The Power of Plastic:
how banks are using technology to reach the unbanked
by John D. Hawke, Jr., Comptroller of the Currency

Technology is rapidly transforming the banking industry — and expanding its ability to reach the unbanked.
Employers are turning increasingly to electronic payroll cards as a cost-effective way to reduce the burden of writing and processing checks. Consumers are using their payroll cards and other versions of prepaid debit cards — also known as stored value cards — as a substitute for cash and checking accounts.

Monitoring this trend, the American Bankers Association reported last December that in 2003, for the first time, electronic payments surpassed cash and checks as consumers’ preferred payment method for in-store purchases — an “evolution of payment behavior,” the ABA noted, “driven by the increasing popularity of debit cards.”

Debit cards accounted for nearly a third (31 percent) of in-store purchases in 2003, up from 21 percent only four years ago. Reliance on credit cards held steady during that time, at about 21 percent. Cash and checks, which accounted for 57 percent of in-store purchases in 1999, dropped to about 47 percent last year.

Evolution or revolution?

These data confirm that since the mid-1990s, when I became involved with the use of technology to reach the unbanked, there has indeed been a dramatic evolution in this field — really almost a revolution.

Consider, for example, the Navy Cash system, a smart card application allowing U.S. Navy surface ships to go cashless. Individual sailors and Marines at sea use their Navy Cash debit cards for everything from buying soft drinks at shipboard vending machines to withdrawing funds in foreign currency from ATMs at ports of call. The program is proving to be a highly efficient and economical way for individuals to move part of their pay onto prepaid debit cards.

With nearly 10 million unbanked households in the United States, prepaid debit products are increasingly being used by employers to remit wages electronically to their employees. Six years ago, the Treasury Department introduced the Electronic Transfer Account (ETA) as a model product to enable all federal government employees, retirees, and beneficiaries to receive their checks via direct deposit. Many banks have since adapted the ETA concept, developing their own fully electronic, low-cost accounts to serve the unbanked market. They’ve found that these products have wide appeal — not only for unbanked retirees but also for college students, people who are new to the workforce, people who change jobs frequently, and immigrants and others who haven’t had conventional banking relationships or aren’t comfortable handling the costs and logistics of a checking account.

So what we’re seeing now is the convergence of two powerful financial forces. It’s newsworthy, for example, when many of the nation’s most influential corporations begin shifting to payroll cards, as they have been doing in recent months. And it is newsworthy when consumers decide, in effect, that a plastic card in their wallet is about all the bank they need — at least for now.

New banking relationships

Payroll cards can eliminate the need to stand in line and pay high fees at a check-cashing store. Functioning as “checkless bank accounts,” prepaid debit cards offer a convenient and generally safe way to store funds, pay for purchases at stores and restaurants, access ATMs, and pay bills. Banks have also recognized their value as low-cost, high-efficiency mechanisms for immigrants to send money home.

Remittance services are emerging as one of the many new ways in which banks can use debit cards to build relationships with previously unbanked customers. According to the Inter-American Development Bank, U.S. consumers sent more than $30 billion in 2002 to their families and friends in Latin America, with about one-third of the total flowing to Mexico. Banks can provide remittance services at lower cost and with greater security than other providers.

But the power of plastic goes beyond merely making connections with new customers. For example, innovative banks are also creating links between payroll cards, tax preparation services, and the earned income tax credit (EITC) — rightly described as the federal government’s most powerful anti-poverty weapon — to help move tax refunds directly into dedicated savings accounts that can aid lower-income Americans in building wealth. Similarly, banks working with nonprofit community development organizations and various funding sources are helping hard-working families to leverage their own assets through matched-deposit Individual Development Accounts, a potentially powerful wealth-building tool (see IDAs: Savings Incentives to Build Wealth”).

Consumer education is essential to the overall success of these new banking innovations and initiatives. Financial institutions have a clear responsibility to ensure that debit cardholders understand the fees and risks involved, even though those fees and risks generally may be lower than with, say, high-balance credit cards, and certainly lower than when relying on check-cashing and predatory payday-loan operations.

But there are also opportunities to take consumer education to another level. For instance, an initiative to help lower-income renters move to automated electronic rent payments has been coupled with an incentive program through which they can obtain, at low cost, a brand-new home computer. For families with school-age children, the motivation to acquire a computer is powerful — and those children can help their parents become computer-literate, an almost absolute necessity these days whether one is looking for work or managing money. The common sense underlying this approach (every adult of a certain age has been humbled by watching a child at a computer) is breathtaking — and very welcome.

Opportunities and obligations

Computer education goes hand in hand with financial literacy education. As more people, many of them lower-income, turn to the convenience of plastic, there are both opportunities and obligations for financial institutions to work with consumers — directly or through community-based organizations — to ensure that previously unbanked customers understand debit-card finance and that they are offered access to savings accounts and similar wealth-building products.

Banks reaching out to low- and moderate-income consumers with low-cost debit accounts, remittance services, EITC links, individual development accounts, and similar products and services may receive Community Reinvestment Act (CRA) service test credit for such initiatives.

As one would expect, the regulatory environment is evolving, along with the products themselves. But there should be no need to wait for a further regulatory impetus to ensure, for example, that consumers are fully protected against losses from theft, unauthorized transfers, or other circumstances beyond their control, and that fees are transparent and fully explained in advance. Banks committed to customer service and the preservation of their reputations will take such steps in any case, recognizing that they are simply good business practices. Similarly, when working with third-party vendors, banks will be alert to the need to perform due diligence to ensure the success of their new debit-card rollouts.

Payroll cards and other stored value cards, when accompanied by reasonable fees and linked to mainstream banking services, represent a promising way to increase consumer choice and to lead unbanked consumers up the ladder of financial sophistication, so that they can learn to use savings and credit to their advantage. A bank offering such cards to people unfamiliar with mainstream banking can cross-sell other products and build mutually profitable relationships.

What it takes, more than anything else, is a willingness to think outside the box — to recognize that the unbanked are, by and large, just as interested as everyone else (perhaps even more so) in making their money work harder and earn more. In the pages of this issue of Community Developments, and in our extensive online resources, you will find many worthwhile ideas to spur your own thinking about how to link consumers’ aspirations with innovative banking services.
The United States is, as we all know, an increasingly diverse nation. Many come from countries where banks may not have been trusted allies; others, whether immigrant or native-born, may have never had the chance to do more than go from paycheck to paycheck, or from one month’s assistance payment to the next. A bank that doesn’t write-off this market segment can help create many kinds of wealth, including some that aren’t measured in dollars alone. That’s the true power — and promise — of plastic.