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Examining the Increase in Prepaid Cards as Alternatives to Bank Accounts

Credit cards

SOURCE: AP/Mark Lennihan

Signs for American Express, MasterCard, and Visa credit cards are shown on a New York store's door in 2007.

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The Federal Deposit Insurance Corporation, which insures Americans’ bank deposits, recently requested comments on its 2011 “National Survey of Unbanked and Underbanked Households.” The survey, which was first launched in 2009 and administered again in 2011, asks Americans about their financial habits as part of the U.S. Census Bureau’s Current Population Survey. Questions include whether households have a checking or savings account and whether they use certain types of financial services outside of the mainstream banking system such as check cashers and payday loans. Households without a checking or savings account are considered to be unbanked.

In response to the Federal Deposit Insurance Corporation’s request, the Center for American Progress submitted comments on December 18. Below is a summary of those comments.

Prior to the “National Survey of Unbanked and Underbanked Households,” no public data on the unbanked—or those without a checking or savings account—was available on a national scale. The Center for American Progress applauds the Federal Deposit Insurance Corporation’s effort to deliver a survey that thoroughly captures the size and scope of the unbanked population, including estimates of the unbanked by state and metropolitan area.

CAP believes the survey is relevant to the Federal Deposit Insurance Corporation’s safety and soundness mandate, as well as its consumer-protection role. The survey allows the corporation to better understand consumer demands that traditional banks do not currently meet, and its findings may help banks to develop new products intended for unbanked or underbanked consumers. It also enables the corporation to measure the growth of emerging transaction products for the unbanked and underbanked—such as prepaid cards—that may require new forms of deposit insurance, like “pass-through” insurance. Millions of prepaid cards are issued by nonbanks, which often—but not always—include this insurance to help protect consumers’ “loads,” or deposits, just as a bank would.

Because the survey results are made public at the state and metropolitan levels, they also allow state and local policy leaders to identify areas where the unbanked most need to be addressed. Leaders can do so by promoting, for example, BankOn initiatives. These are community partnerships in dozens of cities that encourage unbanked and underserved populations to open safe bank accounts instead of using high-cost alternatives like check cashers.

We appreciate the significant effort that the Federal Deposit Insurance Corporation has undertaken in developing a comprehensive national survey. At the same time, given the rapid evolution of both bank account and prepaid card products, we believe that this survey must also evolve to reflect a changing financial marketplace. As noted in a column published in American Banker on November 30, 2012, CAP questions one of the 2011 survey’s key findings: that the number of unbanked has increased since 2009. The growth in prepaid card usage among the unbanked and especially among the formerly banked suggests that account-like prepaid debit cards are being substituted for traditional bank accounts and that the distinction between cards and accounts is rapidly declining.

The Federal Deposit Insurance Corporation should examine prepaid card usage more closely in its 2013 survey in order to address this narrowing distinction. Specifically, we recommend the following two improvements to the 2013 survey and report:

1. The Federal Deposit Insurance Corporation should add additional questions regarding the relationship between unbanked and underbanked households and their use of prepaid cards. Given that prepaid cards are frequently marketed as “bank account alternatives,” it would be useful to measure the degree to which prepaid cards are serving as substitutes to bank accounts. These questions should include how consumers decide whether bank accounts or prepaid cards are more attractive, how they use prepaid cards compared to bank accounts, and what kinds of fees and features their prepaid cards and bank accounts have.

2. The Federal Deposit Insurance Corporation should calculate an alternative measure of the percentage of the unbanked that regularly use prepaid cards. As we suggested in American Banker, consumers who report not having a checking account but who did use a prepaid or payroll card within the past year should be considered “banked.” If the corporation does not wish to alter the established definition of “unbanked,” it should at least include this revised count as a new alternative measure. One way to consider this measure is that households without an account or any prepaid cards could be labeled “cash-only” transactors.

By better capturing consumers’ growing use of prepaid cards in the 2013 survey, the Federal Deposit Insurance Corporation will be able to focus more clearly on emerging transaction products and policies for the unbanked.

Joe Valenti is the Director of Asset Building at the Center for American Progress.

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