The popularity of debit cards seems to have blossomed faster than the ability of wonks to find a means to describe them.

General purpose reloadable (GPR) cards are going to be the new way for low-income households to access the payments system. NetSpend estimates that LMI households will need to deposit more than $1.1 trillion in paychecks and government payments annually.  They may put some of those deposits into banks. However, they’ll also use (more…)

Bank of America’s decision to transition away from free checking means that even more Americans will opt out of a relationship with a mainstream bank. Most likely, those consumers will join the 80 million Americans that meet one of the definitions of “unbanked.”

Bank of America plans to introduce new accounts that include a monthly service fee.  Unless a customer is profitable, meaning that they keep a large checking balance or that they use other B of A Products, they are going to face the prospect of paying $10 a month just to have the ability to write checks.

Banks have put some effort into courting the unbanked, but their efforts have not been paying off. The Bank On initiative started off well in California, but it has never become a nationwide success. In North Carolina, bankers killed the Bank On program.  Community groups, whose buy-in is necessary in order to drive unbanked households into the program, refused to agree to tell their clients to use the Bank On product unless it was free of overdrafts. The banks didn’t budge. They weren’t willing to even offer one overdraft refund per year.

Regulatory reform has brought some change to those positions. Bank of America’s response is to punt. They’re not the (more…)

Green Dot is a closely held company with a set of principal shareholders that have contacts throughout the narrow universe of the prepaid debit card market. Green Dot has filed an application to buy Bonneville Bank, a small one-branch state-chartered bank in Utah. The Federal Reserve is currently reviewing that application. There has been some discussion about the role of Wal-Mart in this transaction. Will this allow Wal-Mart to effectively own a bank? That is a valid question, but I believe that there is another pressing issue that needs to be resolved.

I think that this transaction could give new vitality to the payday lending industry. By giving the owners of Green Dot the rights to an unsullied bank charter, the Fed could empower high-cost subprime lenders to dramatically increase the scope of their business. This transaction involves a small dollar bank, but it carries the potential to impact millions of households.

The unbanked and underbanked market is vast. Some estimates put the size of this group at as large as 110 million, depending upon how it is defined. Many of these households are unbanked because they haven’t honored their commitments. However, others are underbanked simply because they don’t have a substantial credit history. Thin file and no-file consumers have a hard time getting a bank account, let alone a credit card, even though they have never defaulted on a loan. It is unfortunate that (more…)

There is a spectre haunting your local community bank – the Spectre of Wal-Mart.

Imagine there is a Wal-Mart Bank. Can you see the little man dropping prices on those overdrafts? Would you still be paying $2.50 for the ability to use an ATM, or $14 to get your checks printed?

Yes, you would see those prices dropping. No, you would not pay so much for an overdraft. Non-interest income, rather than constituting 30 to 50 percent of gross income, would dwindle. The drop would the most precipitous at small banks, where there is less likely to be much income from either investment banking or trust management. There’s also the issue of competition. Plenty of small banks only have one or two national chains to worry about in their home town. If the Wal-Mart out on the bypass had a bank, though, it might be different.

Wal-Mart has tried to get a bank charter in the past, but it has not worked. They’ve applied for industrial loan charters, to no avail. This is a special purpose bank. This charter can be used as a means of in-house financing. Plenty of retailers have utilized the capacity of the ILC.  Target, for instance, has an ILC. Ditto for Home Depot.

The Independent Community Bankers Association does not like the ILC. It is only a coincidence, but here is how Terry Jorde, CEO of CountryBank (Cando, North Dakota)  put it in testimony before the House Subcommittee on Financial Institutions and Consumer Credit in 2006.

The ILC specter looms over the nation’s financial system. The flood of new applications for ILC charters threatens to eliminate the historic separation of banking and commerce and undermine the system of holding company supervision, harming consumers and threatening financial stability.

The ICBA is pretty clear.

That is why I am surprised that they did not notice when Green Dot applied to purchase Bonneville Bank in Utah earlier this spring.Bonneville Bank is very small. It has one branch. Yet, it does have a charter, and one in a state with a very bank-friendly regulatory environment.

Green Dot makes debit cards. Those cards include reloadable cards. Currently, Green Dot partners with Columbus Bank & Trust. CB&T holds the deposits and provides its charter. Buying Bonneville Bank changes all of that.  Green Dot’s acquisition poses the possibility that those cards will be one step closer to the new (more…)

Although there is no Wal-Mart Bank, there is a Wal-Mart Banco, and its success should tell us something about pathways for resolving the ongoing challenge in the United States to get more people into the banking system.

Wal-Mart is a disruptive force, capable of tranforming not just downtowns but also the business models of any market that it competes in.  Wal-Mart wants to get into banking in the United States, but regulators have not allowed it.  It is a shame.  Wal-Mart would likely create a low-cost financial products that appeal to working class consumers.  This is a demographic that doesn’t go to banks right now.

In Mexico, it is a different story.  Mexico has allowed Wal-Mart to start Wal-Mart Banco.  Banking is unusual in Mexico.  Fixed-rate mortgages are an innovation that has only developed recently, in the aftermath of the nation’s banking crisis in 1994.  In any case, Wal-Mart’s strategy in Mexico is not surprising.  It undercuts its local competitors. Undercutting means something very diffferent south of the border.  Loan defaults are very rare, thanks to some unusual debt collection laws, but interest rates are generally very (more…)