Getting the unbanked on bikes
American Banker’s Andy Peters has a jolly story about how West Virginia’s United Bank is teaming up with Washington’s bike-sharing program, to help the formerly unbanked have access to this handy form of transportation.
To check out a bike from one of Capital Bikeshare’s 110 solar-powered stations, users must first swipe a debit card or credit card.
Such a system locks out plenty of low-income commuters who use Washington’s Metro trains and buses but lack a checking account or a credit card…
Bank on DC is offering a $25 discount on yearly Capital Bikeshare memberships to those who open an account at either United Bank, a unit of United Bankshares, or District Government Employees Federal Credit Union. A Capital Bikeshare annual membership normally runs $75.
“These are not necessarily high-balance accounts, but a lot of the customers are using their accounts very prudently,” says Craige L. Smith, the chief operating officer of United Bank’s Virginia division. “We think there is real value in establishing those relationships.”
The fact is, however, that there’s a lot not to like here, most of which is elided by Peters. This scheme is not going to get the unbanked onto Capital Bikeshare in any remotely significant numbers, for a lot of reasons.
Firstly, the $25 discount comes only on the most expensive form of membership — the annual membership which the poor and unbanked are least likely to be able to afford. If you want to help bring down the cost of accessing these bikes, then charging $50 just to get started is not a great way of doing that. In many cases, that’s $50 desperately needed for food or rent: buying bike access in eleven months’ time simply isn’t on the list of priorities, no matter how good a deal it might be.
Secondly, the unbanked tend to be unbanked for many, many reasons. Some are good, some are bad. But it’s ridiculous to imagine that getting a $25 discount on a bikeshare membership is going to be enough to persuade anybody to open a bank account. Millions of dollars have been spent on all manner of imaginative approaches towards trying to get the millions of Americans without bank accounts to open one. Few if any of those approaches actually work. This one won’t work either.
Thirdly — and this is key — opening a bank account isn’t enough to get you that $25 discount. A bank account will come with a debit card, and a debit card will get you a bike for either 24 hours or three days. But as the bikeshare website clearly says, “all Capital Bikeshare memberships require a credit card”. If you want to get that $25 discount, you’re going to need not only a bank account but also a credit card.*
At the same time, even if you don’t take advantage of the $25 discount, it’s still a bad idea for the newly-banked to rent a bike even for just one day, using their United Bank debit card. Capital Bikeshare spells this out quite explicitly:
When you join Capital Bikeshare with a 24-hour or 3-day membership, a preauthorization hold of $101 per bike is placed on your card account. This is a not a charge against your account. It serves as a security deposit and will be returned to you when the hold expires. Holds may last up to 10 days, depending on the credit card company. We recommend using a credit card and not a debit or check card when becoming a 24-hour or 3-day member. Using a debit card may result in overdrafts if you don’t have sufficient funds in your account to cover the hold.
It’s easy to imagine someone opening their first-ever bank account with United Bank, using their debit card to pay $7 for one day’s biking, and then immediately getting hit by some whopping overdraft fee because of that $101 hold.
Then again, the possible charges if you rent a bike with your credit card are substantially higher. This is hidden away in the small print when you sign up for a membership:
If Member maintains possession of the Capital Bikeshare bicycle beyond the Permitted Period of Continuous Use, then the Capital Bikeshare bicycle is deemed lost or stolen, Member’s credit card will be charged a fee of $1,000, and a police report may be filed with local authorities.
(The Permitted Period of Continuous Use, incidentally, is 24 hours.)
In order to get that $25 discount, then, an unbanked person in Washington has to first open a bank account; secondly get a credit card; and thirdly sign a contract under which they agree to pay $1,000 should their bike be lost or stolen or taken out for more than 24 hours. It’s not even clear that United Bank is promising to give a credit card to anybody who opens up a bank account under this scheme, but assume that they do: then they’re immediately putting the newly-banked individual into $50 of debt, with no real idea as to whether or when that debt will get paid off. Add in late fees and the like, and the $25 savings starts looking even less desirable.
Jim Surowiecki has a column on layaway this week; United Bank should take a leaf out of that book and offer their customers the opportunity to pay the $50 membership fee at a rate of say $4.25 per month, plus whatever usage fees are run up on the Bikeshare program.
Who, under that kind of continuous-layaway scheme, would take on the responsibility of paying $1,000 if a bike were to be lost or stolen? Bank on DC is the obvious organization to do such a thing. They should post a $10,000 bond to cover the first ten times this happens, see whether the scheme is any kind of success, and then take it from there. If there are lots of stolen bikes and the $10,000 disappears quickly, then the scheme would be an interesting failure — but organizations trying new ideas should be open to failure. And there’s a good chance that the $10,000 would not be touched at all.
What’s really needed, in other words, to get the unbanked onto bikeshare schemes is not bank accounts at all — it’s a way of finding institutions which will accept the responsibility of paying $1,000 should the bike be lost or stolen. If you do that, then memberships can be given out to individuals without bank accounts at all, and they can use any old prepaid card to pay the modest usage fees they run up, without worrying about the $101 hold.
Which institutions would do such a thing? Well, there are a lot of non-profit organizations which work with the poor and try to get them mobility — they’re a good place to start. But there’s another set of institutions which might be interested as well: churches, of which there are very many in the DC area. Churches know their flocks, after all, and might well be interested in giving out memberships to those who need them, and taking on a contingent liability in the process. All you’d need is a single credit card belonging to the church, which could then deal in its own way with any congregant who ran up that $1,000 charge.
The Capital Bikeshare scheme has been built in a very cautious manner, carefully constructed so that everybody with a membership needs to have a credit card associated with that membership. That in turn allows Capital Bikeshare to be sure that it can collect $1,000 every time a member loses their bike for whatever reason. This system was set up ex ante, with no indication of how often such a fine would turn out to be necessary — and it has essentially excluded the unbanked from Bikeshare.
I would much have preferred to see an optimistic scheme at first, with the restrictions coming in later if the cost of lost or stolen bikes turned out to be substantial. But even now it’s possible to imagine ways around these problems, if some well-intentioned group has faith in its members and in the Bikeshare scheme. The Bank on DC promotion, however, is not such a way.
*Update: It seems that the website is wrong about this: you can use a debit card to pay for a 30-day or 1-year membership, and when you do so no hold is put on your account. On top of that, Bank on DC also has a scheme to help defray the $1,000 cost if your bike is lost or stolen. More details as I get them!
Update 2: Details, from Bikeshare:
- You can pay for 30-day and annual membership with a debit card.
- There is no hold on an individual’s account if they purchase a 30-day or annual membership with a debit card. The reason for this is that Bikeshare has contact information (name, address, etc.) when an individual signs up online for one of these types of memberships — but not for 24-hour or 3-day members.
- If the bike is stolen and no police report is filed, Bikeshare would charge the debit card $1,000. If the individual who is responsible for the bike does not have $1,000 in their account, Bikeshare would charge the amount available in the account and work with the financial institution to ensure no subsequent charges can be made to the account until there is a full reimbursement for the cost of the bike.
- Approximately 85 percent of annual members do not incur any usage fees when riding. The average usage fee the other 15 percent incur is between $6-$7 per individual per month.