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The Unbanked

What an FDIC Study Reveals

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The Unbanked Overview: In December 2009 the FDIC National Survey of Unbanked and Underbanked Households was released. It was a special supplement to the U.S. Census Bureau’s Current Population Survey (CPS), and was based on the responses of about 47,000 households out of approximately 54,000 surveyed, a response rate of 86%.

The Unbanked: A household was considered unbanked if no member held a checking or savings account. Thus, a household classified as banked actually may contain one or more individual adult members who are unbanked.

The survey results indicate that about 7.7% of U.S. households, or about 9 million, are unbanked. These include about 17 million adults.

Being unbanked is highly correlated with low income. Households with annual earnings below $30,000 accounted for 71% of the unbanked. The likelihood of being unbanked declines with age and educational attainment, but these factors also tend to have positive effects on income. Among racial and ethnic groups, 21.7% of black and 19.3% of Hispanic households are unbanked, with the figure jumping to 35.6% for households in which Spanish is the only language spoken. It was 21.9% among households of foreign born noncitizens, and 20% among households headed by unmarried women.

The leading reasons for being unbanked were, with the percentage of the unbanked citing each reason (multiple reasons can be cited by each household):

  • Not enough money to need an account (37.1%)
  • Do not write enough checks (18.0%)
  • Minimum balance requirement too high (12.7%)
  • Do not see need for an account (12.4%)
  • Uncomfortable with banks (9.1%)
  • Language barriers (6.9%)
  • Do not trust banks (6.3%)
  • Fees too high (6.3%)
  • Lack documents to open account (5.5%)
  • Cannot manage or balance an account (3.8%)
  • Inconvenient bank hours (3.7%)
  • Inconvenient bank locations (3.6%)
  • Banks don't offer needed services (3.5%)
  • Credit problems (3.3%)
  • Do not know how to open account (2.4%)
  • Had too many overdrafts (1.7%)
  • Banks take too long to clear checks (1.1%)

Among unbanked households, 46.9% indicate that they never had a banking relationship.

Additionally, 41.1% of unbanked households believe that they are unlikely to open a bank account in the future.

About 66% of unbanked households use one or more of the following alternative financial services (AFS) from outside the traditional financial services industry:

  • Non-bank money orders
  • Non-bank check cashing services
  • Payday loans
  • Rent to own (RTO) agreements
  • Pawn shops
  • Refund anticipation loans (RALs)

Meanwhile, 25% of unbanked households use no AFS, suggesting that they rely entirely on cash transactions.

Approximately 12% of unbanked households have used a general spending prepaid card, and an estimated 3.1% receive their income through a payroll card.

The Underbanked: The definition of an underbanked household was one that has a checking or savings account, but which also utilizes one or more of the AFS listed above.

The survey results indicate that about 17.9% of U.S. households, or about 21 million, are underbanked. These contain roughly 43 million adults. However, an additional 4.1% of households, or 5 million in total, may actually be underbanked, because they had checking or savings accounts, but their survey responses to the questions about the use of AFS were missing. These encompass 11 million adults.

Accordingly, the combined scope of the unbanked and the underbanked in the U.S. can be as high as 35 million households (29.7% of the total) and 71 million adults.

The underbanked rate declines with the age of the household members, but is more evenly distributed across educational and income groups than are the unbanked. Households with incomes between $30,000 and $50,000 are nearly as likely to be underbanked as those below $30,000. However, the likelihood drops sharply for households with a college educated member and income above $75,000.

Among the underbanked, 81.1% use non-bank money orders and 30% use non-bank check cashing, the primary reason being convenience. Interestingly, they also indicate that they find these services to be faster and cheaper from non-bank providers than from banks (contrary to the rationale behind the Walmart MoneyCenters and similar initiatives from K-Mart and Best Buy). Those that use pawn shops or payday loans do so because it is easier to obtain credit from these sources than from a bank.

Approximately 16% of underbanked households have used a general spending prepaid card and an estimated 4.2% percent receive their income through a payroll card.

Dollar Impact: According to The Economist ("Financial services for the poor: The big save," September 24, 2011), each year Americans buy $75 billion worth of money orders from vendors other than banks or the post office. Meanwhile, nonbank establishments cash $60 billion worth of checks. The total revenue from prepaid debit cards, remittances, money orders, check cashing and payday loans was $338 billion in 2010, and is forecasted to reach $520 billion by 2015. The same article discusses how credit unions, especially those that focus on immigrant populations, are helping to bridge the gap for many of the unbanked and underbanked.

Traditional check cashing establishments typically charge commissions ranging from 2% on government checks to 4% on payroll checks to 9% on personal checks, and the effective interest rates on payday loans often are several hundred percent.

As the major banks eliminate no-fee checking accounts, more small depositors are bound to be forced out of the banking system and into the ranks of the underbanked and unbanked. Herein lies a huge potential opportunity for retailers like Walmart, and a chance to cement ties to their core mass-market customers by also offering them "everyday low prices" on basic financial services. See "The Lex Column" in the June 23, 2010 Financial Times.

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