Prepaid Cards Coming to Wall Street

A few months back I wrote a post about prepaid cards available from Wal-Mart and a company called Green Dot (see my post of March 18, Anti-poverty Infrastructure at Wal-Mart?). Apparently, this is very a good business. Green Dot is going public this week and Wal-Mart has been allocated 36% of the offering as an incentive to promote the Green Dot’s cards to its customers.

At the same time Visa has launched a campaign touting the benefits of prepaid cards for the financially underserved. “Core to this campaign is Visa’s ability to reach consumers who may not realize they can enjoy the benefits of a Visa product, and experience a better alternative to a cash-and-carry lifestyle” said Hyung Choi, head of Visa’s prepaid products in the United States. Sounds very good. However, Visa doesn’t offer cards directly, their “partners” do. And who are these partners? Many are the same pay-day lenders and check cashing companies who make a living enabling the “cash-and-carry lifestyle” for which Visa claims to be providing an alternative.

Are these prepaid cards really good for the poor? Where are all the big banks in this scramble for the business of those at the lower end of the economic spectrum? If the likes of Green Dot, Wal-Mart, Western Union can make money serving the poor why not main street commercial banks whose scale of operations would make it possible to offer less expensive products?

The banks of course were already making lots of money off the poor from overdraft charges and high interest on credit cards. In fact, a recent study showed how even pay day loans can be less expensive than overdraft fees. The financial services reform legislation just passed by the Congress will make it more difficult for banks to reap these benefits so expect other banking fees to go up. (See my post of June 17, Changes in Bank Regulations Will Impact the Poor.)

So, what is the best option for those with fewer financial resources? While the prepaid product is no panacea, it is clearly safer than cash. If properly managed, the prepaid card can be more economical than a traditional bank account. To make the product work most effectively deposits should be made directly from employers or government payers such as social security. Cash “reloads” should be for the maximum amount and as infrequent as possible to reduce the impact of the reload fee.

Cash withdrawals should be similarly as large and infrequent as possible to minimize ATM fees. Many prepaid cards also have transaction fees for making purchases with the card so these too should be limited and only for high value amounts such as the weekly shopping bill at the supermarket. Using these cards for small purchases such as snack food should be avoided at all times.

A prepaid card will only allow one to spend what has been deposited to the card so it is critical to have a budget and keep track of how much is being spent. Many providers are eagerly waiting for the moment the card owner wants to make a purchase and there is insufficient money on the card. That’s when the seductive loan offers will come and card holder will find himself taking out a loan that is every bit as costly as the traditional payday or car loan. If the prepaid card helps instill the discipline to live within one’s means it will be a benefit to the poor. If it is just a back door the same old predatory lending products it will do more harm than good. The Wall Street investor on the other hand will probably make out just fine.

Helping the Poorest of the Poor

When I started this blog almost six months ago I was not sure where it would lead me. I began by chronicling my trip to Indonesia to assist PT Ruma, a micro-franchising social venture that provides poor women with the capability to earn money by selling cell phone air time in small amounts to the people in their communities. It was my first hands-on experience in the field generally called “micro-finance” and the beginning of an education.

I remain involved with PT Ruma and will be travelling again to Indonesia to work with the management on improving their financial systems and reporting and developing financial products for their bottom of the pyramid client base. However, the experience has started me thinking about how to help the bottom of the pyramid—the poorest of the poor—in this country.

It’s been almost a month since my last blog posting. During that time I have been able to spend some time with the clients of a number of organizations that strive to help those who have fallen through the social safety nets into extreme poverty. They are homeless, often suffer from addiction and many also suffer with mental health problems. They live on the streets or in homeless shelters. They do not have bank accounts, most do not have jobs. About one third are veterans who have served our country. Whatever assistance they do receive barely keeps them alive from month to month.

I am in awe of those who work to help these desperately poor people and am inspired by those who succeed in taming their demons if only for a little while. They have, against the odds, climbed out of deep hole only to face a steep hill. Among the challenges that threaten to push them back into the hole is learning to handle their meager financial resources.

Much is written in the press and blogosphere these days about the promise of “micro-finance” as a means for ending global poverty. What is usually discussed is credit—providing loans to the poor so that they can start their own businesses and lift themselves out of poverty. However, those receiving such credit are not the “poorest of the poor.” They are often well educated and generally successful though perhaps not able to obtain bank financing for their business idea.

Those in extreme poverty need jobs and the ability to build financial resources through saving products. I am excited to be working with low income clients who have managed to get their addictions under control and are striving to put their financial lives in order. I think I can help them. But I want to do more.

Muhammad Yunus’ latest book, Building Social Business, inspires me to think about at creating a local social business. Taking PT Ruma as a model, I am looking to collaborate with other like minded social entrepreneurs to create a micro-franchise social venture that will create jobs in the US for the poorest of the poor. I have some ideas that I will be writing about in future posts. Anyone who wants to join in is welcome.