Plastic Empowerment: Financial Literacy and Black Economic Life

Of the multiple changes to consumer banking in the last fifty years, decreases in savings, increases in borrowing, and the shift from a cash to a plastic economy have received the most attention.¹ A recent spate of books like Mehrsa Baradaran's How the Other Half Banks and Lisa Servon's Unbanking of America focuses on a related but perhaps more dramatic shift.² Due to deregulation, profit-seeking through fees (most notably overdraft "protection" fees), and a shift to focusing on wealthy customers, "over the past four decades … banking itself has morphed into a system that no longer serves the needs of far too many Americans."³ Instead, low- and middle-income Americans are switching to so-called "alternative financial services."⁴ Baradaran notes that "the rise of fringe banking correlates directly with the decline of banks in poor communities" and that "banks compete for the deposits of the wealthy and middle class while the other half is left to fringe institutions that are often usurious, sometimes predatory, and almost always much worse for low-income individuals than the services offered by traditional banks."⁵

In the past eight years, the biennial National Survey of Unbanked and Underbanked Households has consistently found that more than a quarter of US households either have no bank account or, if they do, still use alternative financial services including "money orders, check cashing, international remittances, payday loans, refund anticipation loans, rent-to-own services, pawn shop loans, or auto title loans."⁶ Since the 1990s, these alternative financial services, or "fringe banking," have exploded in scale and popularity.⁷ Prepaid cards are one of these fringe banking services. Unlike bank debit cards that link to a traditional bank account in which a minimum balance may be required and overdraft fees may be charged, prepaid cards are loaded with funds online, in person, or through the direct deposit of a paycheck, and then, subject to usage fees, the user may withdraw money or spend at locations that accept debit cards. The history of these types of cards stretches back at least to the early 1990s, when Electronic Benefits Transfer cards replaced paper food stamps and when "open system gift cards" were introduced.⁸

Unlike other fringe services like check cashing, payday loans, rapid tax refunds, and money orders, prepaid cards offer consumers a way to enter the growing plastic economy—in which a credit or debit card is necessary to make internet transactions and authorize contingent payment on things like rental cars—without using a traditional bank account. These benefits, along with the ability to have paychecks and tax refunds direct deposited, are usually impossible without a bank account. They are also cheaper with a prepaid card than the cost of using a storefront check casher to access funds, but as critics are quick to point out, a "free" checking account is much cheaper. Critics of fringe financial services focus on the fees and high interest rates associated with many of these products and suggest that users are making poor financial decisions because of a lack of "financial literacy." However, prepaid debit cards do not fit so neatly in this characterization of fringe banking services. First, unlike payday loans, auto title loans, and rent-to-own services, prepaid cards are debt remote, meaning that there is no way to become indebted using them. Even traditional checking accounts are rarely debt remote, as overdraft "protection" can be understood as an expensive form of short-term credit.⁹ Second, the transparency of (at least some) prepaid debit fees makes them different from traditional bank services.¹⁰ Traditional banks have a long history of targeting the poor and minority consumers for disproportionate exploitation. Low-income consumers are more likely to have low or no credit scores, which means that they will pay higher interest rates for bank credit.¹¹ The process by which those interest rates are determined is obscure. Black people have also long been targets of disproportionate financial exploitation, from the post-emancipation sharecropping system to the multiple documented contemporary incidences of black borrowers receiving...