Finally, someone has tried to analyze the prepaid card question from the perspective of its customers. Using the news of the RushCard outage as a jumping off point, Pacific Standard writer Dwyer Gunn takes an honest look at prepaid cards in context of all financial services available to low-income people.
There are a variety of reasons for individuals to opt for an alternative financial service. Some people are simply barred from opening basic bank accounts or credit cards, either because of a poor credit score, a history of bouncing checks, or insufficient funds to maintain a minimum balance. To be sure, in the FDIC survey on the unbanked, 57.8 percent of unbanked households said they didn’t “have enough money to keep in an account or meet a minimum balance.”
The article even includes an interview with a RushCard user who was affected by the outage.
Indeed, Tackett used a traditional bank account before switching to RushCard. “I liked RushCard better,” she says. “You get early deposit [of paychecks], no overdraft fees. It seemed like it would be cheaper and easier.”
Now this user has opened a traditional bank account, but now must pay a monthly fee and maintain a $50 minimum balance, which is difficult for someone living paycheck to paycheck.
The article goes on to cite research that shows low-income people are better able to assess the opportunity costs of their financial decisions than those with higher incomes.
For a low-income person, it’s easy to accurately assess the cost of a beer—they compare it to the cost of bus fare, or the next day’s lunch. “People don’t know how to look for the value of things, so we look for a clue,” Shah tells me. “For people who are living comfortably, they lack a clear sense for what things are worth. Things are different for a low-income person.” In other words, the rise of RushCard can’t just be chalked up to consumer ignorance.
Far too often, the critique of prepaid cards and other alternative financial services carries the implicit assumption that the customers of these services are mathematically illiterate rubes who are being duped by unscrupulous actors. But the reality is that not everyone has the same access to financial services. People make choices to avoid overdraft fees, have better access to surcharge free ATMs, and better access to cash loading locations. Especially in poorer neighborhoods, these services often are not provided by banks or credit unions, but do come from prepaid cards.
As regulators and others consider reacting to what happened to RushCard, they need to consider not just the horror stories but also the day-to-day existence of those who need alternative financial services.
Overview by Ben Jackson, Director Prepaid Advisory Service at Mercator Advisory Group
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