A flurry of recent media coverage of prepaid payroll cards, including a July 10 editorial in the Post-Gazette ("Wage Cut: Paycard Fees Hurt Low-Paid Workers"), has been less than complimentary about something I believe may do a great deal of good in Pennsylvania and nationwide. The fact that this has been missed by a lot of the media does not surprise me.
Four years ago, I too looked upon these cards as a potential problem. Since then, studying and working with prepaid cards has convinced me of the opposite: Prepaid cards provide access to mainstream financial services for families who otherwise would be shut out. They are a solution, not a problem.
Nearly one in four Americans does not have access to a mainstream bank account. Being "unbanked" means they cannot receive direct payroll deposits. They must collect a paper paycheck and have it cashed. Check-cashers charge up to 3 percent of the value of a check for the privilege of cashing it.
Once a check is cashed, the individual is left with a stack of bills and is vulnerable to theft. This also is frustratingly inconvenient for paying bills that banked families can process automatically online -- for utilities, rent, etc. In addition to the time burden incurred standing in line to pay bills at office cashier windows, some companies tack on an additional fee of $1.50 or more per bill for cash payments.
I was introduced to the "unbanked problem" in my second year at business school. I had heard employers discuss the pain points of issuing paper checks (even the best cash systems are inefficient compared to an all-electronic process). Armed with a business plan for a rewards program that incentivized employees to sign up for direct deposit, I thought I had solved the problem.
What I had overlooked was that the real barrier wasn't direct deposit -- it was that many employees didn't have a bank account in the first place. Reasons for not having an account were as diverse as the unbanked population itself -- from not being able to qualify for an account to not being able to afford the minimum balance requirements for free checking. The message was clear and consistent: A bank account does not suit everyone's needs.
At this point I learned about payroll cards -- prepaid debit cards onto which an employee's pay could be electronically deposited and accessed by swiping like a debit card during check-out or through an ATM. These cards eliminate the need for both regular visits to a check-casher and the cost associated with doing so.
As with all financial products, consumers had to understand how to use them to avoid fees and maximize convenience and safety -- which is why fee transparency and cardholder education are critical components to a prepaid program's success.
I am not the only one who has woken up to the immense potential of prepaid cards in easing the burden on unbanked individuals and families. Employers, governments and financial institutions have begun to create systems that allow safe and convenient access to electronic payments without the requirement to maintain a bank account.
In Pittsburgh, for example, PNC Financial Services Group made available its SmartAccess Prepaid Card last July, incorporating money management features intended to facilitate its safe use and allowing families without traditional bank accounts to directly deposit paychecks onto the card. They also can avoid withdrawal fees when using the bank's ATMs.
Likewise, the U.S. Treasury is not only accommodating the needs of unbanked recipients of financial benefits through the use of prepaid cards, but it also is negotiating preferred rates on behalf of their payees who go that route.
This is an undoubted win for the consumer. It is estimated that the average unbanked payee will save a week's worth of salary over the course of a year by switching from paper checks to direct-deposit.
This is also a win for payors, who can replace the expensive, inefficient and costly paper-check system. The fact that financial institutions can profit from increased card use should not detract from this point.
Instead of focusing on the negative, we should celebrate the fact that payors and financial institutions are supporting a more inclusive payments ecosystem and focus our energy on supporting their efforts. When properly utilized, prepaid payroll cards hold the potential to generate win/win/win outcomes -- and the biggest winner of all is the unbanked family.
Arlyn Davich is founder and CEO of PayPerks, a company that provides finance tutorials and prepaid-card reward programs for low- and middle-income consumers.