The Wall Street Journal
By: Sudeep Reddy
August 18, 2010
Efforts Target Households That Use High-Cost Check-Cashing Services
Federal and local governments are trying once again to persuade some of the 17 million U.S. adults who rely on check-cashing services to open their own bank accounts.
Past efforts to lure "unbanked" consumers into the financial mainstream have fallen short. Some states require state-chartered banks to offer low-cost accounts, but banks rarely promote them. A Treasury Department initiative earlier this decade offered grants to banks and community groups to sign up consumers, but few accounts were opened.
Jolita Richmond, a nursing assistant in Laurel, Md., patronizing a Kash King check-cashing store last week, said she closed her bank account earlier this year after $300 in overdraft fees piled up without her realizing it. Her income-tax refund, deposited into her account, took care of the charges but she decided it wasn't worth the cost.
"That's when I said, 'Forget it with the banks,' " she said. "I just lost hope with them."
Ms. Richmond, 39 years old, now relies on check-cashers that take a cut of her paycheck--generally 1% to 4%--or heads to the bank where a check was drawn. When she needs plastic, she uses a prepaid debit card that charges $1 a purchase and $3 to reload.
Still, she misses having a place to sock away $30 a month for emergencies.
"I'm not really saving anything," she said.
Now governments are trying to take a more active role to shield consumers from higher-cost financial services.
The Federal Deposit Insurance Corp. approved a pilot program last week to encourage banks to create simple, low-cost deposit accounts.
Meanwhile, the Treasury, in its latest budget proposal, is seeking $50 million from Congress to create a "Bank On USA" program to extend local initiatives that encourage people to set up bank accounts. The financial-regulation measure signed into law last month also directs the Treasury to use grants and other agreements to draw lower-income consumers into the financial mainstream. Other initiatives are under way at the local level.
The efforts are directed at the nine million households, or one of every 12, without bank accounts, a group disproportionately minority and low-income. In the modern economy, that puts them at a huge disadvantage: They often rely on higher-cost check cashers or neighborhood stores because they don't have credit histories to borrow at a bank or credit union. They aren't saving for retirement, aren't building the credit records needed to get common loans and often are excluded from less-expensive forms of electronic payment.
Along with the unbanked, 21 million more Americans are considered "underbanked"--people who have checking accounts but often turn to higher-cost services, such as payday loans and car-title loans, with annualized interest rates frequently exceeding 300%.
"It's important that people get into the financial mainstream so they have a place to store their money...and to make sure they're paying fair fees for banking services rather than exorbitant fees that are being charged through the alternative financial-services providers," said Ellen Lazar, senior advisor for consumer policy to the FDIC chairman.
The FDIC pilot program provides a template for banks to offer what the agency calls a "safe" account with features--such as no overdraft fees and a $1 minimum-balance requirement--appealing to lower-income consumers. The FDIC and the banks would promote the program to customers.
The program, for which the FDIC is enlisting banks through next month, is designed to assess whether minimizing fees could be sustainable across the industry. While its accounts would prohibit fees for overdrafts and nonsufficient funds, they would allow other fees that are "proportional" to the banks' costs.
"We felt banks are in business to earn money," Ms. Lazar said. "They've got to do it some way."
It is unclear how the new programs will fare at a time when many banks have indicated they are likely to raise fees for basic checking accounts due to new regulations.
The American Bankers Association, an industry trade group that says it supports drawing in more low-income consumers, has called the FDIC initiative "an inflexible 'one-size-fits-all' approach" that "would not be economically viable" for banks.
Surveys show that unbanked consumers don't think they have enough money or don't write enough checks to make an account worthwhile. Some, of course, avoid banks to dodge tax authorities. Many say they have been burned too often by fees for overdrawing their bank accounts.
James Stuckey, an escalator mechanic in nearby Oxon Hill, Md., has a bank account but says he sometimes heads to his local liquor store to cash checks instead of using banks.
The $14 fee for an $800 check, he said, beats the repeated $35 overdraft fees he has been hit with on his bank account--and lets him keep a closer eye on his money.
"I know where it is and exactly where it's going," said Mr. Stuckey, 45. "I definitely can't afford the little extra fees."
Workers without bank accounts typically spend hundreds of dollars a year to cash checks. An unbanked worker can spend $41,600 over a lifetime in check-cashing fees, the Brookings Institution, a liberal think tank, estimated in 2008.
Consumers who use check cashers are generally drawn to the transparency, even if they know the transaction might be less expensive elsewhere.
"Many people have made a calculated decision that while it may be more expensive, it is less risky," said Jonathan Mintz, commissioner of New York City's Department of Consumer Affairs. "Your basic needs are being met. There are no surprises. It's just that you're in this no-growth environment."
Dozens of state and local governments have launched programs, partnering with local financial institutions, to provide starter accounts with no overdraft fees and low or no monthly fees.
Another novel approach: pushing consumers into bank accounts when they are young, as New York City started doing this year with its summer youth work program. If workers didn't have a bank account, they could create one on the spot--branded as an "NYC First Account"--in order to get paid through direct deposit.
Of the 9,000 eligible young adults over age 18 offered the account, the city's Department of Consumer Affairs says, more than 2,000 signed up.
Write to Sudeep Reddy at email@example.com