According to a recent report from the U.S. Federal Reserve, a staggering 22% of adults in the United States are either “unbanked,” with no access to a bank account whatsoever, or “underbanked,” meaning they do not have sufficient access to traditional banking and must rely in part on alternative financial services.
Direct giving has been on the rise over the past several years, with many local governments and non-profit organizations turning to basic income pilots and mutual aid programs to supplement soft services. When the COVID-19 pandemic turned life upside down and unemployment surged in 2020, multiple congressional acts (like the CARES Act and the American Rescue Plan) were passed to distribute direct-to-recipient, no-strings-attached stimulus payments to Americans.
The problem? Many of the individuals and families most in need of these funds are unbanked and therefore unable to access this funding. Let’s explore the shortcomings of using traditional methods like paper checks for crisis fund distribution and how prepaid cards fill an important gap in getting government funds to unbanked citizens.
Who is Unbanked in the United States?
With such a large proportion of U.S. households experiencing limited access to traditional banking, it is important to understand the makeup of this group. Of the 22% of adults that have limited access to bank accounts, 16% are underbanked and 6% are fully unbanked, with absolutely no access to a bank account. The report from the Federal Reserve dove into the demographics of this segment, with striking results.
The high-level data shows that the unbanked and underbanked are more likely to have “low income, less education, or be in a racial or ethnic minority group.” For example, only 1% percent of individuals with incomes over $40,000 are unbanked, compared to 14% of those with incomes under that threshold. Similarly, 14% of Black adults and 11% of Hispanic adults are unbanked, while only 4% of white American adults fall into this category.
This issue is indicative of larger, systemic inequalities plaguing communities around the world. It’s about far more than just income – these inequalities are tied to education, race, ethnicity, gender, etc. And it’s more important than ever to ensure financial assistance programs are designed to include recipients without access to bank accounts.
The Challenges of Traditional Fund Distribution Methods
Putting aside the disadvantages for unbanked populations, distributing funds to citizens via paper checks is an outdated method that comes with a variety of challenges, including:
- Added check-cashing fees for recipients
- Postal expenses
- Cost of printing checks
- Slow distribution
But most importantly, traditional mechanisms such as paper checks and even direct deposits leave millions of citizens behind who don’t have access to a mailing address, bank account, cell phone, or the internet.
Take the American Rescue Plan for example, which was signed into law in March 2021 and authorized the third round of $1,400 stimulus checks for millions of Americans. All American adults who earn under $75,000 per year were qualified to receive stimulus payments. However, those under the poverty line (earning less than $12,400 per year) generally do not need to file a federal tax return. Because stimulus funds are based on individuals’ tax filings, millions of Americans living under the poverty line never access this life-changing financial relief.
Ultimately, we are entering a cashless future and financial assistance programs must evolve with the changing times in order to truly benefit recipients.
How Prepaid Cards Distribute Funding to the Unbanked
For the millions of unbanked and underbanked Americans, prepaid cards fill an important gap in allowing the dispersion of critical government funds. Reloadable prepaid cards are versatile and easy to use, from both the recipient and the funding source’s point of view.
Below are some of the key advantages of using prepaid cards to distribute crisis funding and aid:
- Flexibility: It’s easy to build unique programs tailored to recipient needs with prepaid cards. Some can be reloaded for recurring payments like rent, while others can be used for one-off assistance payments or stipends.
- Simplicity & Ease of Use: Prepaid cards eliminate check-cashing fees for the unbanked and allocate funds directly to recipients, without them needing to travel to a financial institution to cash their check.
- Security: Crisis funding is allocated to registered recipients and can be monitored for fraud with prepaid cards. In contrast, paper checks can more easily be stolen or lost.
- Compliance: Prepaid, reloadable cards are far easier to trace, with transactions tracked digitally. When it comes to questions of audits and compliance, it’s easier to see where exactly the funds went with modern FinTech products than paper checks.
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ESTHER provides technology and financial services to local governments, foundations, and non-profits running direct financial assistance programs. If you’re interested in learning more about the ESTHER platform and how we help organizations get financial resources into the hands of recipients quickly and safely, get in touch with our team today.