As many as 28 million people in the U.S. do not have a bank account.
Another 45 million people — or 19.4 percent of all U.S. households — have some sort of account but continue to use a variety of high-cost “alternative financial services” such as check cashers, payday lenders, pawnshops and rent-to-own furniture businesses.
In a 2005 survey titled “Getting to Know Underbanked Consumers: A Financial Services Analysis,” the Chicago-based Center for Financial Services Innovation examined the financial habits and preferences of low-and-moderate income consumers in Washington, Los Angeles and Chicago. The survey asked several questions: Why do so many low-to-moderate-income households not have a checking or savings account? And to what extent do households with bank accounts also use alternative financial services, and in what ways are the underbanked connected to the mainstream financial sector?
The survey found that there’s no simple explanation as to why people choose not to use banks and credit unions and that painting that demographic with a broad brush is ill-advised, said Arjan Schutte, associate director of the Chicago-based Center for Financial Services Innovation. Most low-and-moderate-income households, he said, rely on a patchwork of financial services provided by both banks and non-banks.
Two-thirds of the 70 percent of the survey population that was banked still used non-bank services such as pawnshops and auto title lenders as primary sources of credit. Half of the households that were unbanked had once had a bank account. Overall, 30 percent of the survey population was unbanked.
“People’s banked status is not such a clear dichotomy,” Schutte said.
Need for liquidity
In some cases, the survey notes, banks are faced with the challenge of attracting customers who have no experience with banks. But in other cases, they are trying to win back old customers. Many of the unbanked, Schutte said, have simply found that the products offered by banks do not meet their needs as well as the products offered by alternative financial services.
“There are a lot of myths about the unbanked and why they don’t behave the way middle-class people do,” Schutte said. “Some of the perception is that the unbanked are not educated as to financial possibilities, that they’re irresponsible with financial products. But we’re finding that people are choosing, very wisely, products that meet their needs.
“If you lead a high-liquidity life, you don’t want to wait a couple days for checks to clear,” Schutte said. “So the rational choice is to pay a little extra to move a check more quickly.”
In low-to-moderate-income neighborhoods, checks may not be all that useful.
“Many landlords in these areas won’t accept checks,” Schutte said.
Some people may think the rules at banks are too strict or be uncomfortable showing identification.
Joe Coleman, chairman of the Financial Service Centers of America, a trade organization that represents check cashers throughout the U.S., said lower-income people can’t always afford to leave their money sitting in a bank.
“They need transactional, basic services,” he said. “Banks don’t always want those people. ... Banks want you to keep some of your money sitting there.”
Check cashers, he said, provide customers with transparency and around-the-clock service.
“All the fees are stated up front,” he said.
“We get a bad rap because we make a profit on low-income communities,” said Coleman, the president of the Bronx-based RiteCheck Check Cashing and Financial Services Center. “But we have the right business model to serve low-income communities. ... The main thing low-income consumers need is liquidity.”
Finding a common goal
The Center for Financial Services Innovation was founded in 2004 with the goal of expanding financial services access and asset-building to underbanked Americans in a way that is profitable for both the company and the customer. The organization doesn’t view “alternative financial services” as the enemy but rather potential partners in reaching an underserved population.
“Our interest is in working with financial services broadly,” Schutte said. “If the objective is to help people to greater financial stability and the potential to create wealth, the bank isn’t the only instrument for doing that.”
Of alternative financial services, he said, “We believe there’s a greater opportunity to provide efficiencies there.”
He pointed to pre-paid cards as one of the newer, innovative tools for reaching the underbanked.
Pre-paid cards work and look like debit cards but don’t require opening a bank account; money can be added to them as needed. These cards, he said, can be purchased online; in some cases, people can use them to build credit.
The majority of licensed check cashers now offer the NetSpend pre-paid debit card, which costs $9.50 to purchase. Users pay a fee each time they use the card, which was launched several years ago. A newer feature is NetSpend’s savings program; users can call a toll-free number and transfer money on the card to a savings account that earns 5 percent interest; when they need that money, they can move it back to the card.
“It’s a good product,” Coleman said. “People like it a lot.”
The middle ground
What’s needed, Coleman said, are “transitional models” that can bridge the gap between check cashers and banks.
“When people start to move up that ladder, there’s kind of a big gap between us and the bank,” he said. “We need to create middle rungs. ... There are things you can do in a bank that we can’t do for you.”
He said this transition between check cashers and banks is often a two-way street; people may fall on hard times and find themselves closing their bank accounts and returning to check cashers.
“People need to be able to go back down the ladder,” Coleman said.
Last year, KeyBank began cashing payroll and government checks free of charge for people without bank accounts at 20 branches throughout the Capital Region; that number has now risen to 26. The number of people using the service, called KeyBank Plus, has increased every month since it was launched, according to Anthony Lanzillo, KeyBank’s senior vice president of retail banking in the Capital Region. Customers are also allowed to get five free money orders a month. And as people become more comfortable going to KeyBank to cash checks, they begin to learn more about KeyBank’s other services.
The unbanked are “a big market,” Lanzillo said. “In our quest to expand our market, we [focused] in on that segment as an important opportunity for us.”
On Saturday, the check cashing rate in New York increased from 1.70 percent to 1.75 percent.
Among the underbanked, myths and fears about banks persist.
“People don’t feel comfortable in banks,” Schutte said. “They think banks are too complicated.”
Although checking accounts that don’t require a minimum balance are now widespread, “a significant population in the survey group perceived themselves as not having enough money [to open a bank account],” he said.
Many people also are concerned about overdraft fees.
Still, that doesn’t mean the unbanked are complete strangers to banks. Between 30 to 40 percent of the unbanked go to banks to cash checks.
Approximately 40 million U.S. households are financially underserved, meaning they lack a relationship with a mainstream financial institution or use a mixture of mainstream and alternative providers to meet their financial needs. But these households also have a lot of buying power — in the “Getting to Know Underbanked Consumers” study, the Center for Financial Services Innovation estimated that the households in the survey neighborhoods buy 1.2 million money orders each month and cash 1.9 million checks.
Non-white families are four times more likely to be unbanked than white families; 35 percent of all Latinos in the U.S. are unbanked, while 53 percent of Mexican immigrants are unbanked. The underbanked tend to be younger and have lower incomes and less education than the general population.