Banking and Prepaid By William Dunn, CPP
Card Use on the Rise
One out of every 13 households in the United States is unbanked, according to the Federal Deposit Insurance Corporation (FDIC), which released its 2013 National Survey of Unbanked and Underbanked Households in October. For payroll professionals, this report provides insight into the reasons employees may give for declining participation in direct deposit.
The number of unbanked households decreased since the FDIC released its 2011 report and is close to the figures found in its 2009 report. The FDIC suggests that may signal that the public's confidence in the banking system has strengthened. And while the number of U.S. households with bank accounts increased, so did the number of U.S. residents relying on prepaid debit cards as an alternative to traditional bank accounts.
The FDIC encourages people to participate in the country's financial system as a matter of economic inclusion. It states, "When households open an account at a federally insured depository institution, they establish a mainstream banking relationship. This relationship provides opportunities for households to deposit funds securely, conduct basic financial transactions, accumulate savings, and access credit on fair and affordable terms."
Unbanked vs. Underbanked
An "underbanked household" is one that has relied on one or more alternative financial services (AFS) in the previous 12 months. AFS include money orders, check cashing, payday loans, refund anticipation loans, rent-to-own services, pawn shop loans, or auto title loans from non-bank providers. The FDIC's figures on the number of underbanked households are not comparable to previous surveys because it amended the definition of AFS. Under the FDIC's current definition, 20% of U.S. households were underbanked in 2013. That equates to 50.9 million adults and 16.6 million children.
The FDIC defines an "unbanked household" as one in which no adult (age 16 and older) maintains either a savings or checking account. A banked household may include individuals without bank accounts. Unbanked individuals who reside in a banked household are not included in the overall number of unbanked individuals.
One in 13 unbanked households equates to 7.7% of all households in the United States. "This proportion," according to the FDIC, "represented nearly 9.6 million households composed of approximately 16.7 million adults and 8.7 million children."
From the other perspective, that means 92.3 % of U.S. households maintained bank accounts in 2013. Of all U.S. households , the FDIC found that 88.4% had checking accounts and 68.8% had savings accounts.
Individual reasons for not having a bank account varied; however, losing or gaining a job appeared to be the most significant reason for either giving up a bank account or opening one. Among those who recently opened bank accounts, the number one reason for doing so was to receive direct deposits. More than half (57.5%) of those without bank accounts said that they did not have enough money to open an account or maintain minimum balances.
Prepaid Card Use
"The survey results suggest that sizable proportions of unbanked households and, to a lesser degree, underbanked households, relied on prepaid cards for many of the same purposes that households associate with checking accounts," the FDIC says. These purposes include paying bills, withdrawing cash at ATMs, making purchases, depositing checks, and receiving direct deposits.
The banked, underbanked, and unbanked use prepaid cards, the FDIC found. In all, 7.9% of U.S. households had used prepaid cards in the previous 12 months. The highest rate of growth for prepaid cards was among the unbanked. The unbanked were also the most active users of prepaid cards. Unbanked households were more than twice as likely as underbanked households to have used a prepaid card in the past 30 days, and nearly nine times more likely than banked households.
For many, prepaid cards appear to be a stepping stone to move from being unbanked to fully banked.
"Almost half (46.5%) of unbanked households that used prepaid cards in the last 12 months reported being 'very likely' or 'somewhat likely' to open a bank account in the next 12 months, compared with 32.6% of unbanked households that had not used prepaid cards," the FDIC found.
GPR vs. Payroll Cards
It is significant to recognize that the FDIC survey did not differentiate between general purpose reloadable (GPR) debit cards, which may be purchased at retail stores, and payroll cards, which are available through an employment relationship. Although GPR cards and payroll cards offer many of the same capabilities, they are separate financial products subject to different regulations. Most significantly, payroll cards are subject to state wage payment laws, which may address the methods by which a cardholder may access the wages and the range of fees that may apply to card use.
The FDIC noted that the 2013 survey increased the number of questions relating to prepaid cards. However, "to help make room to accommodate the new questions, the question regarding households' use of payroll cards was dropped (2011 Survey Q38). Payroll card use was very low, based on the 2011 results" (Appendix J – 2013 Revisions to the FDIC National Survey of Unbanked and Underbanked Households, p. 151).
Keith Ernst, Associate Director of the FDIC's Research Branch, will explain the ramifications of the report at APA's Capital Summit on March 2-3, 2015.
William Dunn, CPP, is Director of Government Relations for the APA.