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Treasury to roll out checking accounts for the unbanked

By Claes Bell, CFA · Bankrate.com
Wednesday, September 8, 2010
Posted: 5 pm ET

The Treasury announced plans last week to create a pilot program that would bring special checking accounts for the unbanked and under-banked -- those who, for one reason or another, don't have checking accounts and operate strictly from cash. Such consumers are often the target of higher fees for check cashing, bill paying and other financial services, says Treasury spokesman Matt Anderson.

The as-yet-unnamed initiative will be timed to coincide with tax season. Via mailings and other means, the Treasury will offer the option of a direct deposit to a newly created checking account in lieu of a traditional paper check. After the refund is withdrawn, the accounts will live on to serve as basic checking accounts.

"We view this as an opportunity at tax time, when many individuals receive their largest payment in a given year, to introduce unbanked and under-banked individuals to mainstream financial products," Anderson says.

Treasury officials are still working on finding financial institutions to partner with, says Anderson, and the exact terms of the accounts still have yet to be worked out. One thing that's already been decided, says Anderson, is the accounts will rely on purchasing through debit cards. Account holders won't be able to write checks.

"(Check-writing) increases the overhead for the bank, which in turn makes the accounts more expensive, increases the chances of occurrences such as overdrafts, requires more security features," says Anderson. "The debit card, we believe, is an effective way to deliver the accounts to this population, expand the reach of mainstream financial products and reduce reliance on high-cost alternative financial products."

Also, many people the program is intended to help have been shut out of mainstream financial products because of bounced checks, a bad credit score or other financial missteps. Getting rid of checks could help reduce the risk posed to banks, making them more likely to accept lower fees and other favorable terms for the accounts.

Beyond debit cards, Treasury hopes to incorporate other mainstream checking features, such as bill pay and direct deposit, into the accounts, says Anderson.

What do you think? Is trying to bring people back into the mainstream banking system an important goal? Do these accounts sound like a good idea to you?

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5 Comments
Marcie Geffner
September 14, 2010 at 8:03 pm

I think it's a good public policy goal for the government to try to encourage and find ways for banks to give more people access to basic everyday banking services at an affordable cost, though Debra certainly raises some good concerns about how that would work. Good intentions all too often have loopholes and unintended consequences.

Debra James
September 09, 2010 at 1:45 pm

I think this is a pretty bad idea, but not necessarily for the same reasons as Bob. The Feds already regulate all banking products, and defining the parameters in which each account type can be classified and its use guidelines. For example, the six withdrawal per month limit for online savings accounts under Reg D. However, this program just looks like a bone is being thrown to the banks as a way to recover some of the profit they lost through CARD Act. This type of account will do nothing be generate a ton of fees to be paid to the bank while virtually eliminating much of the risks and costs with servicing a checking account.

One of my biggest concerns for this account type is that the target consumer is very likely not to practice good bookkeeping for the account, and will probably encounter more instances of overdrafts and overdraft fees than a traditional account-holder. Although the new CARD Act will provide some protections against this occuring, it only covers debit card transactions at a POS or an ATM and one-time online bill payments. If the bank account can still be set up for recurring bill payments or automatic debits, then those transactions are still eligible for "courtesy bounce protection", and the bank can choose to honor the payment and charge an overdraft fee.

Another point that I'd like to raise is that depending upon where a person lives, there may not be a local branch of the bank that provides the account. The person may have to pay fees at off-network ATMs to get cash or buy more stuff than needed to meet minimum purchase amounts to use the debit card at a local merchant; almost all of the credit card networks are starting to allow minimum purchase requirements. Maybe a certain amount of non-network ATM fees should waived for these bank accounts.

Since accounts at brick and mortar locations cost the most money, how are they supposed to be paid for? The banks will probably pass on the cost of these accounts across the fees collected on to other products and services they provide. The product has not been fully defined, but there is no indication if it will be free or have a monthly cost. Although this account type sounds very similar to an online banking account, that cannot be a criteria for the account, because not everyone has Internet connectivity or the skills to do online banking even if they have Web access. As many banks are changing the criteria for having a free account, in most instances it is unlikely that the target consumer will have enough money to maintain a balance that will qualify for a free account. Yes, some financial institutions do offer free accounts if a customer has direct deposit and performs a certain amount of debit transactions which generate interchange fees. However, if the account-hold fails to meet this minimum, an account fee is charge; potentially causing an overdraft depending on the account balance.

This looks like it will end up costing the tax-payer and other bank customers one way or the other. I do have some questions that I'd like to get more information on. Will offering these accounts be a requirement by the government of all banks that took TARP money that they have to provide and service these accounts at no direct cost to the customer? Will the account costs be absorbed in the restitution payments from TARP banks the government maintains a stake in? Will the government guarantee these accounts against defaults?

Sure, people are not required to accept the IRS bank-account refund option. They still have the option to get paper checks, and cash them wherever they choose. However, if the government goes forward with this program, it needs to be extra diligent in ensuring that this customer segment is fully aware of the terms and conditions for using this type of account. It also has to be sure that these accounts will not cause more of a financial burden than using a check cashing store. Failure to do so will make the government complicite with preying on the financially vulnerable.

Claes Bell
September 09, 2010 at 1:45 pm

As far as I know, banks won't be required to offer these types of accounts. The way the Treasury guy I spoke to said it, it sounds like they're looking to create more of a partnership with a few banks rather than require them on any kind of industry-wide basis. Didn't make any indication that it would be tied to TARP.

Bob
September 09, 2010 at 11:24 am

This is an absolutely terrible idea. The last thing we need is Big Nanny Treasury dictating what people do with their money. If some people want to use only cash, what business is it of Treasury's? How dare Treasury become involved in the banking industry---selecting one or more banks for these accounts---then dictating to the consumer that they will not be allowed to write checks if they use one of these accounts! Since when is it any concern of Treasury's whether a bank incurs overhead costs due to the writing of checks? If the Secretary of the Treasury has such concerns, perhaps he is in the wrong line of work. Perhaps he should resign and seek out a bank CEO position instead. When it comes to issuing tax refunds and federal benefits payments, Treasury should have only one overriding interest: issuing the correct amount to the recipient, and using the form of payment preferred/requested by the recipient---whether that form be through paper check, direct deposit, or debit card.