Over a dozen financial institutions have applied to be the issuer of the Treasury Department's Direct Express electronic bank accounts for depositing Social Security and other federal benefits.
The Treasury touts the product as a safer, easier, and more convenient way to receive and access monthly benefits. In part, this is a strategy by the federal government to lower expenses for taxpayers by saving on the issuance of benefit checks. Compared with the 89 cents for sending a check each month, electronic deposits cost a mere 9 cents a transaction — a savings of up to $125 million a year.
But beside the obvious administrative benefits, this strategy signals there is real government interest in delivering a low-cost, high-value financial product to the elderly and other Americans of modest means.
The federal government is not the only one interested in facilitating the delivery of reasonably priced financial products and services. Mayor Michael Bloomberg's campaign to fight poverty in New York has led to the design of new policy, programs, and even products for this population.
The inaugural step for participants in the mayor's program is establishing a formal connection with the mainstream financial services industry by opening a basic Opportunity New York account. This new product, the result of a unique public-private collaboration, is emblematic of a reinvigorated campaign to bank the unbanked.
It is telling that more than half of Opportunity New York families are unbanked or underbanked. For a myriad of reasons, families across the country are using alternative financial institutions to conduct routine transactions. And it's not cheap. Estimates suggest that as many as 40 million households nationwide are spending significant amounts of their income on things like cashing checks, making payments to others, and changing their paychecks and cash into money orders to pay rent and other bills.
Low-income households use alternative providers because their products and services meet their needs: access to cash; tools to pay bills and send money to friends and family; and small loans to cover emergency expenses. Moreover, depending on the product, the cost actually can be lower than conducting the same transaction at a bank.
A checking account may be advertised as "free," but with an average fee of $34 for bouncing a single check and New York check-cashing fees capped at 1.7%, using a check casher may well be a cheaper alternative than a bank.
However, with new technologies, product designs, and insights into underbanked consumers' demand, banks and credit unions can provide competitive products and services to this population at a lower cost and with more protections.
This demographic represents real profit potential for financial service providers who make an effort to design products these consumers need.
Across the country, city leaders have partnered with the industry to create initiatives such as Bank on San Francisco, an effort to bank the underbanked that couples targeted outreach with redesigned products.
Our research has provided the basis for bipartisan legislative proposals that would get people banked and spur new savings. The New Savers Act, which was introduced in August by Senators Hillary Rodham Clinton and Gordon Smith, would provide low-cost accounts to those without them. What's more, it would create an innovation fund for the industry to explore new products and strategies to meet the needs of lower-income families.
A growing number of bipartisan proposals call for the establishment of children's savings accounts to ensure the next generation is banked from birth. And getting individuals banked early can have a number of positive effects. Account ownership is one of the better ways to learn how to manage finances. Our newly released research shows that account ownership, when combined with financial education, leads to more frequent and wiser use of financial products.
We are developing a proposal that would connect underbanked consumers with accounts for transactions and savings at tax time. We propose leveraging tax refund dollars in combination with a pooled account structure to generate sufficient volume to entice financial institutions to deliver a transaction and savings account at tax time.
Filers with adjusted gross incomes of $30,000 or less are refunded $80 billion each year, according to 2005 IRS data. The accounts would be structured so that holders would receive their refunds on their account and reload them throughout the year with wages and salary. The account, accessible with a network-branded card, could be used for point of sale transactions, to access cash, to make online purchases and pay bills, and possibly to make remittances and secure money orders. It also would contain a savings component, which could help to meet short-term emergency expenses. We're calling it the ATA, short for Assets and Transaction Account.
Demonstration projects have proven the poor can and will save. Technology has cut transaction costs, and new products are beginning to emerge. It's time for the financial industry, with a boost from government, to develop products and services that meet underbanked consumers' needs at a reasonable price and yield fair returns for the industry.
