Unbanked and underbanked

The FDIC issued a report today that shows that many Americans do not have access to banking or choose not to use the banking system.

First the results:

From FDIC.gov:

  • An estimated 7.7 percent of U.S. households, approximately 9 million, are unbanked. These households do not have a checking or a savings account….
  • In addition to the unbanked households, an estimated 17.9 percent of U.S. households, roughly 21 million, are underbanked. These households have a checking or savings account but rely on alternative financial services. Specifically, underbanked households have used non-bank money orders, non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or refund anticipation loans at least once in the past five years
  • From USATODAY:

    “Nearly 30 million households have no bank account or have one but also use alternate financial services at least occasionally, according to the FDIC report. The survey, the FDIC’s first in-depth study of the issue, was conducted by the Census Bureau.

    The problem is most acute among minorities: 53% of African-American households and 43% of Hispanic households use check cashers or similar services instead of or in addition to banks.

    Buying money orders and cashing checks are the most frequent transactions, the survey shows. Those using check cashers and other services say they are faster, cheaper and more convenient than banks — even though they pay a fee to cash a check they could deposit in a bank account for free.”

    And from the UPI:

    “Nine million households, including a fifth of households earning under $30,000 a year, have no bank account, the report to be released Wednesday says.”

    Now we can argue some about the definitions (for instance are you underbanked if you use Money Orders twice a year? and what percentage are in transit (closed account at bank A, have yet to open one at bank B)? But regardless of those issues, the numbers are pretty big but as any student of banking should say, somewhat predictable. Why? As fees go up, small accounts pay a higher proportion. Thus it may be expected that some close their accounts. And indeed, nearly half of those who are “unbanked” did in fact close their accounts.

    Working with many of these “unbanked” through BonaResponds has given me a new appreciation of the importance of banking. Being “unbanked” definitely limits their access to capital (for instance this past year heard : “We will install insulation as soon as we can sell our tractor”) and increases transaction costs. But it also prevents credit histories and thus makes future loans even more difficult.