March 2010 Archives

Do you use a rubber band and your pocket rather than a bank account to store cash?

Or do you hide money under the mattress? Are you too busy to balance your checking account? Want to give your kid in college a debit card with limited balances? Need a safe way to carry cash for a trip?

If you answered "yes" to any of these questions, Nevada Federal Credit Union and some of the country's biggest retailers have a product designed for you.

You need to book a flight, rent a car, reserve a hotel room or buy a shirt that's only available online but you don't have a credit card or a debit card.

In today's America, no plastic usually means no deal when it comes to such transactions.

So you walk into your local supermarket and find an alternative: a prepaid debit card. Deposit money onto the card, and you can use it for any transaction you could make with a credit or debit card.

But the solution comes at a price. There is a fee for activating the card and possibly a fee each time you use it -- and there can be an inactivity fee if you don't use the card often enough.

Customers say they like the cards' convenience, and for some, they are cheaper than traditional checking accounts, with which they can incur low-balance fees, overdraft charges and fees for some ATM transactions. People without bank accounts must buy money orders or pay high charges at check-cashing stores.

Austin resident Stephanie Walsh, 48, said she started using a prepaid debit card from Austin-based NetSpend Corp. about a year ago "because I was tired of bank charges."

Walsh didn't close her bank accounts, but she estimates she saves $20 to $40 per month using a prepaid debit card instead of an ATM card.

Walsh said she was drawn to the prepaid debit card because it allowed her to better "manage my own money."

Rosalia Salinas, 27, of Del Valle has been using a Walmart MoneyCard for about a year.

"My mom never showed me how to manage money, so my husband is showing me how to do that with the card," she said.

However, Salinas said, "I think the fees are a little bit too much. They charge you $3 every time that you put money on the card, and if I check the balance, they charge $3."

As the U.S. economy evolves away from the use of cash, more people are using nontraditional banking methods such as prepaid debit cards.

Providers say the cards are a legitimate alternative for consumers who don't -- or can't -- use traditional banking services, and are safer than cash.

Critics question the fees, which vary widely among providers, and say the cards lack the protections of traditional credit or debit cards and target low-income people.

Unlike traditional debit cards, prepaid cards are not attached to a consumer's bank account. Instead, customers deposit money with the card's provider to "load" the cards.

Before 2000, prepaid debit cards were virtually unknown, but their use is growing fast.

In 2007, consumers loaded about $2.1 billion on the cards, according to the Mercator Advisory Group, a research firm for the payment industry. That increased to $36.6 billion in 2009 and is expected to reach $119 billion by 2012.

The industry's popularity hasn't spared it from critics, who say prepaid debit cards carry high -- and often hidden -- fees.

Card fees can vary widely, according to a 2009 study by Consumers Union, the nonprofit publisher of Consumer Reports . The study cites 12 types of charges, from fees for activations, transactions and inactivity to charges for customer service.

However, those in the prepaid debit card industry say their fees are no worse, and in some cases are lower, than those charged by banks for checking accounts and other services.

An industry-funded study by Bretton Woods Inc., a financial advisory firm, said a checking account can cost as much as $353 a year, assuming six overdraft charges as well as other fees. That compares with $207 for a direct-deposit prepaid card. Without overdraft charges, checking account fees tended to be lower than those for prepaid cards.

A number of consumer advocacy groups have called for more transparency about the fees and more legal protections for customers.

If a traditional debit card is lost or stolen, the Electronic Fund Transfer Act, which is administered by the Federal Deposit Insurance Corp. , limits the card owner's liability to $50 if they report unauthorized use within two business days.

Prepaid cards should have the same legal protection, said Jean Ann Fox of the Consumer Federation of America.

Those in the prepaid industry say they voluntarily provide protections for consumers.

NetSpend CEO Dan Henry said his company limits liability for customers in the event a card is lost or stolen because it is good business.

"I am a free-market evangelist, and I don't think the FDIC needs to be mandating those laws," he said. "I can tell you those companies (that don't protect consumers) won't be around."

Don Finn, chairman of the University of North Texas' accounting department and an expert on business ethics, said there is reason for concern because "consumers do not always have the financial expertise to make rational financial decisions, especially if their needs are great."

However, Finn said in an e-mail interview, the "reality is that the existence of a prepaid debit card is not illegal nor even unethical."

"At some level, there is the 'buyer beware' principle," said David Miller, director of

Princeton University's Faith and Work Initiative and an expert on business ethics.

"The consumer has their own responsibility. They are legal adults -- they can buy liquor, they can vote, they can serve in the military -- so they can decide if they want to buy this product."

