Prepaid Cards: Ensuring Financial Inclusion in the Age of Digital Payments

The move towards digital payments promises efficiency and cost savings, but it also presents a significant challenge: ensuring that vulnerable populations aren't left behind. While technology drives this shift, the real hurdle lies in reaching the millions of Americans who still rely on paper checks due to a lack of accessible alternatives.  

These include senior citizens accustomed to traditional methods, the 5.6 million U.S. households (4.2%) classified as unbanked, the 19.0 million households (14.2%) considered underbanked, and individuals experiencing homelessness who face unique barriers to accessing digital financial tools. Successfully transitioning these groups to electronic payments without causing hardship is not just a policy goal but a matter of financial inclusion. 

Understanding the Unbanked and Underbanked 

Despite a high overall banking rate, a significant portion of the U.S. population remains outside the traditional financial system. The FDIC's 2023 survey highlights that 4.2% of U.S. households (5.6 million) are unbanked, meaning they lack a checking or savings account. An even larger segment, 14.2% of households (19 million), are underbanked – they have an account but still frequently use alternative financial services like check-cashing outlets, money orders, and payday loans . 

These households are disproportionately lower-income, less educated, and often belong to minority populations. Reasons for remaining unbanked vary. A recent Federal Reserve survey indicated that approximately one-third of unbanked consumers "do not like dealing with banks," while a quarter feel they lack sufficient income or transaction volume to warrant an account. Notably, about one-fifth cite concerns about bank fees and minimum balances as deterrents. For many, the tangible nature of a paper check and the familiarity of check-cashing services offer a perceived sense of security and ease that the traditional banking system doesn't. 

Challenges of Moving to Electronic Payments 

Unsurprisingly, cash remains the dominant form of transaction for the unbanked. FDIC data reveals that 66% of unbanked households conduct all their financial transactions using cash. The remaining third utilize a combination of cash, prepaid cards, or mobile payment apps. Without bank accounts for direct deposit, receiving income or benefits often means relying on paper checks or prepaid benefit cards. This reliance frequently leads to incurring substantial fees at check-cashing services. In 2021, Americans paid an estimated $1.5 billion in fees just to cash checks, including paychecks and government benefits. This financial burden disproportionately affects those least able to afford it. 

This raises concerns about financial inclusion. Federal Reserve data from the 2023 Diary of Consumer Payment Choice (DCPC) underscores the stark differences in payment behavior between banked and unbanked individuals. Unbanked individuals made over half (53%) of their payments in cash, compared to only about 16% for the banked population. They also utilized prepaid cards for approximately 11% of their transactions, a rate nearly five times higher than banked consumers (around 2%). In contrast, the banked majority primarily used debit cards, credit cards, and electronic transfers — options largely inaccessible to the unbanked. 

What Is Financial Inclusion? 

Financial inclusion refers to the effort to make financial services accessible and affordable to all individuals and businesses, regardless of their personal circumstances or economic standing. It's about ensuring that everyone has access to useful and affordable financial products and services that meet their needs, such as transactions, payments, savings, credit, and insurance, delivered in a responsible and sustainable way. 

Key aspects of financial inclusion include: 

• Access to banking services: Enabling people to open and maintain bank accounts, make deposits, and withdraw funds. 

• Digital financial services: Providing access to mobile banking, electronic payments, and other technology-based financial tools. 

• Credit availability: Ensuring individuals and small businesses can access loans and credit at reasonable interest rates. 

• Financial education: Helping people understand how to use financial services effectively and make informed financial decisions. 

• Consumer protection: Safeguarding consumers against unfair practices, fraud, and exploitation in financial services. 

Financial inclusion is particularly important for marginalized populations who have traditionally been excluded from the formal financial system, including: 

• Low-income individuals 

• Rural populations 

• Women in certain regions 

• Elderly people 

• Undocumented immigrants 

• People with disabilities 

• Those with limited technological access or literacy 

The benefits of financial inclusion extend beyond individual financial well-being to broader economic development. When more people participate in the formal financial system, it can lead to increased economic activity, reduced inequality, and greater social stability. 

