April 2010 Archives

Florida residents drawing unemployment benefits will have the option of a debit card instead of direct deposit or a check beginning this fall, according to the state work force agency.

The debit card system is expected to save Florida about $317,000 a year, said Robby Cunningham, spokesman for the state's Agency for Workforce Innovation. But critics point to concerns about the agency's ability to make the switch easily, based on its aging computer system, and express concern about potential fees for users.

The agency has contracted with Affiliated Computer Services, a Dallas company that operates debit card systems for 10 states. The unemployed will be able to use the cards at any Wachovia/Wells Fargo or MoneyPass ATM for free.

Unemployed workers also will be able to use the debit cards at any restaurant, store and other locations where Visa-branded cards are accepted. There are no restrictions on what can be purchased with the debit cards and users also will be able to get cash back on purchases without a fee at many locations, Cunningham said.

Harold Pratt, 54, former commodities broker in Coral Springs seeking a management position, said he would prefer his unemployment benefits be deposited in his checking account. "I can check to see that I received the benefits. With a debit card, I won't know it until I go to a machine and find out what's on the card, and then it could say 'insufficient funds,'" he said Tuesday.

The schedule of fees provided by the state work force agency reveals that if someone on unemployment benefits tries to withdraw cash from an out-of-network ATM, the user could be charged $2.25 a transaction, up to a $3 ATM surcharge, and 75 cents to check the balance. However, a user who limits withdrawals from an out-of-network ATM to twice every two weeks won't be charged, the agency said.

When an unemployed worker loses a debit card, there's no fee to replace it. However, additional cards will cost $4 each, with a $14.50 expedited delivery fee, according to the agency's agreement.

If the balance falls to zero on the card, there will be no overdraft fees because the card owner would only be able to purchase up to the available amount on the card, Cunningham said.

Unemployment insurance debit cards have been controversial in other states because of the fees associated with them, taking money out of unemployed workers' pockets when they can least afford it.

-- Overdrawing on your debit card can cost you big time.

Many banks automatically cover overdrafts, but then charge hefty fees.

Last year alone those fees totaled 20 billion dollars.

New federal regulations are coming this summer that will require banks to ask before signing you up for overdraft coverage.

Should you say yes? Consumer Reports Money Adviser says not so fast.

Charles Berman had no idea he'd overdrawn his checking account.

Then he was hit with a flood of overdraft fees.

It started with a five dollar lunch that generated a 35 dollar fee.

"By the time I found out that I was overdrawing my account, I ended up with hundreds of dollars that I had to pay of overdraft fees for buying small items like a soda," said Charles Berman.

Currently, banks are allowed to automatically enroll you in overdraft coverage that can result in those hefty fees. But that's about to change.

Soon new federal regulations will require that banks get your permission to cover overdrafts.

Should you sign up? Consumer Reports says no. But some banks are pushing hard, sending brochures warning: "your debit card may not work the same way anymore" and "don't lose the flexibility" of overdraft coverage.

"It's true that overdraft coverage can help you in an emergency, say you need to have your car towed and don't have the money in your account. But the fees can be hefty, as much as 35 dollars each time," explained Greg Daugherty of Consumer Reports.

Far better, avoid overdrafts altogether.

If your bank offers it, sign up for electronic alerts when your account balance gets low.

"Another option is to link your checking account to your savings account or line of credit. The fees for that kind of protection are usually about 5 or 10 dollars per overdraft," said Daugherty.

As for Charles, he now checks his accounts frequently online to make sure he doesn't spend more than he has.

Automatic overdraft coverage has been controversial. Bank of America recently announced it's doing away with this coverage altogether on debit-card purchases.

The new federal regulations requiring you to sign up for overdraft protection will apply to new accounts as of July first and, for existing accounts, August 15th.

Most people don't think twice when they hand over a debit card to make a purchase, but not Gregory Meyer. He is particularly wary of debit cards that can be used like credit cards -- and for good reason.

