Sometimes banks aren't what folks want

The article below from the American Banker warrants reviewing. Those groups or institutions that are serving the low income and unbanked commuities must recognize that there are very good alternatives and better mousetraps to serve this expanding market.

Viewpoint: Don't Overlook the Role that Nonbanks Play

By Joseph Coleman, American Banker Friday, March 6, 2009

Why is the Federal Deposit Insurance Corp. determined to recreate the wheel when it comes to serving the financial needs of low- and moderate-income consumers?

The FDIC's Advisory Committee on Economic Inclusion's most recent meeting highlights many of the challenges and shortcomings associated with the ongoing efforts to convince millions of Americans that they are better served by using banks and other mainstream financial institutions than alternative providers.

The financial service center industry, with 13,000 locations nationwide, conducts more than 350 million transactions each year. These companies are regulated by a variety of federal and state laws. The transaction-based model for accessing day-to-day financial services is well established and functioning efficiently on a cost-effective basis.

Perhaps more importantly, millions of people use these alternative providers, not because they have to, but because they chose to. Stores are located in neighborhoods, keep convenient hours (up to 24 hours a day, seven days a week), have friendly employees who speak the customer's language and offer a wide array of services.

Through new technologies, many stores that belong to my organization, the Financial Service Centers of America, have expanded those opportunities to include "virtual bank accounts" that offer FDIC-insured savings options with a 5% interest rate tied to a prepaid debit card.

A national customer satisfaction survey confirmed the popularity of financial service center. It found that 92% of respondents rated the overall value of products and services received at centers from "excellent" to "good" for the money. In addition, 95% of respondents rated the overall quality of services from "excellent" to "good."

Two recently published reports by Aite Group ("Debunking the Myths About the Unbanked and Underbanked") and the FDIC ("Banks' Efforts to Serve the Unbanked and Underbanked") highlight common misconceptions about this market segment and the shortcomings of banks to adequately serve it. For example, Aite Group said its study "reveals that people are unbanked for very practical reasons, including credit, pricing, cash flow and service issues." The FDIC study found that more than 70% of respondents "have not identified" expanding services to the underbanked as a priority.

The Advisory Committee on Economic Inclusion is exploring the value of expanding government incentives to help banks serve the underbanked.

What is most perplexing is that even with the financial service center industry's solid record of service to this market segment and the inadequate performance of banks, the FDIC has repeatedly rebuffed my group's efforts to participate in the committee.

One area where we could be of particular assistance is with small-dollar loans. Financial service centers handle about $13.2 billion of these loans each year. The FDIC itself has acknowledged the need for such a product by implementing its Small Dollar Loan Pilot Project.
It is important for policymakers and those who advise them to have solid answers to the following questions:

-What are the standards for judging the success of the FDIC's pilot program?
-Can the bank model for small-dollar loans be economically translated to the current volume nationwide?
-What levels of loan losses are being reported by participating banks?
-Are banks' pilot programs profitable, sustainable and scalable?
-Is the FDIC granting banks relief from existing loan-loss reserves for this product? (Subprime loans require a 25% capital reserve.)
-A core question to consider: Is it better for consumers to have access to banking services or access to banks?

The FDIC should work to create a collaborative, inclusive environment where banks and financial service centers can work together to provide the services customers want and expect.
Coleman is the chairman of the Financial Service Centers of America.
© 2009 American Banker and SourceMedia, Inc.

Directo provides an alternative to this market at the worksite. Payroll Cards. www.directocard.com

Payday loan use growing among middle class families

As the country's economic news worsens, a natural side-effect of job losses and financial uncertainty is the increase in people looking for small loans to pay bills and handle emergency repairs. The Atlanta Journal-Constitution reprinted an article last week from the Los Angeles Times about the booming business of payday loans and its growing popularity with the middle class. Many families live without a financial cushion, and borrowing $300 for a $45 payday lender's fee seems reasonable when faced with having the lights or heat turned off in their homes.

Good money management
One of Directo's goals is to make every cardholder a savvy consumer. We email monthly newsletters full of money-saving tips to all of our clients to share with their employees, and counsel cardholders on the best ways to handle their accounts. An alternative for those looking for immediate access to extra funds for a short period of time is the ability to overdraw their accounts with overdraft protection for a much lower fee than a payday lender's.

Directo paycard accounts are portable, so it's not just the card their employer gave them at this job - it's an account for life. Directo paycard customers know that they don't have to carry all of their cash with them, that it's safe in their account, and soon discover that it's easier to save when their money is in the bank. And those savings might just keep them away from the payday lender.

Debit use is up, and paycards are seen as an answer to high interest credit cards

As belts tighten across the U.S., people are turning away from high interest credit cards and are instead using debit, and some are buying prepaid cards. According to a Business Week article on msn.com, consumers are using the cards as a “budgeting tool to limit spending” or splitting the direct deposit with committed funds going to one account and the paycard receiving discretionary money.

More people use the internet to pay bills and make purchases and the subsequent decline in use means that electronic banking becomes more accepted. Some are also ditching their traditional bank accounts, choosing instead to deposit their payroll into paycards rather than other types of money management tools, such as traditional checking accounts. At Directo we've seen an increase in the number of accounts opened by customers who have other financial options. Directo accounts are checkless checking accounts, and can be used for payroll, bill pay and to receive payments such as social security benefits and tax refunds. Funds are held in an FDIC-member bank, which adds to the security of Directo accounts.

Today as never before, consumers are 'kicking the tires' before committing to financial services. Directo's proven stability and ten years of paycard experience gives our customers the assurance they need.

Does your paycard support electronic bill pay?

Prepaid Trends had a guest column November 6th on electronic bill pay, a feature gaining popularity with the internet savvy customer. Directo debit card holders have had this feature from the beginning, since 1998. Each Directo account is individually owned, and bill pay and auto debit are just some of features our customers enjoy.

The author of the Prepaid Trends article mentioned Payvox, a product that allows electronic bill pay via telephone. I've also seen small businesses, especially in Hispanic commercial areas, that offer billpay at computer terminals that the customer uses, with personal assistance for those who may not know how to operate them. Many public libraries offer their patrons computers with free internet access, and as long as the personal information is erased after using to keep information private, this is a good, free alternative.

Electronic bill pay is convenient, and for Directo paycard customers, free. The cost of postage, money orders and the time and hassle of organizing the payments are erased by learning how to manage a few keystrokes.

Directo's ease of paying bills online and scheduling electronic debits also erases the line between those who are banked and unbanked, as many who can have "brick and mortar" accounts choose the Directocash debit card because of its low cost, ease of use, and range of benefits.

Banks are raising noncustomer ATM fees - again.

Bankrate.com reports that folks are paying 13% more in fees to use ATMs that are not operated by their own banks. The combined fee, which is the "foreign" fee that the ATM owner charges, combined with the fee charged to customers by their banks, has increased to an average of $3.43, compared to $3.03 last year.

Remember when WaMu offered surcharge-free ATMs to everyone? Those days will probably never return (alas, WaMu didn't fare so well, either).

Atlanta's consumer advice guru Clark Howard says that people who pay high fees don't do their homework. At Directo, we agree. The Directocash Card is very economical when used wisely. Used at a point of sale and paired with a cash back request, the Directocash Card knocks out two transactions for under a dollar. Pay bills online, and you save even more. Electronic billpay is worth a blog entry of its own.