December 9, 2009

Banking Without the Bank

The New York Times recently shed light on how banks can charge obscene fees for things like overspending on a debit card. While banks pitch debit cards as a responsible way to make purchases, they have a calculated interest in consumers going over their balances. Ron Lieber and Andrew Martin wrote:

Banks market it as overdraft protection, and the fees it generates have become an important source of income for the banking industry at a time of big losses in other operations. This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.

These excessive fees have contributed to a large number of people choosing to be “ed.”

A recent survey of unbanked and underbanked households was conducted by the FDIC.  The survey was an attempt to find out how and why many consumers don’t use banks. NPR quickly picked up on this survey and found:

"They complained about widespread overdraft fees, waiting for checks to post and transactions hitting their accounts too early or too late. For them, places like ACE Cash Express took out that hassle and expense."

"Banks so far have not shown much interest in reaching these customers, however. In the survey, fewer than 20 percent of banks said reaching out to these communities is one of their priorities."

The survey stated that about 66 percent of unbanked consumers use what are called “alternative financial services” (AFS). Many of those services include non-bank:

Alternative to Debit Cards

One of the best alternatives to bank debit cards–and banking without a bank–is to use a prepaid debit card. Consumers are choosing to use prepaid debit cards over traditional debit cards, because they don’t have any bank penalty fees associated with them. They’re also easy to reload and help consumers stay within their budget.

As banks continue to find new ways to charge fees to consumers, AFS is expected to grow as a viable alternative to personal banking. Expect to continue to see new and innovative financial services appear from AFS providers in the near future.

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