The number of “unbanked” Americans has risen since the recession’s end, according to a study published Sept. 12 by the Federal Deposit Insurance Corporation. In its 2011 National Survey of Unbanked and Underbanked Households results, the FDIC found 8.2 percent of U.S. households do not have access to a savings or checking account, whether by choice or circumstance. The total, representing almost 12 million households, was an increase of 821,000 since the 2009 survey.
When the survey was first conducted in 2009, the then-7.7 percent of unbanked American households was less surprising as the country was coming out of a recession. But now, moving toward two years into recovery, more experts are blaming the increases in unbanked Americans on bank policies. As financial reforms have restricted banks from charging automatic overdraft fees and large debit card interchange fees, the concept of free checking is fading into oblivion. More checking accounts are coming with monthly maintenance fees, statement copy fees and account closure fees; and out-of-network ATM fees are increasing in amount. The result appears to be many consumers either steering away from checking because they can’t afford it, or ditching banks out of sheer annoyance.
“[There's a] declining availability of free checking — and a lot of that is banks pushing out unprofitable customers,” Greg McBride, senior financial analyst at Bankrate.com, told CNN. “And if you have a tendency to overdraft accounts and fees are $35 a pop, that’s really going to prompt you to not open an account.”
In fact, two-thirds of unbanked Americans surveyed responded they did not have enough money for a bank account. The study also showed 30 percent of households do not hold a savings account, while just 10 percent do not have a checking account. Overall, about 67 percent of U.S. households hold both a savings and a checking account.
Those who choose to utilize alternative financial services (AFS) often choose to use prepaid debit cards, although other popular AFS options include money orders, pay day loans, pawn shops and rent-to-own stores. Prepaid debit cards have grown in popularity because, in many ways, they are a less-expensive alternative to checking accounts. Money can be paid toward the card, and then used to make purchases in-person, by phone and online. The consumer does not have to worry about expensive overdraft fees, however, or minimum balance requirements.
The FDIC report also identified a broader issue within the matter of the unbanked, however. The statistics vary strongly by demographic.
“Some of the highest unbanked rates are found among non-Asian minority households, low-income households, households headed by younger householders, and households experiencing unemployment,” the report reveals. “While over two-thirds of U.S. households have both checking and savings accounts, the proportion of households with both types of accounts is much lower among non-Asian minorities, lower-income households and less educated households.”
In fact, the highest rate of unbanked households falls among African-Americans, with more than 21.4 percent lacking any sort of deposit account. The group is followed closely by Hispanics, however, at 20.1-percent unbanked. By comparison, just 4 percent of Asian households are unbanked and only 2.7 percent of white households lack a bank account. Households that speak only Spanish are almost 37-percent unbanked.
The discrepancies only get worse, however, when income is factored into the equation. More than 46 percent of low-income African-American and 41.5 percent of low-income Hispanic households are unbanked, compared with only 11 percent of low-income Asian households and 17.5 percent of low-income white households.
Another population identified in the study is the “underbanked,” those who have a bank account but choose to use AFS at some point during the year instead. More than 20 percent of U.S. households—about 51 million adults—are underbanked. The total of underbanked has also risen since 2009, by about 18 percent. According to the FDIC report, about one-fourth of all U.S. households have used at least one AFS product in the past year, and about 10 percent have used AFS products two or more times. About 12 percent of U.S. households have used an AFS product in the last 30 days—including about 40 percent of unbanked and underbanked households.
When examining the two categories’ combined rates, almost half of non-Asian minority households, low-income households, younger households and unemployed households are either unbanked or underbanked. By comparison, in 2009, only about one-quarter of similar households were underbanked. The rate of unbanked remains relatively unchanged.
Both the FDIC and financial experts agree that relying on AFS products can ultimately cost unbanked customers.
“Access to an account at a federally insured institution provides households with the opportunity to conduct basic financial transactions, save for emergency and long-term security needs, and access credit on fair and affordable terms,” the report states. “Participation in the banking system also protects households from theft and reduces their vulnerability to discriminatory or predatory lending practices.
“Despite these benefits, many people, particularly low-to-moderate income households, do not access mainstream financial products such as bank accounts and low-cost loans. Other households have access to a bank account, but nevertheless rely on non-bank financial services providers for many reasons. These households may incur higher costs for transaction and credit products and services, be more vulnerable to loss or struggle to build credit histories and achieve financial security.”
“The high cost of many alternative financial services does take a toll,” said McBride. “On the surface, it starts as a lower cost option relative to $35 overdrafts, but once you’ve rolled over that cash advance (and get charged additional fees), it’s not a lower cost option anymore.”
And although a JPMorgan Chase & Co. executive told investors earlier this year that 70 percent of customers who maintained less than $100,000 in deposits and investments were unprofitable, the FDIC encourages banks to target the large potential client base that exists with the unbanked.
“Financial institutions interested in pursuing the market opportunity that AFS users present might need to more clearly demonstrate the value in having a bank account to AFS users who perceive non-bank financial services to be more convenient, faster, less expensive, or to present lower barriers to qualification,” the report urges.
The FDIC conducted its survey in partnership with the U.S. Census Bureau, and collected responses from 45,000 households in June 2011. In addition to gathering information to address a gap in data on the unbanked and underbanked in the nation, the survey was also conducted to comply with the Federal Deposit Reform Conforming Amendments Act of 2005 which requires the FDIC to conduct ongoing surveys of banks’ efforts to serve and provide insight to the size of the unbanked and underbanked market.