Job losses in the U.S. may be in the process of bottoming, but the employment market is surely nowhere near being healthy yet. So, it's not surprising that innumerable people find themselves lacking the cash to make even the most basic purchases or pay their usual monthly bills.

That's why "money stores" that provide short-term loans by using car or jewelry as collateral have become enticing to Americans who need funds to cover necessities -- especially when their credit card limits have been cut, they're unable to get a traditional bank loan or they even lack any bank account at all.

Most people who turn to such short-term credit sources do so to "cover recurring expenses like rent, food or bills . . . and to cover home mortgage payments," according to a survey by the nonprofit Texas Appleseed. And yet, top federal regulators warn that people who use these loans repeatedly can end up in serious financial hardship because the loans come with such high interest rates.

Small Storms Become Big Storms

So, what are people to do? Being in a financial tight spot is fraught with difficulty, but there are a few options to consider. Active initiatives are now available from both governmental and nonprofit groups.

For instance, Joshua Reynolds runs a program at nonprofit organization Family Services of Greater Houston, which makes auto-title loans and offers low-cost alternatives to payday loans (in which a working person's next paycheck serves as the collateral). "A lot of our clients don't have the cushion to weather small storms, but those become big storms when they take out high-cost loans," says Reynolds, a vice president of emerging programs at the nonprofit. His group writes loans with annual rates that average around 8%, compared with effective annual percentage rates of 300% to 500% or more for typical money-store loans.

The group works closely with each borrower to ensure that he or she has the income to make repayments, and it helps the borrower budget a monthly payment schedule. Instead of writing out a short-term loan that most people cannot pay back in a month's time, Family Services of Greater Houston will make a $5,000 car loan, for example, for around a two-year term with a $200-a-month payment. Financial coaching is mandatory for anyone who takes out these loans. "We want to break the cycle and help them build savings for future emergencies."

Reynolds says in his experience, each borrower his group works with wants to repay loans and to improve credit. So far, the group has made just under 2,000 loans, and its experience has been heartening. "Nine out of 10 borrowers successfully complete their loan," he says.

Affordable Loans From Banks

Another network that borrowers can tap into is a pilot Federal Deposit Insurance Corp. small-loan program, which ends in October 2010. The program has 30 participating banks in several states and is intended to identify effective and replicable business practices to help banks incorporate affordable small loans into their mainstream services.

"Banks are well positioned to offer small-dollar loans at greatly reduced costs and help their customers build savings in the process," said FDIC Chair Sheila Bair in a recent speech. In this program, people can get loans up to $1,000 with annual percentage rates below 36% and no prepayment penalties.

Bair has also shone a light on Americans who are "unbanked" or "underbanked." Last year, she released a survey that showed over a quarter, or 25.6%, of all households either have no checking or savings account, or have a bank account but still choose to rely regularly on alternative lenders such as payday loan stores and pawnshops.

"These stores lure people in by making such things as money orders much cheaper than banks," says Anthony Santiago, chief operating officer of Newark Now, a program that aims to improve the industrial city in New Jersey. "Many landlords only accept money orders for rent, and people need the service cheap. It's as simple as that."

"An Opportunity to Get a Second Start"

Since the FDIC released its report, several states and cities have joined a program called "Bank On" to get the unbanked to open accounts. For example, banks that have signed up in the Newark effort offer people one free money order a month, and they're making financial education a key component of the initiative. "It's an opportunity to get a second start, act responsibly and learn to save for unforeseen expenses," says Santiago.

The program has different components in different cities and has also been adopted by Seattle, California, Illinois, Denver and St. Petersburg, Fla., among others.

Other initiatives have been launched elsewhere. Lyn Haralson, a community affairs specialist for the Federal Reserve Bank of St. Louis, has been instrumental in developing an alternative payday loan program in Arkansas. The group, called Arkansans Against Abusive Payday Lending is a coalition of 36 consumer, military and faith-based organizations in the state.

It offers a loan of up to $500 with no application fee, and the interest rate doesn't exceed 17% a year. Borrowers are given free financial counseling. And they're also loaned an additional 100% of their loan that gets deposited into an interest-bearing savings account, as a first step toward a healthier financial life. The six- to 12-month repayment term is much more liberal than traditional payday loans, which require payment in full by the next paycheck.

It Pays to Do Some Homework

It's also worth reading fact sheet on alternatives to payday loans that the independent consumer advocacy group Consumers Union publishes. It advises, among other things, that consumers try to get an advance from employers to meet short-term cash needs.

Despite the pressure felt by people in dire financial straits, running into the first money store they see shouldn't be their first move because other options are often available. The extra homework will save people from getting into a bind that's hard to get out of, as others have found.