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Regulation Not the Answer for the Unbanked

A little-known government agency that is virtually unstoppable is tightening its grip over banks and lending institutions, taking away new innovative options from people who are already struggling to safeguard and access their money.

The Consumer Financial Protection Bureau (CFPB)—an administrative agency set up by the Dodd-Frank law in 2010—has proposed new rules that will make it even harder for the unbanked and the underbanked to pay their bills. Even worse, these people have little to no recourse if CFBP removes their access to much-needed alternate forms of banking.

Serving the Underbanked

Imagine a world without banks, where you carry your paycheck in cash, hoping against hope it doesn’t get lost or stolen. Imagine jetting around town and waiting in line to pay all your bills in person. Imagine watching 10 percent of your income drain away, just to access and manage your money.

This is not the Wild West or the Great Depression, but the sad reality of millions of Americans who lack access to the basic services traditional banks provide. 34 million American households are in this predicament—and are known as the “unbanked” or the “underbanked.” With little or no access to traditional financial institutions, they rely on alternative financial services like check cashing, payday loans, money orders, and pawn shops.

While middle class consumers enjoy bank-issued credit and debit cards, mobile wallets, and online payment options, many members of low-income communities must rely on cash and costly alternatives to manage their money.

Check-cashing services alone cost the average full-time worker without a bank account $40,000 over his or her career, according to the Brookings Institution. America’s poorest families have many better ways to spend that money—by saving for retirement, purchasing a home, or saving towards a child’s college fund.

With such a large amount of money on the table, businesses in the free market have responded to the predicament of the unbanked by providing innovative banking options. Among the most popular and effective are prepaid debit cards, which allow the unbanked to nevertheless get a Visa or Mastercard with which to make easy purchases. Many services allow workers to deposit their paychecks directly to these cards, providing more secure access to their money.

According to the Federal Deposit Insurance Corporation (FDIC), over 25 percent of unbanked households have used prepaid cards, along with almost 20 percent of underbanked households. A recent study by the financial services consulting firm Aite Group estimates that prepaid cards will double from 2012 to 2017. The study also showed that 30 percent of households using these cards have an annual family income of $25,000 or less.

I’m From the Government, and I’m Here to Help!

In response to the growing use of prepaid cards, CFPB has proposed an 870-page draft rule to get in on the action. It is unclear if or when the rule will come into effect, but some analysts worry that the current draft, if adopted, could end up raising the cost of prepaid cards and have unintended negative impacts on the very people it is intended to help.

The Dodd-Frank Financial Reform Law has had adverse impacts before. Intended to prevent big banks from growing bigger and crowding out smaller ones, it arguably reinforced the large banks and led to the decline in smaller financial institutions.

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Before 2010, the FDIC approved an average of 170 new banks a year, but since then, it has only approved one new bank. Meanwhile, government figures indicate the U.S. is losing one community bank or credit union a day. Larger banks, by contrast, have seen an increase in their market share. As HotAir’s Ed Morrissey points out, Dodd-Frank shows that “regulatory expansion disproportionately impacts smaller players in any market,” leading to fewer options for consumers and less competition for entrenched big businesses.

Another example comes from the Durbin Amendment to the Dodd-Frank Act, which wiped out low-cost checking accounts for roughly one million people after it took effect in 2011.

The proposed CFPB rules would impact overdraft protection on prepaid cards—a helpful service provided by companies like NetSpend. As Breitbart’s Michael Patrick Leahy explained, “NetSpend’s customers who use its overdraft protected cards can charge on a pre-paid account beyond what they’ve deposited in the account-typically up to about $100-and have no fee charged to them for 24 hours.” Those who miss this window are charged $15, less than the fee banks charge.

CFPB aims to nix this helpful feature, claiming NetSpend is extending credit to its customers, and must be regulated under the cumbersome standards of the credit card industry. NetSpend’s president, Chuck Harris, explained that some of these standards would prove “prohibitively expensive,” and force NetSpend to cancel this helpful feature.

“With that onerous regulation you put restrictions on the ability to innovate,” Harris told Breitbart.

While consumer protection is very important, CFPB must not overlook the unintended consequences of complex regulation. In trying to protect customers, it may end up removing the few remaining options for financial security available to the unbanked and underbanked.

Worse, should the rules come into effect and end up hurting millions of Americans, these people have no recourse against a powerful government agency. Ostensibly to keep CFPB pure from undue influence from the financial system it oversees, the agency does not rely on Congress for its funding. This leaves almost no effective check over CFPB—making it virtually unstoppable.

Even as most Americans enjoy significant cost and time savings from a rapid progression in electronic payment technology, there are millions trying to catch up. Those who have been blessed with resources have a responsibility to make sure their less fortunate brothers and sisters are not left behind.

Tools like prepaid debit cards present one of the best options for bridging the gap between financial exclusion and full participation in our 21st century economy. These tools—and all the innovations which have the potential to make them even better—should be fostered through entrepreneurship, thoughtful policy, and education for those caught in a deep cycle of poverty.