Last summer, Meyer, who lives in San Jose, California, used his debit card to book a rental car that he planned to drive from Memphis, Tennessee, to St. Louis while he was on vacation. The car was supposed to cost him about $240. When Meyer went to make a purchase in Memphis, he discovered that his bank account had been frozen. The rental car agency had put a $500 hold on the account, an amount that was steep enough (and that occurred far enough away from his home) to trigger a fraud alert at his bank.Meyer immediately got his account reactivated, but the $500 hold remained -- not only until he turned in the car but for two days afterward, as well. "It just ticked me off," he says, pointing out that his $500 could have been in his bank account earning interest rather than stuck in cyber-banking limbo.

In many ways, Meyer got off easy. Three years ago, an identity thief stole Lucinda Lu's debit card number and made $600 worth of fraudulent purchases. The back and forth between her bank and the merchants consumed a lot of time and caused a lot of headaches. Lu eventually got some of the charges reversed but was unable to recover close to $160 worth of the charges. "Because my loss was so small, it really didn't get any attention from the police," Lu says. Unfortunately, what's not a "big deal" for law enforcement can have a big impact on someone struggling to pay their bills. "I no longer trust debit cards, and I don't use one now," says Lu.

Jacque Tiegs of Clair Shores, Mich., had a similar experience a few years ago. She used her debit card at a hotel in Milwaukee for incidental charges and found out on her next month's bank statement that someone had run up a $3,500 bill at another hotel of the same brand in Chicago. Her bank couldn't (or wouldn't) solve the problem, and the hotel claimed she had run up the charges. Only by threatening to go to the police and offering proof that she had been out of town on a work assignment was she able to get the charges reversed.

The Dos and Don'ts of Debit Cards
Don't think that the same protections you get from your credit card apply to your debit card. If someone steals your credit card number and runs up a big bill, you won't be responsible for the fraudulent charges -- at least not until the card company completes its investigation and probably not at all if they find evidence of fraud. But if someone steals your debit card information and starts charging away, you're on the hook. The money comes straight out of your bank account. Not only are they your funds -- with no one there to cover for you -- but getting the money back can be a huge hassle that can easily take a month, if not more, to resolve.

Even if your money is only locked up temporarily, as Greg Meyer's was, it can still be devastating, especially if you don't have a large balance to tide you over. Not only that, but if the hold is greater than your balance, it can trip an overdraft protection and subsequent transactions can be denied or add to your overdraft woes.

So how do you protect yourself - and your debit card? "Be alert when there's an opportunity for so-called 'skimming' or where people can look over your shoulder to track your PIN number," says Tim Lukens, a senior vice president at Affinion Security Center, a company that makes anti-cybercrime software for big banks. Also, think twice before using your debit card at a restaurant, where you don't actually see the server swiping it, or at gas stations, where surveillance cameras can record you keying in your PIN.

Online shopping is another potential danger zone. If you can't use a credit card for online purchases, Lukens says to make sure you're only using a debit card when shopping at well-established, trusted merchants. "I think that's where consumers are at the most risk, when they don't know a site," he says. Before you enter your debit card number, look at the bottom of the web page for security seals from companies like VeriSign, Cybertrust, PCI Compliance or Truste, he suggests. Be warned, though: "A number of fraudulent sites will cut and paste logos," Lukens says. Click on the logo if you're unsure; if it's the real deal, it will take you to that site's security verification.

The FTC has created new regulations for merchants that go into effect June 1 that will require that financial institutions set up checks that will trigger a response if a customer's card is used fraudulently. This new requirement, commonly called the "red flag rule," should help, Lukens says, but thieves are clever and illegal charges can sometimes slip through the cracks.

Getting burned by a debit card once can change the way people purchase in the future. Identity theft victim Lu says she now only pays by cash, check or credit card. She even went to her bank to request an ATM card that couldn't be used for debit purchases if it fell into the wrong hands. Lu admits not having a debit card can be a hassle sometimes, especially if it involves the time-consuming process of writing a check and having it approved as opposed to just swiping a card. But she says it's worth her peace of mind. "If I felt completely secure, I'd consider getting a debit card again," she says. "But at this point, I don't think they're safe."

It is almost 40 years since "modern" microfinance was born. Money has always been lent to the poor but in the Indian subcontinent in the 1970s Grameen and BRAC made it big. Providing tiny loans to the poor (usually women) to help grow tiny businesses, the top-down, Bretton Woods development world watched as the borrowers repaid fastidiously, cross-insured their loans and used the working capital to grow.

