Recently consumers have protested when banks increased their fees for certain services. However, as bad as banking fees may be, not using a bank can be even more costly. The Federal Deposit Insurance Corporation (FDIC) conducted a survey about unbanked households as part of a larger FDIC effort to encourage more Americans to use the banking system. The survey found that many Americans aren’t using banks when they could benefit from them.
Living Without a Bank: Approximately 7.7% of American households, including at least 17 million people, are considered unbanked, meaning that no one in the household has a checking or a savings account. An additional 17.9% (29 million people) are underbanked, meaning that they have bank accounts but rely frequently on “alternative financial services” (AFS). These services include pawnbrokers, payday lenders, check cashing businesses, money orders, payroll cards, and prepaid debit cards. The unbanked and underbanked use such services because they are more convenient and more accessible than banks – and often do not have as strict lending standards.
Who are the Unbanked? At least 25.6% of U.S. households, occupied by approximately 60 million adults, are either unbanked or underbanked. Not surprisingly lower income households account for the majority, with households earning less than $30,000 a year representing 71% of the unbanked population. Minorities are also disproportionately represented. An estimated 21.7% of African American households are unbanked. In American Indian/ Alaskan households, 15.6% are unbanked as are 19.3% of Hispanic households. Only 3.5% of Asian households and 3.3% of white households are unbanked. The southern states have the highest percentage of unbanked households.
Why Are They Unbanked? Many of these households do not have a history of using banks and are unfamiliar with the advantages. Some people have been turned down for accounts and do not trust banks. Many simply feel they cannot afford an account. The most common reason cited (by 37% of households) for not having a bank account is that they do not have enough money to need a bank account. Other reasons given include that the minimum balance is too high (12.9%) and that there was no reason to have an account (12.4%). Many of the unbanked do not anticipate using a bank; 41.1% say that it is not likely they will open a bank account in the future.
The Consequences of Being Unbanked: People who use AFS providers rather than banks usually pay much higher fees. Since most of the unbanked or underbanked have a lower income, these higher fees are borne by the people who can least afford them. The unbanked and underbanked also experience predatory lending practices and a constant risk of loss or fraud. AFS providers are not insured by the FDIC, so they are riskier. Relying on such services also makes it hard to build a credit history or achieve financial security.