The Unbanked in America
By Deborah M. Figart
Relatively few free checking accounts. High monthly service fees or low balance fees. Especially high overdraft fees. When is having a bank account just not worth it? Amply, to the tune of 25 million people in the U.S. (out of a population of about 319 million). This is a key finding of the Federal Deposit Insurance Corporation’s (FDIC) latest biennial National Survey of Unbanked and Underbanked Households, released on October 29, 2014.
The percent of households without a bank account (unbanked) declined slightly from the previous survey (2011), as more households are recovering from the Great Recession. Now only 7.7 percent of U.S. households are unbanked, compared to 8.2 percent two years before. This is the sliver of good news. The highest unbanked rates are still among lower-income households, younger households, non-Asian minorities, households with at least one person unemployed, and working-age disabled households.
Underbanked households do have a checking or savings account, but utilize non-bank services—e.g. check cashing stores, payday lenders, pawn shops—at least once or twice per year. Such services are often located in poor communities and used by those who cannot afford, do not have access to, or are uncomfortable with banks. The percent of underbanked households remained the same between 2011 and 2013. But at 20 percent of households, this amounts to 24 million U.S. households with an estimated 68 million people living in them.
Consistent with the FDIC’s previous two biennial surveys, about 46 percent of unbanked households previously had bank accounts. What caused them to leave mainstream banks? The FDIC asks survey questions about this. While a spell of unemployment is a typical reason for closing a bank account, other common motives included: balances were too low to maintain an account, bank fees were too high, banks were not welcoming or were not trusted, or there wasn’t a perceived need to have an account.
Check cashing places and other alternative financial service providers (AFSPs) have stepped into fill the void, and that industry is doing well. As in the previous FDIC surveys, about one in four households shared that they used at least one AFSP in the previous year. In addition to cashing paychecks and government checks, U.S. check cashing stores, for example, offer prepaid debit cards. Similar to a checking account, these ever-more-popular cards can be used to pay bills, withdraw cash at ATMs, make purchases, deposit checks, and receive direct deposits. A large proportion of unbanked and underbanked households now use these cards.
This helps make alternative financial services big business, according to the trade association of its members, the Financial Service Centers of America, Inc. According to FISCA industry statistics: “Through its 13,000 locations nationwide, the industry conducts more than 350 million transactions each year, providing an estimated $106 billion in various products and services to an estimated 30 million customers.” As long as customers do not feel satisfied with banks and there are reasonably priced alternatives that are responding by offering needed services, AFSPs will be here to stay.
One reliable and safe way to offer inexpensive financial services is the U.S. Postal Service, as I argued in an op ed article for the Press of Atlantic City in 2012, following publication of the previous FDIC survey of unbanked and underbanked in America. The local post office is often one of the geographically closest retail outlets for millions of Americans. There are over 30,000 post offices in the U.S. We had a postal savings system for accepting and insuring small deposits from 1911 to 1967. It was discontinued when the FDIC extended deposit insurance at private banks. According to the CGAP/World Bank Group (2009) survey of 139 countries, Financial Access 2009, more than 70 percent of countries use post offices to provide financial services.
Using post offices as financial service providers was endorsed by U.S. Senator Elizabeth Warren (D-MA) in a blog with the Huffington Post on February 1, 2014. Senator Warren wrote that “We need innovative ways to create pathways for struggling families to build economic security, and this is an idea that falls in that category.”
The FDIC concludes the new 2013 survey with implications from its findings, pointing to possible ways to help households renew their relationships with mainstream banks. Yet, as long as there is great need for alternative financial services (“nonbanks”), then there will be a gap between financially included and financially excluded households. That is not necessarily a bad thing, argues Lisa Servon, Professor of Urban Policy at the New School in New York City. Professor Servon spent some time working as a “teller” at two check cashing stores in the U.S. where she interacted with hundreds of customers. She shared her reflections with The New Yorker magazine in a recent essay titled “The High Cost, For the Poor, of Using a Bank.”
Of course, not all AFSPs are created equal. Pawn shops and payday lenders that charge upwards of 1000% interest for a short-term loan are located at one extreme. The other is a local, licensed check-cashing store in a highly regulated state, such as New Jersey, with clearly posted fees and policies. New Jersey fees are among the lowest in the U.S., according to data from the New Jersey Financial Service Centers, Inc. So the way forward in terms of public policy may not be to castigate the AFSPs or the people who use them. Rather, state departments of banking and insurance may want to consider stronger regulations of AFSPs, using a state like New Jersey as a model.