But microfinance is not yet global. Its centres are in the subcontinent, Central and South America, the former USSR and Yugoslavia and, slowly but surely, Africa. And with millions of people remaining outside mainstream financial services in the developed world, it is yet properly to permeate richer societies.

In the US, microlending has been growing slowly for the past 30 years and it should find a larger market as a result of the credit freeze. There are 9m US households untouched by mainstream banks and another 21m using alternative credit means such as payday loans and pawnshops. With money-lenders' interest rates in developed societies sometimes over 1,000 per cent APR, there should be a market - and arguably a moral imperative - for the provision of credit and other financial services to the unbanked poor.

But despite the attractiveness of microfinance in principle, criticisms are many: there is continued dependence on subsidies from donor organisations; few organisations reach break-even; and there is probably confusion as to its purpose. Is it a social tool for poverty alleviation or a potential mass market? It can, and perhaps should, be both. But someone will have to work out how to make it scalable.

Some organisations have made progress. Accion Texas (AT), a licensee of the US Accion network, has the largest microfinance loan portfolio in the US. It has provided more than 10,500 loans since its establishment in 1994, totalling $93.6m disbursed and $20.3m in its active portfolio as of September 2009. Loans range from $500-$100,000 and are disbursed from 14 offices to more than 2,000 active clients across Texas.

AT's relative success, according to Gustavo Lasala, AT's CFO, is due to the management services and back office support that it offers to other microfinance institutions (MFIs) - helping to reduce their costs. "Accion is now across four time zones and this brings economies of scale," Lasala says. "For the organisations we support, using our systems reduces their costs by a third to a tenth, compared with doing it themselves."

Citigroup has invested in AT. Bob Annibale, Citigroup's Global Head of Microfinance, says it joined up with Accion two years ago and was especially impressed with its data. "[The data] went back 12-14 years and was of high quality. We were also enthusiastic about how many of Accion's clients were start-ups - 50 per cent or so - and its focus on business development." AT was reaching a client segment Citigroup had previously been unable to reach.

Most AT clients use loans for working capital or equipment purchases and many have received more than one loan from AT. Although 46 per cent have been in business for less than one year, 32 per cent have been in business three years or longer. AT's market is really those who would otherwise be using credit cards for business capital.

The past two years have seen difficulties in the sector, as the poorest have been hit particularly hard by the credit crunch and the economic downturn.

"The portfolio performance for MFIs generally began deteriorating as early as April 2007," Lasala says, "and since then, there has been a gradual worsening, with a levelling off in Q4 2009." Accion, he says, has nevertheless outperformed the market. It lost 9 per cent of its portfolio in the 2008-2009 fiscal year but now delinquencies are steady at 6 per cent and restructurings at 5 per cent.

Accion's selling point is a technical platform for processing applications. This makes for more volume and efficient credit scoring - a homogenised approach that allows greater operational efficiency. So far, 12 other organisations use AT's platform to do their underwriting - freeing them up to focus on providing retail services.

In Britain, Street UK - the first MFI in the country to become sustainable, according to Rosalind Copisarow, a co-founder - also combines retail lending with providing back office support and platform design. Set up in 1998, Street UK offers services including business advice and support, enabling micro-enterprises and the self-employed to move from undeclared work into the tax-paying economy.Unlike AT, Street does not make predominantly business loans.

"Only about 14 per cent are for some form of entrepreneurship," says Martin Hockley, chief executive and co-founder. The remainder are personal consumption loans at rates of 35-37 per cent. Street UK remains a minnow, with three branches in three locations, each handling about 1,500 loans.

In addition to the retail service, however, Street UK provides a range of back office support, tailored to the needs of partner organisations, and sells bespoke software platforms.

Some MFIs have shone just for a while. Before undertaking his current role as Manager of Community Finance at Oxfam America, Jeffrey Ashe helped to set up Working Capital (WC) in 1990 - a Grameen-style MFI pioneer in New England. "We really did reach the poor," Ashe says. With a small grant from the Ford Foundation, WC spread from rural Massachusetts to Vermont, New Hampshire and Maine. "Our clients were very poor, they included illegal Hispanic immigrants and the loans were small - not the thousands of dollar loans provided by so-called 'microfinance' in America."

