Previous studies have suggested that payday loans were one of the biggest problems facing impoverished and unbanked households in the United States. With these short-term, high-interest loans, the most vulnerable would enter into perpetual debt cycles that would be difficult to escape.
A new report now suggests that prepaid cards play a bigger factor for these homes than payday loans.
The Federal Deposit Insurance Corporation (FDIC) published the results of a new survey on Thursday that discovered that 10 percent of all American households are regularly using prepaid cards. This is up from 7.9 percent in 2013. In the 12 months prior to June 2015, more than one-quarter (27 percent) of U.S. households reported using a prepaid card. This is also up from 22 percent in 2013.
And these numbers are a lot higher than experts had anticipated before the release of the results.
Rather than maintaining a basic bank account that comes with receiving deposits, making purchases and saving for the future (even with low interest rates), these individuals are using prepaid cards.
What’s going on in the U.S. today? FDIC Chairman Martin Gruenberg said more research is needed.
For now, experts are alluding to income volatility, criminal records, bank fees, bad credit, language barriers and poor fiscal management as potential reasons for millions of Americans being unbanked.
More than half of unbanked Americans think they don’t have enough money to start a bank account.
In terms of bank fees, Americans forked over more than $11 billion fees, including overdrafts and non-sufficient fund (NSF) penalties. But oftentimes these fees can be much lower than unconventional alternatives, such as businesses offering payday loans, check cashing and other services not offered by banks.
New technology and innovations have made prepaid cards a regular financial management tool. In recent years, prepaid cards have provided users with features similar to that of a bank checking account. This has made prepaid cards attractive, but has also drawn the corn of the Consumer Financial Protection Bureau (CFPB), which established new comprehensive rules for prepaid cards.
According to the same FDIC study, one-fifth of Americans are underbanked. These are individuals that have bank accounts but also utilize payday loans, check cashing services and money orders as a means to get a loan with bad credit. As previous studies have found, the unbanked and underbanked are doling out unnecessary amounts of money to pay for these types of services. This erodes their hard-earned incomes and sends them deeper into poverty. The CFPB has been looking at getting more impoverished communities banked.
In response to the study, the credit union industry says it’s time local and state governments give credit union facilities more opportunities and leverage to open up in unbanked areas of the country.
“While this study did not specifically include credit union data, NAFCU knows that there are many consumers that do not access traditional banking channels, including not-for-profit member-owned credit unions,” said NAFCU Executive Vice President of Government Affairs and General Counsel Carrie Hunt in a statement.
“In fact, NAFCU has been pressing for field of membership improvements so that credit unions can reach more of the unbanked. In particular, we support regulatory changes to the NCUA’s field of membership rules and H.R. 5541, Financial Services for the Underserved Act of 2016, so that credit unions can reach the underserved.”
Until then, a large number of Americans will depend on payday loans, prepaid cards and money orders to get by. With the CFPB cracking down on these services, it won’t be for much longer.