That millions of Americans are without a bank account -- "unbanked," in the parlance of policymakers -- has historically been treated as a kind of social problem.
Traditionally seen as a consequence of poverty or serious financial distress, not having a checking account locks consumers out of the financial system, forces them to pay high fees for services like check cashing and exposes them to risks such as losing a large amount of cash to theft.
But the advent of prepaid debit cards and the near universality of direct deposit as a preferred way for businesses to pay employees have made it easier to live life without a checking account or credit card. Nowadays, a general purpose reloadable prepaid debit card that's carrying your paycheck via direct deposit doesn't feel that much different from a modern checking account.
Gary Fields and Maya Jackson-Randall of the Wall Street Journal have an article out this week on how many consumers are looking outside the traditional banking system for everything from debit cards to small-dollar loans:
The Russell family of Kirkland, Wash., makes about $230,000 with Charles Russell, 43 years old, working as a systems analyst for Microsoft Corp. According to the U.S. Census Bureau, that puts them among the top 5 percent of American households.
But their affluence might not be apparent based on the way Mr. Russell conducts his personal finances. He has no bank account, having dumped it due to irritation over fees and overdraft penalties. Instead, for more everyday transactions he uses a debit-card offered by NetSpend Holdings Inc.
"I have no need, desire or want to go to a regular bank," says Mr. Russell, who adds that a savings feature on the card offers a competitive interest rate.
Middle-class Americans are spending less time in the bank lobbies their parents would recognize. Today, 8.2 percent of the nation's households -- nearly 12 million -- are managing their finances without a bank, according to Census-based data being reported by the Federal Deposit Insurance Corp. That is up from the 7.7 percent that the bank regulator found in its 2009 report.
Another 24 million households defined by the government as "underbanked" have a bank account but still dabble outside of the formal banking system by using payday loans, prepaid cards and other alternative banking products, the FDIC found. This population that has left banks or uses their services infrequently makes up 28.3 percent of America's households, the agency says. That is a slight increase from the 25.6 percent who fitted into those categories in 2009.
What gets lost in the article is that a lot of Americans probably aren't going unbanked by choice. I've heard from many readers who are locked out of checking accounts due to being reported to banking credit bureau ChexSystems. Those people aren't staying away from banks because they're fed up with them. They're staying away because they've been blackballed.
Still, there's no question that providers of alternative financial services are seeing more middle-income and affluent customers like the Russells. According to the article, prepaid debit card provider Green Dot says its customers' median income has risen to $45,000, and Cash Advance Centers is putting its average user's income at $50,000 a year.
It's hard to argue banks haven't contributed to this trend with sometimes excessive fees and a business model that feeds off customer mistakes. But my concern here is that a lot of consumers are jumping out of the frying pan and into the fire.
As I wrote a few days ago, prepaid debit cards aren't as closely regulated as bank accounts, and numerous studies, including our own, have found a wide variance in the fees, terms and conditions. There are no guarantees you'll get FDIC insurance or fraud protection and no requirements concerning how prepaid debit cards present fee information to customers.
I still think most people would be better off with a free checking account from a local bank or credit union than a prepaid debit card or other alternative financial services. But if you're truly sick of dealing with banks and don't mind paying a little extra in various small fees that prepaid debit cards charge, I'd look for one that ties your name to the card, has relatively low fees for the transactions I do most often and guarantees some kind of protection from fraud.
What do you think? Are Americans abandoning banks? Are you unbanked? Share your story!
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