Fed study finds one in four use 'alternative' banking

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Kansas City Star
By: Greg Hack
June 22, 2010

More than one in four households -- an estimated 2.3 million in the Federal Reserve Bank of Kansas City's district -- each day use non-bank businesses to meet their financial needs, a new Fed report says.

Rather than banking with banks, these people turn to payday lenders, check cashing outlets, convenience stores and and other non-bank businesses, the report says.

The Fed's study, available for download here, includes results from 24 focus groups, six conducted in Spanish, in Kansas City, Denver, Omaha and Oklahoma City. The 10th Federal Reserve District covers Kansas, western Missouri, Colorado, Oklahoma, Nebraska, Wyoming and northern New Mexico.

The "unbanked" were defined as people who have no bank account, checking or savings.

Many people surveyed said they lived paycheck to paycheck and often felt they didn't have enough money left over regularly to making having a bank account worthwhile.

The "underbanked" were defined as having a bank or credit union checking or savings account but using non-banks for services such as check cashing, money orders, bill payment or borrowing. Many of them said they simply found it much more convenient to use retailers for some basic services.

Many people in the focus groups said they had difficulty with the complexity of bank rules and with keeping track of their accounts. Some of them said they distrusted banks because rules and proper procedures weren't clearly explained to them, and then they got in trouble after making mistakes because they didn't understand that they were doing something wrong.

Yet the report also describes people without bank accounts who use complicated combinations of check cashing and lending services to get by.

"Unbanked and underbanked consumers are finding checking and savings accounts less relevant to their financial lives, but research shows that access to safe and affordable bank services is a key step in achieving personal financial stability," said Thomas Hoenig, president of the Fed's Kansas City bank. "We hope this study will provide an understanding of these challenges and assist financial institutions, policymakers and community organizations in improving the outcomes for all involved."

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