, 2010). "The Truth About Immigrants' Banking Rights," NEDAP (tinyurl.com/DROMNEDAP03). John Ulzheimer, "Are Pawn Shops, Rent-to-Own and Other Loan Alternatives Worth It?" Mint Life, January 30, 2012 (tinyurl.com/DROMUlzheimer).
Check cashing outlets
Jean Ann Fox and Patrick Woodall, "Cashed Out: Consumers Pay Steep Premium to 'Bank' at Check Cashing Outlets," Consumer Federation of America, November 2006 (tinyurl.com/DROMFox). National Association of the State Treasurers Foundation: Tomorrow's Money for Young Adults, "Check-Cashing Stores,", 2012 (tinyurl.com/DROMTMYA).
"Electronic Benefits Transfer Frequently Asked Questions," NEDAP, December 2006 (tinyurl.com/DROMNEDAP01). "Prepaid Cards: Loaded with Fees, Weak on Protections," Consumer Reports, March 2012 (tinyurl.com/DROMConsumer02). Deyanira del Rio, "Perils of Prepaid Cards," NEDAP, December 22, 2010 (tinyurl.com/DROMRio01).
1. Federal Deposit Insurance Corporation, National Survey of Unbanked and Underbanked Households (Washington, D.C.: GPO, 2009) (tinyurl.com/DROMFDIC02), 28. 2. Arjan Schutte, "Not Underbanked: Untapped. Underserved Spend $45B on Financial Services," Inside the Underbanked, November 2, 2011 (tinyurl.com/DROMSchutte). 3. National League of Cities Institute for Youth, Education and Families, Banking on Opportunity: A Scan of the Evolving Field of Bank on Initiatives, U.S. Department of the Treasury, (Washington, D.C.: GPO, 2011) (tinyurl.com/DROMNLCI), 9-10. 4. Preeti Vissa, "Debit Card Overdraft Fees: Reforms Welcomed but More are Necessary," The Greenlining Institute, April 2010 (tinyurl.com/DROMVissa), 3. 5. National League of Cities Institute for Youth, Education and Families, 9. 6. Jessica Silver-Greenberg, "Welcome to Debtors' Prison, 2011 Edition," Wall Street Journal, March 16, 2011 (tinyurl.com/DROMSilver3). 7. "In for a Penny: The Rise of America's New Debtors' Prisons," American Civil Liberties Union, October 2010 (tinyurl.com/DROMACLU), 73. 8. Christine Haughney, "City's Poor Still Distrust Banks," New York Times, August 17, 2009 (tinyurl.com/DROMHaughney). 9. Robin A. Prager, Federal Reserve Board, Determinants of the Locations of Payday Lenders, Pawnshops and Check-Cashing Outlets, (Washington, D.C.: GPO, June 2009) (tinyurl.com/DROMPrager), 6. 10. Jean Ann Fox and Patrick Woodall, Cashed Out: Consumers Pay Steep Premium to 'Bank' at Check Cashing Outlets, (Washington, D.C.: Consumer Federation of America, 2006) (tinyurl.com/DROMFox), 2. 11. William Clinton and Arnold Schwarzenegger, "Beyond Payday Loans," Wall Street Journal, January 24, 2008 (tinyurl.com/DROMClinton). 12. Fox and Woodall, 2. 13. Brad Tuttle, "Big-Box Banking: Why the Unbanked are Cashing Checks at Walmart," Time, February 1, 2011 (tinyurl.com/DROMTuttle). 14. "The Remittances Game of Chance: Playing with Loaded Dice?" Consumers International, January 2012 (tinyurl.com/DROMConsumer03), 4. 15. Bureau of Consumer Financial Protection, Electronic Funds Transfer (Regulation E),(Washington, D.C.: GPO, 2012) (tinyurl.com/DROMBCFP). 16. Tomorrow's Money for Young Adults: National Association of the State Treasurers Foundation, "Check-Cashing Stores,", 2012 (tinyurl.com/DROMTMYA). 17. Tomorrow's Money for Young Adults. 18. Gary Rivlin, "America's Poverty Tax," Economic Hardship Reporting Project, May 16, 2012 (tinyurl.com/DROMRivlin). 19."New Fin Lit Survey: 56% of Adults Don't Budget," Credit Union National Association, April 4, 2012 (tinyurl.com/DROMCUNA). 20. "Fact Sheet: Reforms to Protect American Credit Card Holders," White House, May 22, 2009 (tinyurl.com/DROMWH). 21. Ben Popken, "Why Money Launderers Love Prepaid Debit Cards," The Consumerist, May 25, 2011 (tinyurl.com/DROMPopken). 22. Michael McCauley, "Consumers Union Report: Prepaid Cards Come With Long List of Fees and Weak Consumer Protections," Consumers Union, September 15, 2010 (tinyurl.com/DROMMcCauley). 23. Lauren K. Saunders and Jillian McLaughlin, Unemployment Compensation Prepaid Cards: States Can Deal Workers a Winning Hand by Discarding Junk Fees (Washington, D.C.: National Consumer Law Center, 2011) (tinyurl.com/DROMSaunders), 19. 24. Bureau of Consumer Financial Protection. 25. Saunders and McLaughlin, 3. 26. Steinisch. 27. "Dos and Don'ts: Choosing and Using a Prepaid Card," Consumer Action News, Spring 2012, (tinyurl.com/DROMCAN).