Fees Eat into Limited Income for "Unbanked"
By Erin Jordan, Reporter
CORALVILLE, Iowa – Nick Birtcher closed his bank account because he needed the $7 that was keeping it open.
"It was a decision to cancel my account and utilize the funds or keep the $7 in there and not have food for the day," the 33-year-old Coralville man said.
But when Birtcher tried to cash his next paycheck, Walmart turned him down because of inadequate identification and Check 'N Go wouldn't pay because of issues with Birtcher's credit. He ended up going back to the University of Iowa Community Credit Union and reopening his account.
These are challenges faced by 10 million households nationwide that do not have checking or savings accounts. About 4.4 percent of Iowans are considered "unbanked," which is about half the national rate of 8.2 percent, according to a September report from the Federal Deposit Insurance Corporation (FDIC).
Steep fees for check cashing, money transfers and debit transactions eat into the meager incomes of people without bank accounts, financial analysts said. The financial services industry is looking for new ways to capitalize on this growing group.
"There's a lot of money to be made in dealing with the lower-income population, as long as you don't give them a bank account," said Richard Bove, a bank analyst based in Florida.
More than 820,000 additional U.S. households have become unbanked, a .6 percent increase, since the FDIC's first survey in 2009. More than half of unbanked households said they don't have an account because they believe they don't have enough money or that they don't need or want an account, the FDIC reported.
"If you're spending everything you're earning, there's very little reason for you to have an account," said Tim Terry, founder of Terry, Lockridge & Dunn and World Trend Financial.
Cost shifted to unemployed
Increasingly, government agencies are putting payments on debit cards for people without bank accounts.
One quarter of Iowans who get unemployment insurance benefits have the money deposited on a debit card, amounting to $2.13 million in June alone.
Iowa Workforce Development used to send unemployment checks by mail, but then the federal government stopped paying for the postage. In 2008, the state contracted with Xerox subsidiary ACS to administer the debit cards.
The state pays nothing for the service, shifting the cost of the program to ACS, which makes money from fees charged to users.
ACS is a $10 billion business that provides electronic payment card services in 23 states, Xerox reported. Exactly how much the company and its subcontractors make in fees from unemployed Iowans is confidential, Xerox spokeswoman Jennifer Wasmer said.
"This is a competitive business and we don't disclose our business model," she said in an email to the Gazette. "What makes it work, though, is the convenience of a debit card, which far outweighs the use of traditional paper checks."
In Iowa, unemployment recipients who use debit cards get one free ATM withdrawal per week, as long as they use an ATM operated by Wells Fargo, Alliance One or MoneyPass. Additional ATM transactions and non-network withdrawals cost $1.35.
Other fees include 50 cents for an ATM balance inquiry or ATM denial. There is a $3 fee for international ATM withdrawals, plus 3 percent of the transaction amount. Card holders get six free customer service phone calls per month and then pay 40 cents per call.
Debit car purchases and cash back with purchase are free for the cardholder.
Businesses cash in
Financial institutions have other reasons to provide debit cards to people without bank accounts. First, they make income from the "float," which is the pool of money available in the combined accounts between the time cardholders make a purchase and the time vendors settle payment.
Institutions can also gather valuable marketing information about where cardholders shop and how much they spend.
"What is less certain is the ability to mine data to see if they are buying milk or beer," Terry said. "It's just a matter of time before that data will be readily accessible, if it is not currently."
Jim Miller, senior director of banking services of JD Power & Associates, doesn't think banks are getting rich off providing debit cards for government services. "This isn't going to be a big moneymaker for them," Miller said.
Other industries sell services traditionally offered for free to bank customers.
Payday lenders provide cash advances with annual interest rates that can be more than 400 percent. Iowa Sen. Joe Bolkcom, D-Iowa City, has proposed legislation in recent years to limit the interest rate to 36 percent, but the bills have been defeated.
Coinstar machines, located in Hy-Vee and Walmart stores in the corridor, let people cash in their coins for paper money or reloadable debit cards. The company keeps 9.8 cents of each $1.
"If you are going to stay off the banking grid, the way to do it is to be more capitalistic about how you incur transactions," Terry said.
Stick with in-network ATMs or withdraw more cash in fewer transactions, he said. If you need to cash a check, go to the bank that issued the check because officials there will be able to verify the money is available.
The best alternative to avoid service fees is finding a bank account with free checking and a low minimum balance, he said.