Why you should care
More than a quarter of adult Americans pay a penalty for living outside the financial mainstream.
On a recent Tuesday evening at a Pay-O-Matic in Manhattan’s East Village, a long line of customers — men, mostly — waited in virtually uninterrupted silence. Despite the discomforting July heat, they hung in there as long as it took to reach the teller windows. Many had no other choice — not if they needed to cash checks, pay the New York City Housing Authority for their apartments, transfer money to family back home or conduct other timely financial transactions.
Welcome to the world of America’s unbanked and underbanked, and it’s not confined to urban neighborhoods. According to a 2015 report from the Federal Deposit Insurance Corp. (FDIC):
27 percent of U.S. households do not have regular access to banks and other mainstream financial services.
That’s 90.6 million financially marginalized people who are further penalized, in terms of time and money, by having to rely on alternate financial services (AFS), which charge fees for transactions that are often free to customers of banks, credit unions and other federally insured institutions. Despite the financial recovery since the Great Recession and the growth of online financial services, the number of households with little or no access to bank accounts has remained stubbornly steady since 2009, when the FDIC began collecting statistics on the phenomenon.
For its report, the FDIC surveyed more than 36,000 American households. The primary reason respondents did not use a bank? Not having enough money to open an account and keep it going. Households in this underserved community break down to 7 percent unbanked and 20 percent underbanked, and they tend to be young, poor, uneducated, Black and Latino. They rely on payday lenders, check-cashing stores, prepaid debit cards and other alternative financial products to manage their money.
In this area, the United States lags behind other developed nations. The percentage of Americans who are completely unbanked is 7 percent. For comparison, a 2014 World Bank report shows that the percentage of Canadians without a financial institution account is less than 1 percent; Germans, less than 2 percent; and Spaniards, less than 3 percent.
When compared to the developing world, the United States performs better. The same World Bank report revealed that only 53 percent of Indian adults have a financial institution account, though 24 percent hold a mobile account. In Nigeria, 44 percent of adults have a financial institution account and just 2.3 percent have opened a mobile account.
Being unbanked adds costs for families, anywhere from hundreds to even thousands of dollars a year in transaction fees.
Joe Valenti, senior policy adviser, AARP
As for the U.S., it’s important to look beyond purely economic reasons to understand why some of the population bypasses standard financial services. Some simply don’t feel welcome. An FDIC spokesperson emphasized that unbanked households are much more likely to perceive banks as “not at all interested” in serving households like theirs. Only 17 percent of unbanked households with this perception reported they were somewhat or very likely to open an account in the next 12 months.
Alternatively, in unbanked households that perceived banks as interested in “serving households like their own,” 50 percent “were somewhat or very likely to open an account in the next 12 months.” So the perception of banks as exclusive entities may perpetuate socioeconomic disenfranchisement. How banks present themselves to the working poor and other financially struggling communities seems to have ramifications that extend far beyond the subtleties of marketing.
Joe Valenti, a senior policy adviser with the AARP, detailed some of these consequences. “Being unbanked adds costs for families,” he says, “anywhere from hundreds to even thousands of dollars a year in transaction fees.” In fact, the Center for Financial Services Innovation (CFSI), a nonprofit think tank based in Chicago, estimates that Americans shell out $8 billion annually in fees for check-cashing services and payday loans in what is essentially a surcharge for being poor. Valenti also notes that reliance on AFS heightens the risk of disappearing savings through theft or loss, and it can lead to missed opportunities to spend, save and invest in a world that is increasingly moving away from cash.
Fortunately, technological innovations are altering the AFS landscape in favor of consumers who may never have set foot in a Citibank or Wells Fargo branch. Theresa Schmall, a manager at CFSI, points out that “solutions using digital and mobile platforms can provide expanded access” for the unbanked. It may also remove the presumption of exclusivity that prevents many unbanked and underbanked households from approaching mainstream financial services — while also eliminating those seemingly endless lines.
Correction: An earlier version of this article cited the total annual amount of alternative financial services instead of the annual fees for those services.