Making a Transaction and Savings Account a Certainty, Just Like Taxes

In the Feb. 20 issue of Paybefore Update, my colleague, Melissa Koide, discussed a proposal to use prepaid cards to deliver tax refunds through a unique alliance of government and industry, Viewpoints: A Convergence of Opportunities: Delivering Prepaid Accounts at Tax Time (February 2008). We believe the prepaid sector can and should play a major role in working with government to provide an "assets and transactions account" (ATA), a low-cost, high-value transaction account that facilitates savings for financially underserved consumers. The ATA would be opened when a tax filer's refund is deposited at a regulated financial institution and accessed through a prepaid card, giving the filer access to the mainstream financial system and a host of prepaid card features.

A critical step in the development of an ATA product is to understand the banking needs and product preferences of the 39 million potential users. To that end, we analyzed evidence from surveys, focus groups and pilot programs aimed at lower-income consumers to determine the core functions and features most desired by this segment.

Here are a few common themes:

• Convenient and quick access to funds through ATMs and point-of-sale terminals. Research shows a need to get cash through ATMs and to pay for purchases at the point of sale. Empirical data from two samples of prepaid cardholder transactions show that consumers actively access funds through both point-of-sale purchases and ATM withdrawals. And, anecdotal evidence in the prepaid space suggests that consumers move toward transactions at the POS over ATMs as they become more familiar and comfortable with the card product.

• Automatic savings capabilities. Conjoint analysis and focus groups show that lower-income households prefer prepaid cards with automatic savings features to those without. Furthermore, adding a savings capability creates a "stickiness" that leads to longer term use, delayed funds spend-down and increased take-up of other savings programs.

• Ability to receive additional deposits such as wages and salary. Lower-income households strongly prefer to add funds from more than one revenue source (e.g., wages and government benefits) and through a variety of channels (e.g., cash loading at a teller or kiosk and Internet reloads). Consumers value the ability to make direct deposits into their accounts and actually may save more with direct deposit. With respect to network branded prepaid cards, the financial services industry, in particular, asserts that direct deposit is important for facilitating use of the card and sees it as critical to driving interchange revenue, thus helping to make the product viable over the long term.

• Savings linked to tax time, automatic transfers to savings and financial incentives. Lower-income tax filers desire savings products to support savings goals and are attracted to products and programs linking tax time and savings. Several experiments demonstrate that auto-enrollment in retirement and other savings plans increase participation and contribution amounts, especially among lower-income and minority populations.

• Federal protections including FDIC insurance coverage and protections against lost cards. Protections on funds provided under FDIC or equivalent insurance are important both in terms of providing actual insurance against loss and because federal protections are valued as an important signal among lower-income consumers. Given a choice to use a federally protected prepaid card or not, consumers prefer federal protections that limit losses on a lost or stolen card. A Network Branded Prepaid Card Association survey shows that consumers view prepaid cards as a way to obtain such protection.

• Transparent fees. Fees are important to this consumer segment, but low fees do not appear to affect overwhelmingly product take-up. Instead, fee transparency, access to services and interest earnings matter as much or more than low fees for lower-income consumers. Anecdotal evidence suggests that for underbanked consumers with few banking options, low advertised fees may be a big enough incentive to take up the card. However, practitioners observe that as consumers incur a series of fees, they re-think the value of the card and often drop it. So, for first-time users with few options, low fees may tip consumers into adopting the card but may not be enough to ensure continued use.

Areas for Further Research

Consumer education, marketing and messaging are important factors in driving consumer demand and take-up. Marketing that explains the specific capabilities and customer value-add is likely to lead more consumers to adopt a prepaid product.

Less is known about the extent to which consumers in this segment desire the ability to interact personally with a financial institution for routine transactions. A more thorough understanding of the importance of a bank or card issuer's presence within the neighborhood would complement the evidence that consumers desire and benefit from early-stage, in-person customer service. Lastly, limited research and anecdotal evidence suggest that electronic daily balance notices and real-time balance information, bill pay and purchases, electronic check writing and remittance capabilities would be valued by lower-income users.

Reinforcing the Need for an Account

Many lower-income households that live paycheck to paycheck do not rely solely, if at all, on traditional bank accounts for cash management. They are discouraged by minimum balance requirements, high overdraft penalties, delayed crediting of checks and monthly maintenance fees. Yet, alternative financial services are sub-optimal, offering little consumer protection, savings capability or ability to establish a credit history. Though alternative financial services provide immediate liquidity, they do not tend to build wealth.

Our work involves crafting and analyzing policies that promote the development, protection and intergenerational transfer of wealth and assets. As envisioned, the ATA would enable consumers to take a step in this direction.

Individually, the prepaid industry and policy institutes, such as the New America Foundation, have amassed critical knowledge of the preferences and behaviors of these individuals. Market research, such as the national segmentation study of the underbanked to be released next month by The Center for Financial Services Innovation, will contribute key learnings that will enhance the success of such endeavors. We welcome your involvement as we continue to refine the product features and functions that would maximize consumer interest, encourage participation by the financial services industry and develop a policy strategy to leverage the near universal process of tax filing.