THE FEDERAL government has some soul-searching to do, about its responsibilities.
It's on a campaign to distribute most government payments electronically, including Social Security and veterans benefits.
You're still allowed to get paper checks. But having the money wired to your bank account is more secure.
Direct deposit is easy for people with traditional bank accounts. But what about the 6 million federal beneficiaries without bank accounts, most of them poor?
New kinds of accounts are being developed, to make direct deposit attractive to those who are currently unbanked.
But some of these systems raise the price of cashing government checks.
The Treasury could protect low-income consumers, by putting some limits on how electronic payments are disbursed. But will that happen? Or will the government tell the poor that they'll have to look after themselves?
Here's the story:
The Treasury will soon unveil a special, low-cost bank account called an Electronic Transfer Account (ETA). It provides a simple way of receiving government benefits through an insured financial institution, at a price that might be as low as $3 a month.
Some unbanked consumers are currently paying less than $3 to cash paper checks, at grocery stores or other neighborhood check-cashing outlets. But others may be paying $5 or more. For them, the ETAs would be a better deal.
Banks will be able to choose whether to offer the new ETAs. These accounts won't be money losers, but they won't be highly profitable, either.
There's the rub. The banks have found a more profitable way of providing direct-deposit accounts to the unbanked. They do it by teaming up with the free-standing check-cashing companies.
Under this arrangement, the government wires a person's money to a bank. But to get the cash, you have to go to a check casher or use the check casher's debit card at an ATM. The check casher would advertise the accounts and sign people up.
Several banks have taken this route already, including Citibank and Chase. Western Union also offers electronic accounts through ATMs or its own offices, with a $7.50 minimum.
These accounts are expensive. The account holder pays three layers of fees -- to the ATM owner, the check casher and the bank.
$19 to cash a check?
The total cost to collect a single Social Security check could range from $7.50 to $19 or more, says the National Consumer Law Center (NCLC) in Boston, a lobbyist on behalf of low-income consumers. This, for a government check that's perfectly secure.
Abby Hans, chairwoman of the National Check Cashers Association in Hackensack, N.J., says the costs are reasonable and that people like the convenience of neighborhood check-cashing stores.
In many poor neighborhoods, banks simply do not exist.
There's another issue here.
When the Treasury announced its push for direct deposit, one of its goals was to bring the poor into mainstream banking, where financial services generally cost less than they do on the street.
The Treasury's new, low-cost Electronic Transfer Accounts will be handled by banks alone, with no check cashers involved. Account-holders will receive their government payments through tellers or bank ATMs.
But what's the incentive for bankers to offer an ETA? If they can make more money by starting their own electronic accounts, in partnership with check cashers, that's what they'll do, says Margot Saunders, managing attorney for the National Consumer Law Center.
The proof is what's happening with Western Union and others. They're using the government's push for direct deposit to sign up the poor for accounts that cost them more.
There's another problem with funneling government benefits through check cashers. The recipients of the checks become captive customers for other expensive financial products.
For example, take payday loans. These loans attract people who need small sums of money until their next paycheck or government check.
The loans typically cost $15 for every $100 borrowed, but the fee can run as high as $30. Over two weeks, that's an annualized interest rate of 391 percent to 782 percent, according to the Consumer Federation of America.
Consumer groups think the Treasury should refuse to pay government checks through direct-deposit accounts that are handled by check cashers. An alternative might be bank ATMs in local stores.
The Treasury is considering whether to impose the ban or to regulate the fees.
While it ponders, many banks wait.
"They're not going to launch a product, only to find it affected by regulation," says Treasury official Donald Hammond.
But the National Check Cashers Association is launching a direct-deposit deal with Citibank this month, charging recipients about $12.
Hans says he's confident that government regulation won't interfere.
Tip to the unbanked: Do not sign up. You're better off cashing paper checks.
Pub Date: 6/14/99