Spotlight on Poverty and Opportunity: The Source for News, Ideas and Action \
By: Ethan Geiling & Genevieve Melford
July 11, 2011
Something as simple as a checking account can be the first step in saving, planning for the future, building credit, and climbing the economic ladder. Unfortunately, basic financial services like checking accounts are out of reach for many low-income American families.
If we're going to help connect these people to genuine opportunity, now is the time to take some simple but important steps to provide better financial products for low-income Americans.
According to the Federal Deposit Insurance Corporation (FDIC), approximately 8 percent of all American households are unbanked, with neither a checking nor a savings account. Another 18 percent are underbanked, meaning they may have an account but they also rely on non-bank financial services like check cashing and high-interest payday loans.
This financially underserved population of over 30 million households is disproportionally low-income and minority. Forty-three percent of households with a yearly income below $30,000 are either unbanked or underbanked. Nationally, 54 percent of black households and 43 percent of Hispanic households are unbanked or underbanked, compared to only 18 percent of white households.
These households spend an enormous amount of money on financial services for which most Americans pay little to nothing. The average full-time worker without a bank account spends $40,000 over the course of his or her lifetime to turn income into cash.
In addition, those without a bank account don't have a safe place to store their money, which makes them more likely to be the victims of theft and unable to safely access money during emergencies.
Beyond issues of cost and safety, unbanked individuals do not have a way to save and build a personal safety net, turn savings into asset investments, or to build the robust and positive credit history needed to access affordable credit and succeed in today's increasingly complex consumer marketplace.
Given the overwhelming disadvantages, why do so many low-income people lack a bank account?
Surveys of the unbanked have found that the most common reason people don't have an account is that they don't think they have enough money to need one.
There are also those who abandoned banks due to negative past experiences. For these individuals, unexpected fees, including transaction, minimum-balance, overdraft, and other "hidden" fees, contributed to a feeling of mistrust.
Others require more immediate access to cash to tightly manage their cash flow needs in the context of very small financial cushions and employers or landlords who may deal only in cash.
Lastly, many people either truly cannot open bank accounts - due to insufficient identification or past trouble managing a checking account that has gotten them blacklisted from opening a new account - or just believe that they will be turned down.
It's clear that banks and financial institutions are currently not meeting the needs of many low-income households. Rather than assuming all low-income people would be better off with a one-size-fits-all bank account, we should take action on some simple but important steps to provide access to better financial products for the unbanked and underbanked populations.
We need to encourage financial institutions to offer low-cost transaction and savings products that meet the specific needs of low-income families and others for whom traditional banking products may not be useful, relevant, or cost-effective. The "Bank On" model, created by the San Francisco Treasurer's Office, is one approach that is gaining traction across the country.
We can facilitate the take up and use of these checking and savings products by supporting employers in their efforts to direct deposit wages and automatically enroll employees in Individual Retirement Accounts. And we can empower, inform, and connect the unbanked to safe, affordable and useful financial products by embedding financial access programs and financial coaching into the programs and services that already touch their lives.
Some of these actions require simple state policy changes; others can be accomplished within the existing policy framework and require the leadership, partnership, and commitment of state and local leaders, financial institutions, employers, and non-profits.
Access to affordable and safe financial products and services is one key piece of the larger financial security puzzle. The Corporation for Enterprise Development (CFED) recently released a report documenting a range of strategies cities - led by the Cities for Financial Empowerment Coalition - are using to increase the economic security of underserved populations. The report shows that well-designed financial products are an important step towards increased financial stability among the poor.
The needs of unbanked and underbanked households should be a priority for anti-poverty advocates and stakeholders across the country. With the Consumer Financial Protection Bureau coming online soon, and with many big banks rethinking their consumer products in the wake of new regulations, this is a critical time to be thinking about financial products that will help low-income households get ahead.
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Ethan Geiling is a policy and research associate at the Corporation for Enterprise Development.
Genevieve Melford is director of research at the Corporation for Enterprise Development