Blogging about the RushCard has me thinking.  Prepaid debit is filling a market need for financial services (payments and safe-keeping) for the unbanked.  But prepaid debit products are often as predatory in their pricing as check-cashing outlets.  So two questions.  

First, why isn't this market working better?  That is, why isn't competition pushing out the bad products and lowering prices?  This can't be a credit-rationing or red-lining story, as there's no credit (and almost no risk) involved with a prepaid product.  

And second, is this market isn't working, what role for government?  There are lots of ways to respond to market failures, and a lot depends on identifying the nature of the market failure.  But one option, when the private market isn't working, is to spur it along with public competition.  To this end, it's worth considering the possibility of government-sponsored prepaid debit cards as a means of providing low-cost basic financial services access (payments and safe-keeping) to the unbanked (who are generally low-to-moderate income (LTMI) consumers.  

Payment systems are the infrastructure backbone of commerce; we should want to ensure that all Americans have basic commercial access; it's no stranger to think of the government subsidizing payments than for the government to subsidize rural housing or rural broadband.  I think there's a case that since the private market is not providing low-cost access to basic financial services for LTMI consumers that government competition in that market is a reasonable policy response.  A low-intensity form of postal banking through prepaid cards could be a way to bank the unbanked.   

The government already transfers a variety of welfare benefits to consumers using prepaid debit–SNAP benefits (foodstamps), Social Security, state benefit programs, etc. But these programs are just using prepaid cards as a means of transferring funds to consumers.  They could be leveraged to achieve a broader goal of providing LTMI consumers with no-or-low-cost access to basic financial services like payments and safe-keeping of funds.  For this to work, entitlement programs would have to be combined with a reloadable, prepaid government-sponsored debit card.  

There would be a thicket of operational issues to work through for such a program, including the expense (I suspect that float income alone might be sufficient to fund a large-scale program with economies of scale) and then there is a conceptual question of whether we want a "public option" of this sort?  Do we think there is value in public-private competition?