WC expanded quickly, reaching 5,000 group members within a couple of years. In 1994, the model spread on a franchise model (Working Capital in a Box) to Delaware, Florida, Georgia and far east Russia.

WC had a 10-year run before operations ended, with the exception of some activities in New Hampshire. The Russian programme evolved into one of the largest MFIs in Russia. But why did WC ultimately not work out?

Ashe says: "When we started in 1990 the country was in a deep recession and banks had pulled out of marginal markets and moved upscale. Unemployment in the areas we were working in was upwards of 12-14 per cent - just as it is today. People were pouring into self-employment and there was no competition from other organisations." It was, he says, a perfect set of conditions, with all traditional institutions pulling out of the low end of the market.

By the time WC was no longer able to stay afloat (in 1997-1998), unemployment was close to 2 per cent, the financial sector was awash with cheap credit and many banks were providing individual loans - not just to groups. "We were killed," Ashe says, "by the twin perils of prosperity and competition."

The best-known name in global microfinance remains Grameen, begun by Muhammad Yunus, Nobel Peace laureate. He is bullish about microfinance's prospects in the US and insists that it must make money. As he told Time magazine recently: "If it's not profitable, it's not microlending. It's charity."

Since 2008, Grameen America has collected 1,700 borrowers in New York City and in June 2009 it opened a second branch in Omaha, with future branches planned for San Francisco, Boston and Charlotte. As one might expect, Grameen's model is closer to traditional, undeveloped world microfinance than Accion's. Its borrowers are mostly immigrant women and they use a group savings model - as seen in dozens of developing countries around the world. The women meet regularly with their group manager. If any of the women do not pay, credit is cut off to the entire group. So far, the results have been as positive as those seen in Bangladesh in the 1970s, achieving 99 per cent repayment.

But the shortcomings of microfinance in the developed world remain. Few MFIs are sustainable, or at break-even. Efficiency is lacking. The understanding of, and appetite for, such a sector is low. And there are continuing doubts about scalability. Jeffrey Ashe says: "In the US or UK, 10 per cent of the population is either fully or part-time self-employed. In the developing world, it's 40-60 per cent. The market is smaller."

On the other hand, Gustavo Lasala claims the market is barely tapped. "There are 25m small businesses in the US. Assume that 10 per cent of that number is our target market (10 per cent of US households are unbanked). Assume 30 per cent of these require microlending services. With an average loan size of $7,500 you get a potential market of $5bn. Now consider that the aggregated microfinance portfolio of all microlenders in US is somewhere between $200m and $300m. That's a drop in the bucket."

There may be obstacles specific to the developed world. According to economist Jonathan Morduch, of New York University, microloans have less appeal in the US because people think it is too difficult to escape poverty through private enterprise - something that is not an issue in Bangladesh. He is critical of what he says rests on a specious win-win proposition: that MFIs that follow the principles of good banking will also be those that alleviate the most poverty.

Morduch derides this vision - detailed as a set of "best practices" circulated widely by the Consultative Group to Assist the Poor (CGAP), the US Agency for International Development and the United Nations Development Programme. In an article in 2000 in the journal World Development, he argued that while some found the win-win argument to be self-evident, most practitioners were not convinced. "Despite keen awareness of best practices, nearly all programmes remain substantially subsidised. And recent surveys show that the programmes that target the poorest borrowers generate revenues sufficient to cover just 70 per cent of their full costs." Most are failing to get enough clients to become sustainable.

Successful microfinance should arguably try to lose clients anyway. "What Accion Texas and Accion USA are doing," says Bob Annibale, is "helping people to build a credit history, which they require to access mainstream banking." A successful sector, then, should be helping to lift people up to where the banks will lend to them. It is a peculiarly self-defeating thought.

For this to happen, MFIs need to reach the large potential market and to push the doorstep lenders and loan sharks away from the vulnerable poor. To do this, MFIs must demonstrate efficiency and innovation. The experiences of AT, Grameen America and Street UK show that developed-world microfinance has a challenging path ahead.