Financial Services Are Expensive for the Poor, Prepaid Can Help, But Has Limits

by Ben Jackson 0

Low-income Americans pay more for credit, bill payments, and accessing wages than those with high incomes, the Economist reports. Tools that can help low income people manage their money, like prepaid cards and smartphones can help, but only if the tools are accessible.

Life is expensive for America’s poor, with financial services the primary culprit, something that also afflicts migrants sending money home (see article). Mr Martin at least has a bank account. Some 8% of American households—and nearly one in three whose income is less than $15,000 a year—do not (see chart). More than half of this group say banking is too expensive for them. Many cannot maintain the minimum balance necessary to avoid monthly fees; for others, the risk of being walloped with unexpected fees looms too large.

For those people who can’t get or feel like they can’t maintain bank accounts, prepaid has become an option for transactions and receiving direct deposit. This can help ameliorate some of the high costs of financial services. However, the prepaid industry is facing pressure from regulations driven by consumer advocates who feel that everyone should simply use a free checking account for their financial lives, regardless of the circumstances of the customer.

The other thing this article points to is the slow unfolding of a crisis that will face banks and credit unions if current trends are not unchecked. Financial institutions are facing the crisis of a shrinking customer base and increased competition from alternative financial services providers. Banks and credit unions need to develop products that make their institutions more relevant to low income people and that help low income people become savers and borrowers so that the low income customer can start to reap the benefits of saving on financial services and become profitable.

Overview by Ben Jackson, Director, Prepaid Advisory Service at Mercator Advisory Group

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