New FDIC Report: One Out of Every Four Households is Unbanked or Underbanked
Blog Post
Dec. 4, 2009
Last week, the FDIC released an important, data rich report: the 2009 FDIC National Survey of Unbanked and Underbanked Households. The 31-question, special supplement to the Census Bureau’s Current Population Survey offers a comprehensive picture of who is banked, unbanked, underbanked, and why. This research is the household-level companion report to the industry-level FDIC Survey of Bank’s Efforts to Serve the Unbanked and Underbanked.
Though not the first survey on this topic, the FDIC survey stands apart in its breadth, touching 47,000 households (covering 86% of the Census’ 54,000 household survey) to collect demographic characteristics on the unbanked, the underbanked, and the rationale underlying their banking decisions. In addition, the FDIC has unveiled a user-friendly website with data available by topic, or geographic unit-such as state or metropolitan statistical area. Much more is available, too, so it's worth a visit: www.economicinclusion.gov.
The FDIC report affirms earlier research on who is unbanked. Compared to the general population, the unbanked tend to be lower income earners, who possess less education, are more likely to be minority.
The FDIC also finds consistent reasons as to why people are not banked. The leading responses were all cost related: people don’t feel they have enough money to make the account useful.
Here are some highlights and observations of the report:
Nearly 8% of U.S. Households are Unbanked
Fully 17 million people report living in households that do not currently have a checking or savings account. These are defined as the unbanked. Two thirds of this group use alternative financial services, mostly money orders and check cashing services, while the remaining third rely mainly on cash.
<p>Ensuring households have knowledge of and access to affordable, appropriate banking options is important for a number of reasons. First, the incremental costs of using services such as check cashers could add up to $40,000 over a worker’s lifetime, according to the <a href="http://www.brookings.edu/reports/2008/01_banking_fellowes.aspx">Brookings Institution</a>. Exclusive use of cash also brings no protection from risk of loss and theft. Moreover, a household cannot fill the spectrum of financial needs at a non-bank retail servicer. But before considering that the solution lies in exclusively opening bank accounts for the unbanked, keep reading.</p><p><b>Nearly 18% of U.S. Households are Underbanked</b><br>Approximately 43 million adults report owning a checking or savings account, yet also using an alternative financial services (AFS), including payday loans, pawn shops, rent to own agreements, refund anticipation loans, etc.. This is the definition of being “underbanked.” Nearly half of the underbanked (40%) use AFS to access credit. Asked why they pursue "alternative" credit products over products offered at their own bank, the majority of respondents answered that qualifying for a non-bank loan was easier. </p><p><b>The FDIC report shows that fully one quarter of all U.S. households possess a weak attachment to the financial mainstream.</b> <br>The underbanked's reliance on AFS products reflects the failing of banks to fully meet the financial needs of their customers who are walking out the door, seemingly unencumbered by banks efforts to retain their business. The marginal relationship also suggests a need to reinforce the financial building blocks which all households need to leverage to get ahead. Non-bank products typically lack the ability to save, invest, borrow on safe and reasonable repayment terms, and build credit. But these are precisely the elements that help consumer's get ahead and build wealth, not debt. For example, with an established credit history and credit score, a customer can in turn have access to improved loan and credit terms. Repairing and building a healthy a financial track record is important, but it's not usually part of the alternative financial service providers menu of options. To be clear, there certainly are good AFS players and good products, but they are not the norm. Banks should take steps to re-engage their customers who are leaving their branches, and consider the upside of securing a long-term customer relationship. From the FDIC data, banks can start by competing on cost and convenience. </p><p><b>Prepaid, General Spend and Payroll Cards<br> </b>The FDIC survey estimates the usage of general spend, reloadable prepaid cards and payroll cards by the underbanked to be 16.4% and 4.2%, respectively. Interestingly, the FDIC does not count the prepaid or payroll cards as alternative financial service products. I draw two observations from this. By not adding these two products to the list of alternative financial services, the reported estimates of the underbanked and unbanked segments are likely undercounted/low end estimates. That the report does not explain the rationale for this classification suggests that the FDIC may view them as comparable products to accounts offered at depositories. I think this move adds credibility for the prepaid card, which is not a small point in light of the scrutiny and uneven treatment offered to general spend and payroll cards. The underbanked population embraces general spend cards, and to a lesser extent payroll cards. Policymakers should add these products to the array of options that merit more concerted innovation and serious consumer protections, in pursuit of the ultimate goal of bringing more people into safe and affordable banking relationships.<br><br><strong>Final Thoughts</strong><br>With one of every four households possessing a weak financial attachment, attributed to the affordability and convenience of a banking account, the imperative to improve access for the underbanked is clear. To reinforce the report’s authors: “Clearly, a significant opportunity exists for the government and industry to jointly demonstrate a serious commitment to expanding cost effective and safe financial services to unbanked and underbanked households.”</p>