Why Banking Matters

This is the first post in a series. My startup, Teller, is a personal finance coach that you can talk to through text-messaging. Even if you know nothing about saving, budgeting, or credit, you can text a number and quickly learn some of the basic concepts.

Setting the Stage

Let’s start with the definitions of unbanked and underbanked:

Unbanked

Unbanked households do not have a checking or savings account at an insured institution. The total unbanked population (in 2013): 7.7% of households in the U.S (9.6 million households or about 16.7 million adults).

Underbanked

Underbanked households have a bank account, but also use alternative financial services or products such as money orders, check cashing services, payday loans, etc. The total underbanked population (in 2013): 20.0% of households in the U.S. (24.8 million households or about 50.9 million adults).

Collectively, I will refer to the unbanked and underbanked population as underserved.

Demographic Factors:

  1. For Black or Hispanic households, the underserved percentage is nearly 54% and 46% respectively. For comparison, the rate for White non-black, non-hispanic households is only 19.5%.
  2. For the nearly 16 million single-mother households, the total underserved (unbanked+underbanked) percentage is nearly 48%.
  3. Without a high school degree, the unbanked rate is 25% compared to 1.1% for college graduates.
  4. Perhaps most unfortunate is the relationship between family income and bank status. There are 19 million households (not individuals) who have a household income less than $15,000. Among this group, 27.7% of households are unbanked, and 22.4% of them are underbanked totaling over 50%. This particular group that can least afford the negative consequences of being unbanked, has the highest unbanked+underbanked rate.
  5. Households with a disability have a considerably higher rate of unbanked+underbanked: 46.5%. Perhaps this is related to employment status and high medical costs.

Before moving on, I should point out that while these seem like several independent statistics, there is probably an underlying phenomenon connecting many of them. Many of these factors (for example, education and income) are definitely correlated to each other so it shouldn’t be a surprise that both are also related to bank status.

These statistics are alarming in part because of the sheer number of households they include. While percentages can seem small (after all, only 7.7% of U.S. households are unbanked), the number of households and individuals are measured in tens of millions.

What is the cost of being unbanked?

So after a brief introduction on the status of banking in the U.S., the next logical question is why does it matter? Or put another way, what are the consequences of being unbanked?

Spending Income

Let’s start with cashing a check. If you do not have a bank account, and you receive a payroll check, or government benefits check, it will likely cost you anywhere from 2.5-5% just to convert them in to spendable income. The St. Louis Fed estimates that the cost of cashing bi-weekly checks, along with money orders (described below), can result in fees of $1,200 for someone with an annual income of $20,000. About the same amount was estimated by Candice Choi, an AP writer who personally ‘acted’ unbanked for a report. This amount, $1,200, is substantially more than it costs to open and maintain a checking account.

Paying Bills

If you need to pay your rent, utilities, medical bills, car payments, or anything else with a check, you need to turn your cash into a check. Although a money order may not cost much individually ($0.75 -$1.50), you still need to go to a post-office, Walmart, or Western Union to issue one. This is a completely unnecessary errand if you have a bank that can issue checks.

Getting a Loan

Life is full of unexpected expenses -this is precisely the reason most personal finance guides recommend building an emergency fund as one of the first steps. Medical emergencies, layoffs, home or automobile expenses, or natural disasters are some of the numerous unexpected expenses that can arise. If you haven’t built up your savings, you will need to take a loan or a pricy financing option (more on that in another post).

While the process of obtaining a loan is not directly related to having a bank account (in the same way check cashing is), there is likely a large overlap between the group of unbanked households and those that can’t get loans from banks. These people sometimes have no choice but to resort to payday loans.

Most of us know about the predatory tactics of payday loans. If not, consider watching this John Oliver segment that investigates the problem. According to the CFPB, a typical two-week payday loan with a $15 per $100 fee, equates to an Annual Percentage Rate (APR) of almost 400%. For comparison, most credit cards charge between 12%-30%. The total amount of credit extended by payday lenders is about $38.5 billion, or roughly about $1,120 per underserved household.

While technology today empowers many people to deposit checks or pay bills online, underserved households must still go to brick and mortar locations to cash checks, get money orders, mail or deliver payments, purchase and reload prepaid cards, etc. As Candice Choi put it in the article linked above, when you don’t have a bank, you spend a lot more time managing your money.

In a future post, I will try to cover some solutions (both tech-enabled and local/in-person) to better serving the unbanked and underbanked population.

Sources:

  1. https://www.fdic.gov/householdsurvey/2013report.pdf
  2. https://cfed.org/newsroom/experts/ethan_geiling/the_most_unbanked_places_in_america/
  3. https://www.stlouisfed.org/Publications/Central-Banker/Winter-2010/Reaching-the-Unbanked-and-Underbanked
  4. http://blogs.reuters.com/felix-salmon/2010/10/08/the-cost-of-being-unbanked/
  5. http://www.consumerfinance.gov/askcfpb/1567/what-payday-loan.html
  6. http://cfsaa.com/about-the-payday-advance-industry.aspx