Having a bank account is foundational to building financial security. Unfortunately, the lower your income, the more likely you are to be financially insecure and the less likely you are to have a bank account. According to the FDIC, about 20 percent of households earning less than $30,000 are unbanked.
This can be especially problematic for families receiving TANF, what we'd commonly refer to as welfare, who can face significant fees to access their benefits in the absence of a bank account. Typically, benefits can be issued either directly into a participant's existing bank account or onto an EBT card, which functions in some ways as a debit card. Low levels of account ownership among participants, however, make the EBT card the default option. Consequently, families can be subject to a range of fees, such as on withdrawing benefits at an ATM or making a purchase, depending on the terms of the financial institution managing the accounts.
On Monday, Spotlight on Poverty and Opportunity published commentary from Washington State Senator David Frockt (D) and Representative Bill Hinkle (R) advocating the need for connecting TANF recipients to bank accounts to create a means for making safe financial transaction, building savings- and avoiding EBT fees. According to a new report, only 12 percent of TANF recipients have their benefits deposited into a bank accounts and the rest are subject to an 85 cent transaction fee at ATMs when they wish to withdraw funds. This amounts to $1.2 million a year diverted from benefits that families use to meet their basic needs to the managing financial institution on top of the $10 million a year the state pays to the financial institution to administer the accounts AND surcharges to participants for use of out of network ATMs, which amounted to almost $900,000 in the first quarter of 2011.
So, what can be done so that these families keep more of the benefits they need and have access to secure place to keep their money, pay bills, and save for the future? Not too long ago my colleague Rourke O'Brien spent some time with TANF recipients in California and talked with them about their financial needs. Based on those conversations, here's what he suggests: First, make EBT cards more like debit cards so they can function as bank accounts for families who don't have them. That way, every TANF recipient who gets an EBT card will effectively also be getting a bank account. This can be done by branding EBT cards with the Visa or MasterCard so they will be accepted almost everywhere and by making the cards reloadable so they can store money in addition to their benefits. Second, eliminate fees for transacting with EBT cards. State and Federal governments shouldn't be subsidizing financial institutions with resources dedicated to helping very low-income families. Contracts with banks who administer the accounts should mandate a no-fee structure or states should reimburse participants for fees they incur. Third, encourage savings by including a savings "bucket" as part of the card features and eliminate assets tests that explicitly restrict the amount of savings a family can have and be eligible for the program. Finally, there should be a broader effort to increase access to affordable banking options for low-income consumers. Yesterday, my colleague Pam Chan sat down with Sherrie Rhine with the FDIC to discuss their Safe Accounts pilot, which offered basic, low-fee accounts through partnerships with several financial institutions. At the end of the one year pilot, retention rates for new accounts were high, 80 percent for transaction accounts and 95 percent for savings accounts, and banks reported that the cost of offering the account was comparable to that of other accounts. These outcomes suggest that there is a demand for these products and this model could provide a sustainable way to expand availability in a way that works for consumers and financial institutions.
The Spotlight piece also highlighted several of these solutions, making it clear that efforts to address the financial security of low-income families can be an area with many opportunities for bi-partisan agreement. It's exciting to see the leadership being taking by Washington in this area and we look forward to following their progress.