ACH Could Leave the Neediest Behind 

This data serves as a critical reminder for policymakers: a blanket transition to electronic payments without considering the specific needs and circumstances of the unbanked risks exacerbating the existing financial divide. Simply mandating online transfers for individuals without bank accounts or digital literacy could effectively cut off their access to essential funds. Recognizing this, the recent executive order on modernizing payments includes provisions for "limited exceptions" and accommodations for those without access to banking services or electronic payment systems.  

The overarching goal is to integrate the unbanked into safer, faster payment systems without leaving anyone behind. This includes public awareness campaigns and collaborations with community organizations to facilitate the adoption of digital payment options, potentially through assisting with opening low-cost bank accounts or enrolling in government-sponsored prepaid card programs. 

Addressing the Needs of the Elderly and Technophobic 

Another vulnerable group in the shift away from paper checks is older Americans who have relied on them for decades. While many seniors have successfully adopted direct deposit, a significant subset remains more comfortable with traditional methods. Data from the DCPC survey indicates that 17% of seniors (age 60+) wrote at least one paper check during a brief three-day period, compared to only 2% of young adults. In fact, individuals over 60 made approximately 5% of their payments via check, a rate six times higher than the under-thirty age group. These checks often cover essential expenses like rent, utilities, or payments to caregivers, where the familiar paper trail provides a sense of security. 

Transitioning this demographic to digital payments requires a sensitive and supportive approach. Concerns about online fraud, scams, and the fear of making errors online are prevalent. The government's plan acknowledges these challenges, including outreach efforts and potential hardship exceptions. 

Engaging trusted community touchpoints like local Social Security offices, AARP, and senior centers can be crucial in educating and assisting older benefit recipients in setting up electronic payments. Prepaid benefit cards can also serve as a familiar and accessible alternative, resembling government-issued identification cards they already carry. 

Reaching the Unhoused and Those Without a Stable Address 

Perhaps the most complex challenge lies in delivering payments to individuals experiencing homelessness or lacking a stable mailing address. While paper checks could at least be forwarded or held at a post office, digital payments present unique logistical hurdles. Creative solutions are essential.  

Prepaid debit cards offer a promising avenue, with agencies potentially partnering with local assistance organizations to distribute cards and ensure automatic monthly benefit loading. Leveraging digital wallets linked to mobile phone numbers, which many unhoused individuals possess, is another possibility. However, using private apps for federal benefits raises questions about accessibility and identity verification.  

The executive order directs the Treasury to collaborate with financial institutions, consumer groups, and other stakeholders to address financial access for unbanked and underbanked populations. This likely entails a multifaceted strategy to onboard individuals onto some form of electronic payment — whether a basic bank account, a reloadable government card, or a certified digital wallet — before paper checks are phased out entirely. 

Prepaid Cards: Bridge to Financial Inclusion 

As the deadline for eliminating paper checks approaches, prepaid debit cards have emerged as a critical tool for reaching individuals who cannot or prefer not to use traditional bank accounts. The White House order explicitly includes "prepaid card accounts" as an approved electronic payment method for federal agencies. Prepaid cards offer a unique combination of familiarity and accessibility, functioning like a payment card while bypassing the need to open a traditional bank account. And perhaps more importantly, public-private partnerships could result in successful implementation by the September 2025 deadline. 

The federal government already utilizes prepaid cards successfully through the Direct Express program, a prepaid debit Mastercard used to distribute Social Security and other federal benefits to individuals without bank accounts. As of 2022, Direct Express served approximately 3.4 million Americans, disbursing 53 million payments totaling $40 billion. Beneficiaries receive their funds electronically each month, loaded onto their government-issued prepaid card. They can then use the card for purchases, ATM withdrawals, and bill payments, similar to a debit card.  

This success was driven by: 

• Public-Private Partnerships: Leveraging established banking and payment networks. 

• Consumer-Friendly Fees: Minimal to no fees for basic usage. 

• Comprehensive Education: Providing resources to help recipients use their cards. 

• Continuous Improvement: Regularly enhancing features and accessibility. 

Benefits of Government Prepaid Cards 

The Direct Express card is personal, reloadable, and crucially, features minimal to no fees. There are no monthly fees, no overdraft charges, and at least one free ATM withdrawal per deposit, making it possible to use the card entirely free of charge. This stands in stark contrast to the 2-5% fees often charged by check-cashing services. 

