The digitization of payments can generate savings in several ways. It can make it possible to buy online at better prices and through loyalty programs and merchant discounts.
Perhaps the most obvious source of financial benefits from digital payments, however, is the cost to check-cashing businesses, which can get expensive.
April is Financial Capability Month in the United States, and when we talk about affordability, we generally focus on two things: educating financially underserved people to become more savvy consumers of financial services, and finding opportunities. ways to help them connect to better financial services.
Certainly, financial access and knowledge are essential for financial capacity. But another obstacle on the road to financial health – obvious but more difficult to overcome – is simply the lack of money in their pockets, let alone their bank accounts. To build long-term financial security, they need to keep every penny they can. And any comprehensive financial capability program should help find ways to help people do that.
You’ve probably heard the old adage, “poor man pays twice”.
It’s an ongoing problem for the 33 million households in the United States that are either unbanked or underbanked, according to the 2017 FDIC survey. These Americans are much more likely to use alternative non-bank financing services such as payday loans, auto title loans, and check cashing services, which can be expensive compared to traditional financial services.
Check cashing services, for example, typically cost 2% to 3% of the check amount, or about $ 15 to $ 23 to cash the average check for additional security income of $ 770. According to FISCA, the check-cashing business group, its industry collects $ 58.3 billion in checks each year. With a 2% fee, that would represent $ 1 billion in check-cashing fees per year – a billion dollars that financially underserved Americans pay just to have access to their money.
In the usual discussions of financial capability, it often seems to be assumed that financially underserved people turn to these expensive products because they do not have access to banks or do not understand the nature of these products. The implication is that improving one or both, access or understanding, will drastically reduce the need for these products.
But that’s not the whole story. If people don’t have the funds to meet an urgent need before the next payday, they might not have a better option than a short-term payday loan, for example. Financial education and access cannot change this reality; this is largely due to a lack of funds. Putting – or just keeping – more money in the pockets of underserved people could help, however. And any comprehensive approach to financial capability must address this issue.
One way to help underserved people keep more of their money is to digitize government and employer payments. Using digital payments offers significant savings over check cashing. Public sector payroll cards and prepaid cards issued for depositing government benefits are two of the most well-known examples.
In the area of government benefits, the most prominent of these programs is the US Treasury Department’s Direct Express prepaid card program, issued by Comerica Bank and under the Mastercard brand. The vast majority of cardholders in the program are unbanked. Each month, millions of Americans receive Social Security, Veterans’ Benefits, and other government payments loaded directly onto these cards.
The federal government loves this approach, and it’s no wonder: it saves American taxpayers millions of dollars each month, compared to distributing paper checks. And for recipients, it addresses both access and education by providing a prepaid debit card that works just like the cards many of us take for granted and includes a financial literacy program with an extensive curriculum. , offered free of charge to all cardholders.
But the best benefit for recipients is that they can access their funds on the card for free to make purchases or pay bills in person, online or over the phone, and withdraw money – again, for free – at virtually any bank branch. nationwide or to tens of thousands of networked ATMs. Prepaid card and payroll card programs like these can help cardholders save money regardless of the brand of card.
Developing initiatives that use digital financial solutions to not only provide better access and better financial literacy, but also to help people avoid these high fees, will dramatically improve the financial capability of Americans on the fringes of the formal financial system.
The powerful integration of the three drivers (access, advice, and savings) more clearly emphasizes discussions of financial capabilities over the well-being of underserved people in America.