This fact sheet focuses on the lessons learned from consumers who purchase and use prepaid debit cards.More info
Seventeen million Americans live without a bank account, exposing themselves to risks of monetary loss, fraud, and high costs associated with less regulated financial services markets.1 In this two-phase longitudinal survey of 2,000 low-income Los Angeles households, the Pew Health Group’s Safe Banking Opportunities Project aims to further local, state and national understanding of the financial needs of underserved populations in our urban centers and the opportunity for banks to capture this market. The study explores the connections between financial services, the populations they serve or are failing to serve and the financial stability of those populations.
Our in-depth survey of low-income households—1,000 with a bank account and 1,000 without—reveals three key findings:
- Between 2009 and 2010, the ranks of the unbanked increased, with more families leaving banking than opening bank accounts. One-third (32 percent) of households that left banking cited unexpected or unexplained fees as their reason for closing their bank accounts; another 27 percent attributed their departure from banking to the loss of a job or lack of funds. Among all unbanked households, half (50 percent) report that they are unable to deposit the minimum balance required to open an account, up from 30 percent identifying this as a barrier to opening a bank account during the first phase of the survey. A local effort in Los Angeles to promote banking—the Bank on LA campaign—slowed the rate of departure from banking, but it could not overcome persistent concerns by the financially-stretched participants of the survey about hidden and unexpected bank fees and lack of sufficient funds for opening or maintaining accounts.
- Opening an account is only the beginning of a beneficial banking relationship. After overcoming the barriers to opening a bank account, low-income workers face new and additional obstacles to maintaining their bank accounts and to using those accounts to meet their financial services needs. Our study finds that banks hold significant service and location advantages over alternative financial services (AFS) providers: 79 percent of crossover respondents report that banks have better customer service than check cashers and 59 percent of crossover respondents prefer the location of banks to that of check cashers. However, these customers continue to supplement their depository accounts with services from AFS providers, citing the need to access their cash quickly (30 percent) and to purchase multiple services, like money orders and remittances, at one time (38 percent).
- Among the working poor, banking is associated with savings. Even when faced with high rates of job loss and declining household income during the period of our survey, the banked were better able to sustain their savings behaviors, including those associated with long-term goals such as paying for college. Eighty-eight percent of banked households have at least one savings account and, even in times of economic turmoil, 67 percent of the Banked actively save at least some of the time. Among the Unbanked, only 9 percent report being able to save.
Our analysis leads to the following policy recommendations:
Overcoming barriers to banking: The significant barriers preventing unbanked low-income households in Los Angeles from opening bank accounts are concerns about fees as well as a perceived lack of liquidity to meet the minimum opening balance requirements and lack of proper identification. Policy makers, banks and employers each have a role to play in making bank accounts more affordable and accessible to the working poor.
- Employers and government agencies can offer direct deposit to workers and recipients of public assistance.
- Government workforce placement programs can introduce bank accounts to the newly employed.
- Policy makers and the banking sector can use public-private collaborations to reach the unbanked and to set safe terms for starter accounts.
Helping Families Stay Banked: Pew’s research indicates that unexpected and unexplained fees drive low-income households away from banking. banks and policy makers should take steps to reduce the surprise of these fees and increase transparency.
- Policy makers can require, and banks can implement, fair and transparent fees.
- Banks and banking regulators can end deposit delay and require depository institutions to post deposits and withdrawals in a fully-disclosed objective and neutral manner, such as chronological order, which does not maximize overdraft fees.
- Banks can increase the availability of ATM networks in low-income areas to reduce reliance by customers on out-of-network ATMS carrying high fees.
Encouraging the Building of Savings and Credit: Pew found that low-income households with bank accounts continue to rely on costly alternative financial services to meet their financial needs, while also seeking to use savings mechanisms. To encourage the working poor to build savings and credit, banks, community organizations, local leaders and policy makers can promote policies that allow households to use their bank accounts effectively and beneficially. Additionally, the use of AFS by banked households presents an opportunity for banks to utilize their competitive advantages to capture this market for revenue-generating financial services.
- Banks can provide a comprehensive suite of products including money orders, remittances, check cashing, bill pay services and personal loans.
- Community organizations, local governments, efforts to bank the Unbanked, like the Bank On programs, and depository institutions can provide financial education to help new customers manage costs and build up assets.
- Banks, policy makers and community organizations can capitalize on household aspirations to build family financial security by providing low-cost and easy-to¬understand opportunities for savings and asset-building.