The Underbanked

Posted on October 15, 2009
Filed Under Credit

The Underbanked is a term that’s used in the financial world to represent people or households that have very little or no relationship with any financial institution. Sometimes the term Unbanked is also used and while it’s difficult to know exact numbers, the general consensus is that there may be as many as 40 million households in the United States that fall into the Underbanked/Unbanked category. To put it simply, there are a lot of people out there that either don’t have a bank account or don’t want a bank account.

These are not people who don’t work for a living. We’re not talking about free-loaders here. We’re talking about real flesh-and-blood people who go to work, buy normal goods and services, and pay their taxes.

Sometimes these consumers are new to the financial world; they’re either new to the job market like recent graduates or new to this country like recent immigrants. In either case they often have a tough time establishing themselves.

Sometimes they’ve been in and out of the financial world and now they have bad credit or no credit at all. In this case, perhaps the banks don’t want to do business with them because they see them as a risk or at least not a potentially profitable customer.

And sometimes these people have plenty of credit, but they have no trust in or love for banks. They see banks as nothing more than brick-and-mortar scam artists and they’d rather keep their money in a mattress than to turn it over to the strangers behind the teller’s window.

In any case, all of these people still make financial transactions every day and still have financial needs. So it’s a little mind-boggling when you think about it. How do they cash their paychecks? How do they buy anything on credit? How do they buy anything online? The answers are that some things they can do only with great difficulty and other things they simply can’t do at all.

Take cashing a paycheck for instance. In many cases the Underbanked have to resort to a Check-Cashing business – one that charges an exorbitant rate just to cash their checks. So they take an earnings hit every time they cash those checks. Something that we take for granted like Direct Deposit is unavailable to them. And so what we end up enjoying for free (the simple cashing of a payroll check) costs an underbanked consumer from 2 to 4 hours of pay.

But have no fear. With 40 million households full of potential customers, there was bound to be a product or service that would come along and fill the gap. That product was the prepaid debit card.

The prepaid debit card industry (sometimes called the stored value card industry) was born to serve the underbanked community. Most of the benefits that flow from a prepaid card are tailor-made for those with little or no banking ties. It’s a perfect fit.

For instance, when cash has been loaded onto a prepaid card an underbanked consumer feels a higher level of confidence and security. That’s because they’re not travelling around with their entire paycheck in their wallet. If it’s lost or stolen, they can get a refund. You can’t do that with lost cash.

Then there’s the ability to buy things over the Internet. With a reloadable debit card it becomes possible. They work just like credit cards do on almost all business sites. Even recurring subscription payments can be set up for things with a prepaid card. Try doing that with cash.

Prepaid debit cards also give people access to their cash via ATMs. When they get a card they set up their own PIN just as they’d do with a credit card. And when they go to the ATM they’re pulling out their own cash from what they previously loaded onto the card. That means for things that are more appropriately paid for with cash – can be paid for with cash.

There are all sorts of smaller benefits to prepaid debit cards as well. For instance, spending can be tracked automatically online; all anyone needs to do is look up and print out their statements. Immediate balance alerts can be sent to any customer over their cell phone to keep them up-to-date on where their balance is. Direct deposits can be set up from just about any paycheck too so those large check cashing fees can be a thing of the past.

Then there’s the prestige factor. Just the simple ability to hold a debit card in their hand, knowing it can be used anywhere they want to use it, knowing it gives them equal access to many goods and services, and knowing that it belongs to and is controlled by them is a very appealing benefit. It doesn’t necessarily save anyone any money, but it’s a benefit nevertheless because feeling good about your own finances is a good feeling indeed.

So the prepaid debit card industry lives to serve the underbanked. And it has grown by leaps and bounds in the short number of years it has been in existence because it has delivered a good product that works. Now the industry is maturing and reaching out to those of us who are not underbanked. It’s developing a wider scope of services to help out the middle class who are trying to wean themselves away from their credit cards.

Many people developed minor or severe “credit addictions” in the past decade and are now waking up to the fact that it was a bad idea. Making credit card purchases and thus paying for things with your future earnings has proven way too costly for a lot of us and prepaid debit cards are going to help us work our way back to financial sanity.

Imagine, saving up for that big-ticket purchase by putting the money on a prepaid debit card for a couple months until you have enough to buy it outright? Then pay for it and take it home – no finance charges, no minimum payments, no worries about your credit, just one simple, complete, forget-about-it type transaction. You can do that with a prepaid debit card.

Maybe you want to teach your teenager the value of a dollar so you put their allowance on a prepaid card and let them see how the real world works. Not a bad idea either is it? (see Start with a Student Debit Card)

Or perhaps you don’t like playing the monthly cat-and-mouse game the banks play with your credit card bill and payments and just want a simpler way of doing things. Well then, a prepaid debit card is the right tool for you.

In any case, whether you’re underbanked or overbanked, hate banks or love them, couldn’t care less or couldn’t care more, prepaid debit cards deserve at least a look-see. The industry’s growing for a reason and you just might be part of that growth too.

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