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WalmartSomewhere between 30 million and 60 million Americans have limited or no access to banking services. A good portion of this group will be due refunds when they file their federal and state tax returns in the coming months.

Typically, this is where payday lenders come in, cashing that government check for the customer and charging a percentage of the refund for the service. But this year there's a new cashier competing for the same business: Walmart (WMT).

Walmart is pitching flat-rate check cashing (available in 47 states as of this writing) for the unbanked: $3 to cash refund checks of $1,000 or less, and $6 for checks up to $7,500 in value.

The potential savings? Up to $90 on the average tax refund of $2,902, Walmart says.

Banks Don't Want This Business

If Walmart's move strikes a chord with customers, it's because banks are less willing to cater to low-income earners than they once were. Regulators have either limited or eliminated overdraft and other fees that at one time were used to subsidize low-balance accounts.

This why "free" checking accounts are getting harder to find: MoneyRates.com reports that only 34.3% of checking accounts are free of fees and minimum balance requirements. The other 65.7% may not be an option for those who live paycheck to paycheck.

In pitching its own services, Walmart argues that the unbanked tend to bear an unfair burden when it comes to services fees. "We believe Americans shouldn't have to pay exorbitant prices on their everyday financial needs," said Daniel Eckert, vice president of Walmart Financial Services, in a press release. "It's their money and we want to make sure they can cash checks, pay bills and transfer money at a low price."

How People 'Bank' Without a Bank

Tax season brings the problem of affordable banking into sharper relief.

The Treasury Department is preparing to mail out an estimated $31 billion in refunds. Most of us won't think twice when we deposit that money into our accounts -- or have it directly deposited for us. The unbanked, though, not only have to pay to turn their refund check into currency, they get charged every single time they want to cash or write a check, or access any banking service.

Here, too, Walmart is pitching a lower-cost option: direct deposit to its prepaid MoneyCard cash card.

Cash cards are like checking accounts in that they have account and routing numbers, and can therefore accept direct deposits. You can also use cards to pay rent, utilities, and other necessities online. The cards themselves act like any other bank debit cards when you use them while shopping.

Walmart is teaming with prepaid card vendor Green Dot (GDOT) to offer MoneyCard, which can be purchased and reloaded either online or in stores. Direct deposits to active accounts cost nothing, though check-cashing fees may apply.

Rival vendor NetSpend Holdings (NTSP) also pitches its prepaid cards as easy vehicles for the unbanked to get access to their tax refunds. Both firms have seen revenue increase more than 20% annually over the past two years as the number of unbanked individuals has risen to 7.7% of the U.S. population, according to FDIC estimates.

The Perils of Prepaid Cards

Sound good so far? Prepaid cash cards are certainly better than giving a percentage to a payday lender. Yet failing to maintain a bank account also has drawbacks, starting with restrictions.

Walmart's check-cashing policy is limited to payroll checks, government checks, tax refunds, and Walmart-issued MoneyGram money orders. You'll still need a payday lender for personal checks and other payments.

Prepaid cards can also become expensive. Cards typically come with spend and deposit limits, and reloading typically costs money, especially if you're reloading with a paper check that needs cashing. In the case of Walmart's card, ATM transactions cost $2 each while a standard reload costs $3. There's also a $3 monthly fee for carrying the card.

So while I applaud Walmart's intent -- the unbanked can use all the help they can get -- don't view these services as a panacea, nor even a long-term substitute for a good checking account. You'll probably pay less over the long run by going with a traditional banking partner. You'll also get access to low- or even no-limit savings accounts as a bonus for putting yourself on the path to financial freedom.


Are you using a prepaid cash card? If so, what has your experience been like? Please let us know using the comments box below.


Motley Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and past columns. The Motley Fool owns shares of Walmart. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Walmart.




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