Should Cities Be in the Business of Issuing Debit Cards?

The city of Oakland already offers residents a municipal ID card, a form of identification thought to help undocumented immigrants, in particular, who might otherwise fear reporting crimes, or labor or housing violations. Now, they've upped the ante, becoming the first city to add a pre-paid debit-card function to its ID.

Residents can reload the card at Western Union, direct-deposit paychecks to it, withdraw cash from it at ATMs, and shop with it like any other pre-paid Mastercard.

Governing has an interesting look today at how the whole thing is going. With nearly one in 10 households considered "unbanked" in the U.S., Oakland's initiative is part an effort by many cities to broaden the financial options available to low-wage workers beyond check-cashing stores and payday lenders. The challenges of being "unbanked" are also related to those of being undocumented. As J.B. Wogan writes:

A municipal ID card with a debit feature may be the natural evolution of those two movements. The same people who lack official identification are likely to be unbanked or underbanked. Undocumented immigrants, for instance, often become targets for robberies because they carry cash -- instead of storing money in banks -- and are less likely to report crimes to the police. Theoretically, it makes some sense for cities to tackle both issues with the same program.

Oakland has also couched the program as a crime-reduction strategy. But Wogan writes that the ID/debit card (you can sign up for the former without the latter) has received considerable criticism for the fees attached to it: They include a 75-cent transaction fee, a $1.50 ATM withdrawal fee, and a $2.99 monthly service fee. All of which pretty quickly adds up to a serious burden on people who receive their weekly payday in cash.

Oakland and the company managing the program suggest that the fees will go down as the idea catches on, creating economies of scale. Consumer advocates so far don't seem sold. Could an improvement on the same idea work better somewhere else? What would that look like?

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Source: http://news.yahoo.com/cities-business-issuing-debit-cards-223635205.html

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