According to a recent study by the Federal Deposit Insurance Corporation (FDIC), nearly 95 percent of U.S. households (approximately 124 million) are “banked,” meaning the occupants have either a bank or credit union account; 5.4 percent (approximately 7.1 million households) are “unbanked,” meaning they don’t have access to savings or checking accounts and don’t use other traditional banking services, such as loans or credit cards.
The reasons why a household or individual might not use a bank or credit union can vary. The most common reason people don’t use traditional banking services is that they don’t think they have enough money to put into an account. And the statistics confirm this belief. According to Federal Reserve data, 14 percent of households making less than $40,000 are unbanked, compared to only three percent of households making more than that amount. And roughly one out of four American households making less than $15,000 a year do not have a bank account.
Some unbanked people don’t trust a bank to maintain their privacy; some worry about the costs of maintaining an open account via bank fees; some believe that being unbanked will help keep creditors or collection agencies at bay; some believe that finding and visiting a bank is too inconvenient; and some just don’t believe that a bank or credit union serves their needs.
But in today’s economy, being unbanked generally makes life more complicated. Unbanked individuals often must rely on check cashing services to cash paychecks because they don’t have direct deposit. They have to pay bills using money orders, and they need to always carry cash to pay for everyday expenses, such as gas and groceries. Further, being unbanked makes it more difficult to get quick access to government programs, such as the $1,200 stimulus payments that came earlier this year from the stimulus bill.
Unbanked individuals often use prepaid credit cards to handle the sorts of transactions a banking customer would use a credit card for. And although prepaid cards can fill an important gap for its users, they often come with additional fees – an activation fee, a monthly fee, and fees for making deposits or using the card at an ATM. The biggest issue with using prepaid cards, however, is that, unlike credit cards, they do nothing to help their users build and maintain a credit history. And without a credit history, unbanked individuals cannot access loans. And since credit history may also be accessed by employers, landlords, utility companies, and insurers in making decisions on whom to hire, rent to, provide service to without a deposit, and insure, not having a credit history can really hurt.
Finally, being unbanked makes it difficult to set aside money for future spending, while, at the same time, earn interest on those funds from traditional savings accounts, CDs, and money market accounts.
Once unbanked, it can be challenging to get back into the financial mainstream. But many community banks and credit unions offer different options to help those individuals achieve better financial health and are more than willing to work with these potential new customers. Here are some of the ways in which these financial institutions attempt to reach the unbanked. They:
- Eliminate barriers such as account minimums, monthly fees, and other requirements such as requiring an account holder to receive direct deposit payments from a job.
- Offer Second Chance Checking Accounts, which don’t have the perks and features of other checking accounts but offer the opportunity to upgrade to a traditional account after a consumer manages it responsibly within a certain time frame.
- Create more mobile apps that give low-income individuals, who can’t afford a home broadband connection, the ability to transfer money, pay bills, and deposit paper checks via their smartphones.
- Decrease reliance on physical branches, so that more services can be performed offsite.
- Offer low-cost, prepaid debit cards as a bridge product to convince unbanked individuals to begin using other services, such as opening a savings or checking account.
- Create financial education opportunities, such as short video tutorials, via a website or mobile app, on topics such as saving money, applying for credit, or opening a checking account.
- Expand credit and loan options, such as secured credit cards or credit-builder personal loans, in order to help consumers re-establish financial responsibility.
Local community banks and credit unions are mainstays in American life. The more they are utilized, the healthier the national economy will be.
Al Krulick, Editor-in-Chief