Prepaid cards, widely accepted by the underbanked as a way to facilitate spending, are also emerging as a catalyst for saving and an alternative to short-term credit.

Banking Up, a prepaid card marketer formerly called Plastyc, has had more uptake with its Rainy Day Reserve savings account launched in November 2011 than the results some other savings options have in appealing to the underbanked.

"There are millions of households that are underbanked or unbanked…and we need to find innovative ways to reach consumers with savings," says Sarika Abbi, director of ideation at the Doorway to Dreams (D2D) Fund. "Because of the prevalence of prepaid cards in the market and the usage by especially financially vulnerable consumers…we need to reach them where they are."

The D2D Fund is a national non-profit that focuses on building financial stability for the low to moderate income households.

Attaching a savings account to an existing product such as a prepaid card helped eliminate users' reliance on short-term credit and check cashers, Abbi says. "Consumers saved more than $14 million into the [Banking Up] savings feature," she says.

The underbanked "do have access to credit but that credit is more expensive," Abbi says. "We want to see options more affordable for the household and more financially stable for the long term."

In a survey of Banking Up's Rainy Day Reserve customers, 22% of respondents said they had tried traditional savings products and they didn't work for them, according to a whitepaper published this month by the (D2D) Fund. But of those that use the Rainy Day Reserve, 40% have used payday lenders less because of the feature, says Abbi.

Customers that use the savings feature are also more engaged with the card, she says, which is a win-win for consumers and card providers.

Banking Up says 16.5% of its account holders have adopted the savings feature. Consumers reported using Rainy Day Reserve for several reasons, including 84% to save money, 62% because it seemed like a good idea and 49% because it seemed easy to try, according to the whitepaper.

Banking Up's Rainy Day Reserve has had better adoption than savings options associated with tax assistance, for example. $aveNYC , a matched savings program offered in New York at Volunteer Income Tax Assistance sites, saw adoption of 9% from 2008 to 2010, according to the D2D Fund's report. When the program expanded in 2011 to include SaveUSA, which launched in four cities, it had take-up rates between 6% and 13%.

Savings bonds offered at tax time had take-up of 3% to 6%, D2D says.

Users of Rainy Day Reserve, available only as an add-on to Banking Up's prepaid card, are primarily low-to-moderate income households, D2D's research found.  Seventy-seven percent are asset-poor, with household savings and assets of $5,000 or less. 

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