February 24, 2010, 5:00 am

How More Americans Are Moving Away From The Traditional Banking System

by: The Financial Blogger    Category: Banks and You
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I had read in an interesting report published by well known firm, Breton Woods, comparing the cost of a prepaid debit card vs a regular checking account in the United States. While prepaid debit cards are not a big deal in Canada, I was curious to learn more about why scores of Americans are turning their backs on traditional banks by trying alternatives.

Who doesn’t have a bank account?

There are around 60 million adults that do their transactional business while avoiding banks. I guess that the recent recession helped increase this number and therefore, the popularity of prepaid debit cards.

Most of them are found within minority groups; poor people, people without college education and those who do not really use their bank accounts. As many individuals now work with a day-to-day money management budget, they prefer to keep their cash in pocket instead of having to transact with a financial institution. As making money under the table and receiving cash in an envelope became reality for many of them, a regular bank account seems to be a money-eating-box-of-fees with aggressive appetite!

No bank account, what are your alternatives?

As I previously mentioned the prepaid debit cards gained a lot of popularity in the past decade. It allows an individual to load money on a debit card that is accepted almost everywhere (the access is comparable to a regular credit card). While this option may seem expensive since you have to pay fees each time you reload the card, Breton Woods showed that it is a great alternative for specific individuals helping them save up to 35% in banking fees.

Other marginal options include using check cashing services (like ACE’s), payday loans (very expensive!) and pawn shops. It really seems that we are going backwards as these individuals prefer having cash in their hands regardless of the fees (check cashing services can easily take more than 4% of the amount you want to cash).

So if it expensive, why are they doing it?

In my opinion, there are 2 major reasons why some Americans have decided to give up their banking accounts. The first one is because they have completely lost their faith in the banking industry (can you blame them?). There is an uncomfortable sentiment towards banks since they “got the country into financial trouble”, they were saved in extremis by the Government and paid themselves fat bonus check as early as 2009. Let just say that they didn’t behave like socially responsible corporate citizens!

The other reason comes from a lack of financial education. People who have a hard time managing their money get easily frustrated when paying overdraft fees, NSF checks and other banking fees related to poor money management. Cash or prepaid debit cards won’t “let them down” as once there is no money left, you just can’t do anything!

In the end, I still believe that you are better with a checking account but in some cases, financial education has to start with cash in your pocket!

image source: Sam Howzit

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i think that this is why i have a debit card instead of a credit card. thank God i have not fallen into the quagmire of “easy credit”

Overall, I like the idea if it can help people to educate themselves to live by their means. Obviously, the last 2-3 decades showed us that human being have a very hard time living by their means when credit is surrounding them everyday. Maybe it is a good idea, knowing what many Americans are facing unemployment, debt and poverty.

Yeah, credit is card is the root of all evil to many extents. People are rarely able to manage their card and always end-up by paying huge interest on their balance… that is tooooo bad!