Programs help 'unbanked' avoid high fees

Dozens of cities are launching programs to sign up low-income people as customers at commercial banks so they can avoid the high fees typical of check-cashing stores and payday lenders.

More than 50 cities and at least three states now have programs modeled on the 3-year-old Bank On San Francisco.

The programs - including Indiana's, launched last week, and Newark's, which began Monday - are aimed at the estimated 8.7 million American households that do not have bank accounts. Bank On programs encourage residents to open low- or no-cost checking accounts.

Participating banks and credit unions must offer "second chance" accounts for customers who have bounced checks in the past, and accept identification besides Social Security numbers, such as taxpayer identification numbers.

"We wanted to open up access to the financial mainstream," says Leigh Phillips of Bank On San Francisco, which has opened 41,000 accounts since 2006. "We do think we've made a pretty significant impact."

People who don't use banks spend an estimated $1,042 a year on check-cashing services, which charge a percentage of the value of the check, according to a study by the Pew Charitable Trust.

Fear of fees and lack of trust in banks are two main reasons why people do not have bank accounts, the Pew study found. Public scrutiny of overdraft fees on checking accounts, which in 2009 are expected to reach $38.5 billion, has led to congressional legislation that would regulate such fees.

"Clearly lots of lower-income folks are concerned about or have been burned by the tricks and traps of a traditional bank account," says Paul Leonard of the Center for Responsible Lending. "The big question is whether or not (Bank On programs) are creating sufficient safeguards to prevent the new enrollees from accruing fees."

Some Bank On programs require banks to waive one set of overdraft fees annually.

"It is a big issue that we need to pay attention to," says Jerry DeGrieck, who heads Bank On Seattle-King County.

City officials say it is too soon to know whether Bank On participants will really save money but that a bank account is a necessary step toward financial progress for low-income families.

"Even with the risks associated with fee structures," says Newark Deputy Mayor Stefan Pryor, a bank "still beats a check-cashing establishment on the corner of your neighborhood every time."