Community Developments Online
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Community Developments Investments

Fall 2004

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Plastic assets: using stored value cards to build wealth

A photo of a man receiving counseling

Financial literacy counseling at the Center for Financial Services Innovation.

The financial services system has a crucial role to play in facilitating asset-building opportunities. It’s a fact that lower-income families with a deposit account are more likely to own other assets than those without an account. So the path from asset poverty to asset ownership may well be through traditional financial services providers — if the industry provides well-designed and suitably priced products, marketing, and outreach strategies.

In recent years the industry has developed new technology applications that have improved the structure and delivery of consumer financial products and services, creating new opportunities to serve unbanked, often lower-income households. New products and delivery mechanisms are being used to send money abroad, pay employees, cash checks, store funds, and make purchases online. Now the challenge is to link these transactional products with broader asset-building opportunities, thus providing consumers with a path to financial prosperity.

Converging interests

The Center for Financial Services Innovation (CFSI) was launched earlier this year to address this challenge. An initiative of ShoreBank Advisory Services (SAS) with support from the Ford Foundation, CFSI is designed to encourage efforts to serve unbanked and underbanked consumers.

CFSI provides funding for innovative solutions, a meeting place for interested parties, resources for testing products and services, and authoritative information on how to respond to the needs of the underbanked profitably and responsibly. We work with banks, credit unions, technology vendors, alternative service providers, consumer advocates and policymakers to forge new relationships, products, and strategies that will build assets and create value for both customers and companies.

Research tells us that the interests of the financial services industry and low-income consumers are converging. Five factors are helping to narrow the gap between supply and demand:
• technological advances that lower costs and expand consumer access;
• the federal government’s desire to pay benefits electronically;
• expansion of the alternative financial services sector;
• the emergence of the asset-building movement;
• and major demographic shifts.

Technology, for example, is a key factor in initiatives by several banks and credit unions to link the earned income tax credit (EITC), savings accounts, and direct deposit. The EITC has lifted more low-income families out of poverty than any other federal program: nearly 19 million families claim more than $30 billion in EITCs annually, and refunds run to as much as $4,000 per family.

ShoreBank pioneered in linking tax preparation services and the EITC with broader financial services. Through a four-year partnership with the Center for Economic Progress (CEP) in Chicago, ShoreBank offers EITC-eligible tax filers free savings accounts that can be opened by direct deposit of the expected refund. Nearly two-thirds of the participants in this program were unbanked when they signed up; many now use the account to have their payroll checks deposited directly.

The combination of electronic filing and direct deposit of refunds allows funds to arrive much more quickly than when tax forms are mailed and refund checks are issued, providing an added selling point in encouraging tax filers to open bank accounts. And having refunds directly deposited into accounts makes it easier for some customers to resist cashing and spending their refunds immediately, thus helping to facilitate longer-term saving and asset building.

Building on ShoreBank’s experience, institutions such as Bank One and H&R Block (in partnership with Bank of America), have been experimenting with stored value cards (SVCs) — prepaid debit cards — as a mechanism for receiving tax refunds.

The stored value card is an important innovation that uses technology to reach unbanked consumers. Like traditional debit cards, SVCs can be structured to allow consumers to draw down funds through purchases or cash withdrawals. SVCs can be PIN-based or signature-based and may be branded with Visa or MasterCard logos. Unlike traditional debit cards, SVCs are prepaid, and the PIN-based format in particular, helps limit the risk of overdrafts while providing nearly immediate liquidity for consumers.

Rapid change

SVCs are spreading rapidly, both in variety and uses, and growing numbers of unbanked and underbanked consumers are using them as alternatives to traditional bank accounts. Aware of the trend, many employers are reducing costs by moving from paper paychecks to electronic payroll cards. Celent Communications estimates that 10 percent of unbanked American workers were using payroll cards by the end of 2002, and that the proportion could rise to 25 percent by 2006.

“19 million families claim more than $30 billion in Earned Income Tax Credits annually, and refunds run to as much as $4,000 per family... ShoreBank offers EITC-eligible tax filers free savings accounts that can be opened by direct deposit of the expected refund.”

Most SVCs currently available in the market do not provide a platform for saving, building assets, or developing a credit history. However, CFSI has identified some examples of SVCs that attempt to incorporate a credit-history-building feature by reporting accounts in good standing to credit bureaus. CFSI also has identified SVC programs that are attempting to incorporate other innovative functions, such as linking SVCs to savings accounts or Individual Development Accounts (IDAs); offering rewards or rebates; facilitating remittances; and providing overdraft protection and alternatives to payday loans. (For additional information about IDA programs, see the article “Individual Development Accounts: Savings Incentives to Build Wealth” in this edition of the on-line newsletter.)

But while SVCs increasingly offer features that mimic bank accounts, some might lack important consumer protections, such as FDIC deposit insurance and Regulation E protection against unauthorized transfers, undisclosed fees, and other potential problems. We have found that SVCs distributed by banks and credit unions are more likely than other cards to have consumer protections, lower pricing, and more obvious transitions into other financial products and services. With enhanced functionality and regulation, SVCs could pave the way for people to have both convenient transactional services and links to broader financial opportunities.

At their best, SVCs exemplify an important paradigm shift in which function takes precedence over form. More financial services providers of all kinds are beginning to focus on the methods needed to deliver the right product functionality to low-income consumers, breaking free of the constraints of legacy systems and conventional wisdom in order to better meet customer needs.

In some cases, banks are recognizing that they may be better suited to a back-end role, such as processing payments and moving money, rather than the front-end job of marketing directly to low-income customers. In other cases, banks are learning from the business models of other financial services providers and adapting their techniques to reach out to underbanked consumers. The current environment of innovation and experimentation is exciting — and, through the work of CFSI, our partners, and financial services providers around the country, it has the potential to produce increased profits for financial services firms and increased asset-building opportunities for unbanked consumers.

For more information, please see the Center for Financial Service Innovation’s paper “Stored Value Cards: A Scan of Current Trends and Future Opportunities,” www.cfsinnovation.com; or contact them at (312) 881-5856; info@csfinnovation.com.