Federal Reserve data indicates that total cardholder fees for government prepaid card programs like Direct Express amount to just 0.1% of the funds disbursed, a fraction of the cost associated with cashing paper checks. For beneficiaries, switching to prepaid cards effectively represents a financial gain, as they retain the full value of their benefits. 

The success of Direct Express demonstrates the potential of prepaid cards to reach vulnerable populations, particularly the elderly and unbanked. Enrollment doesn't require a credit check or a bank visit; individuals can sign up by phone or online and receive a card by mail. The backing of the U.S. Treasury provides an added layer of trust and legitimacy, which can be particularly important for those hesitant about traditional banking. 

The government's prior shift to electronic payments has yielded impressive results: 

• Fraud Reduction: Electronic Social Security payments have virtually eliminated check theft. 

• High Recipient Satisfaction: Consumer surveys show 89% satisfaction with instant government disbursements, 15 points higher than alternative methods. 

• Administrative Efficiency: Agencies benefit from reduced reconciliation burdens. The IRS, for instance, now manages far fewer uncashed refund checks. 

• Scale of Transformation: In FY2024, the federal government disbursed over $5.45 trillion through 1.27 billion individual payments. Check usage has plummeted from 131 million in 2021 to just 39 million in 2024. 

Advantages of Prepaid Cards over. ACH 

From a policy standpoint, prepaid cards offer advantages over both paper checks and standard electronic funds transfers (ETF) for the unbanked. While ACH requires a bank account, prepaid cards provide an alternative infrastructure, effectively creating a "bank account" on the backend without requiring direct user management. Funds are FDIC-insured at the issuing bank level, ensuring the safety of the recipient's money.  

Prepaid cards bridge the gap between traditional and digital finance, offering the familiarity of a physical card with the accessibility of cash. They serve as a de facto bank account for the unbanked, overcoming barriers to traditional banking. Key benefits include: 

• Budget Control: Pre-loaded funds prevent overspending. 

• No Bank Account Required: Accessible to the unbanked and underbanked. 

• No Credit Check: Available to all, regardless of credit history. 

• Wide Acceptance: Usable wherever major payment networks are accepted. 

• ATM Access: Provides convenient cash withdrawals. 

• Reloadable: Funds can be added as needed. 

Furthermore, prepaid cards offer enhanced security compared to paper checks, often requiring a PIN for transactions and allowing for remote deactivation if lost or stolen. In such cases, the government can reissue a new card and transfer the remaining balance, similar to a traditional bank. 

Likelier to Be Adopted 

Data from the 2023 DCPC further supports the effectiveness of prepaid cards in reaching the unbanked. Regression analysis indicates that lacking a bank account increases the likelihood of using prepaid cards by roughly 80% compared to banked individuals, even when accounting for age and income. This suggests that the unbanked are significantly more inclined to adopt prepaid solutions as a substitute for a checking account.  

While older age correlates with lower prepaid card usage, targeted outreach and support can help bridge this gap, enabling older unbanked individuals to benefit from the convenience and security of prepaid cards. 

Less Reliance on Internet Access 

It's also important to note that prepaid cards do not necessitate smartphone or internet access, with essential banking functions being able to be conducted over phone or SMS. This makes them a more inclusive solution than purely mobile payment options, which require digital literacy and smartphone ownership. While mobile payment platforms are gaining traction, particularly among younger, underbanked consumers with nearly 72% of U.S. consumers adopting online or mobile payment accounts, prepaid cards offer a more universal solution, catering to both those in cash-based economies and those beginning to engage with digital finance. 

Superior Fraud Protection 

Beyond that, fraud and waste are two concerns the White House explicitly mentioned, and prepaid cards surpass both ACH and paper checks in terms of fraud mitigations. 

Conclusion 

In conclusion, prepaid debit cards serve as a crucial bridge in the transition to a fully digital financial ecosystem. They provide a viable and accessible pathway for the government to include unbanked, underbanked, and vulnerable populations in the modernization of payments without imposing undue hardship.  

As the shift away from paper checks accelerates, expanding successful programs like Direct Express and exploring similar prepaid options for other federal payments will be essential to ensuring equitable access to electronic payments for all Americans. Viewing prepaid cards not as a secondary option, but as a fundamental tool for financial inclusion, is paramount to a successful and just transition.