discussed above, advocates for the unbanked urged banks to offer _basic_ checking accounts, a low-cost checking account with low minimum balance requirements and a specified minimum number of free checks per month. While this account was suitable for some of the unbanked who wished to open a bank account, it was not suitable for all. For one, many of the unbanked who had previously had a checking account were forced to close those accounts because they overdrew their accounts and did not promptly return the accounts to a positive balance. Banks not only closed their accounts, but they also commonly reported them to “ChexSystem,” a network owned by member banks and credit unions that contribute information on mishandled checking and savings accounts to a centralized database. Most other banks will refuse to open checking accounts for people whose names are in ChexSystem. In addition, even among those unbanked individuals who can open a checking account, many may not want to for fear of the fees that they will incur if they overdraw their accounts. Most banks charge $20 to $30 for each “non-sufficient funds” (NSF) check, and the merchants that receive the checks traditionally impose a $10 to $15 returned check charge. For an individual living from paycheck to paycheck, it is easy to overdraw a checking account at the end of a pay period. This can make a “free” checking account quite expensive.

In recent years, some banks have encouraged unbanked individuals who express an interest in opening an account to open transaction accounts without checking privileges. These are low-cost low-minimum-balance accounts. Individuals can withdraw money from their accounts by using an ATM or visiting a teller. They can generally make debit card purchases using the ATM card, but the ATM card is usually an “on-line” card that does not permit the account holder to overdraw the account. The account holder pays bills by purchasing money orders or by making electronic transfers from the account. There is no data yet on the success of these accounts, but they do appear to be well designed to meet the needs of many of the unbanked who wish to open starter accounts.

Banks are also making efforts to create cost-effective means for LMI individuals to obtain emergency loans ranging from $200 to $500. Traditionally banks do not make such small loans except through credit card advances or some other prearranged line of credit, which excludes people unable to pass a traditional credit-risk screening procedure. Many credit unions and banks offer deposit-secured credit cards to customers unable to meet traditional credit risk standards. In addition, many credit unions will make deposit-secured small-value loans. For example, if a depositor has $500 in his account, he can borrow $500 rather than withdraw the money. The deposit balance serves as the collateral. Many customers apparently prefer to borrow the money rather than withdraw it because they like the budget discipline that repaying the loan imposes upon them. Some credit unions have also begun to offer rapidly-disbursing unsecured small-value loans to customers who might not meet traditional credit risk standards. Typically they require that the recipient has used direct deposit for several months and the loans are repaid out of future direct deposits. Early reports from credit unions offering this service indicate that it is popular and profitable for the credit unions (Richter and Tan, 2002).

The development and marketing of automated “payroll cards” is another recent privatesector innovation that could benefit the unbanked.<sup>14</sup> Until recently employers had to pay their

> 14A recent report on payroll cards issued by the Office of the Comptroller of the Currency provides a nice overview of the type of cards on the market and their features (Frumkim et al, 2003).

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