Getting Americans to the Bank

September 3, 2010

The U.S. Treasury Department today announced a pilot program to encourage tax refund recipients who are unbanked to sign up for low-cost bank accounts so that they can receive their refunds by Direct Deposit.

If successful, the pilot could save "tens of millions of dollars" a year in check writing and related administrative tasks incurred by the federal goverment, according to the Center for Financial Services Innovation (CFSI), which hailed the pilot.

The pilot plan is to target offers to low- to moderate-income taxpayers the option to open a tax refund account, funded by Direct Deposit of those refunds, and accessible by debit card. Treasury says low-cost accounts that can be used year round will also be made available.

"For many individuals, a tax refund is the single largest payment that they will receive each year. That's why tax season is a great opportunity to deliver safe, low-cost financial products to the unbanked and underbanked that will help those Americans build stronger foundations for their financial futures," said Michael S. Barr, Assistant Treasury Secretary for Financial Institutions.

Melissa Koide, a CFSI policy director, said if the pilot is successful and gets rolled out nationally, "Over 30 million underbanked individuals and families would have easy access to a tool to help them on the path towards financial prosperity."

The pilot, scheduled for an early 2011 launch, will encourage participation through direct mail and payroll outreach to taxpayers who currently don't receive federal tax refunds by Direct Deposit, the department said. The enrollment offers will include details about how to open and use the accounts.

This is the second initiative launched by the Obama Administration in as many weeks to move more Americans into the financial mainstream. Last week, Treasury said it was seeking a $50 million budget allocation for the launch of Bank On USA, which builds on successful state and federal initiatives to promote basic, low-cost bank accounts for the unbanked and underbanked. (See related post here.)

The FDIC estimates that there are about 9 million U.S. households where no one has a bank account. Another 21 million households are underbanked; these folks may have bank accounts, but they also rely on non-banks like check cashers.

More to the point, the unbanked and underbanked in America are disproportionately low and moderate income households. According to the FDIC's research, a person making $30,000 or less a year is 7 times more likely to be unbanked as someone earning $50,000 or more a year.

"The use of safe and appropriate financial services and products can help households maintain financial stability," Treasury wrote in a statement announcing its latest initiative.

50 million American households are considered "unbanked" - they have no relationships with federally insured financial institutions