Nearly 34 million US households are disconnected from the financial system in some way according to a 2013 FDIC National Survey of the Unbanked and Underbanked. The disconnect refers to Americans who are either unbanked or underbanked.
17 million Americans are unbanked—meaning they do not have any bank accounts at all—and another 51 million are underbanked—meaning that they have bank accounts but rely on alternative financial providers, such as check cashers and pawn shops, to meet some of their banking needs.
Households reported the main reasons for not having a bank account were: (1) Insufficient money to keep in an account or meet minimum balance requirements and (2) A significant income loss or job loss that they said contributed to becoming unbanked.
Other households have experienced a financial mistake that led to a ChexSystems or EWS report and are unable to open a bank account.
The Unbanked Community
The minority population represents the majority of the unbanked. These findings are particularly relevant to Latinos, African Americans, and young Americans. Approximately half of all Latino and African American households are disconnected from the financial system, compared to only about one in five white households. The numbers are staggering and translate into way too many households relying on other means to conduct financial transactions.
The alternative financial service (AFS), such as non-bank check cashing or payday loans, or money orders can cost the unbanked as much as $1,200 yearly according to the Federal Reserve Bank of St. Louis.
Considering half the unbanked believe they do not have enough money to warrant a bank account, the realization of how much alternative financial services actually cost may be cause for reconsideration — especially when second chance checking is available nationwide.
Breakdown of the Unbanked
- In 2013, 17.9 percent of Latinos were unbanked and 28.5 percent were underbanked, down from 20.1 percent unbanked and 28.6 percent underbanked in 2011.
- For African Americans, the unbanked rate declined slightly from 21.4 percent in 2011 to 20.5 percent in 2013, and the underbanked rate decreased from 33.9 percent to 33.1 percent.
- Less than 4 percent of white households do not have a bank account.
- Asians make up about 3.5 percent of the unbanked.
- About 4 in 10 Americans under age 35 remain either unbanked or underbanked.
Annual Income of the Unbanked
Many unbanked households are lower-income families. The annual income of approximately 71% of the unbanked households is less than $30,000. Low income may be the reason so many of the unbanked feel they do not have enough money to justify a bank account.
But if you have limited means, a bank account may be just what you need. Fees for prepaid debit cards, fees to load cash onto prepaid cards, check cashing fees and money orders are probably costing you more than if you had a bank account. Even late fees add up if you’re not able to get a money order to a utility company on-time because you have limited transportation. Not having a regular bank account is time burden too.
Alternative Financial Products
The financial industry stands to benefit if they find a way to tap into the unbanked segments of society. Consumers who do not have traditional bank accounts still have to utilize some way of paying mortgage or rent, utilities and other obligations. According to another report, Markets and Markets, 43 million unbanked and underbanked consumers spend approximately $10.4 billion on alternative financial products. Check cashing store may charge anywhere from 2 percent to 5 percent for their services
What banks can do to reach the unbanked
Financial education is vital to build trust among many of the unbanked. Knowing how to manage money and being aware upfront of bank overdraft and other charges can help the unbanked understand account management. Many of the unbanked can start with something as simple as opening an online savings account. New products tailored to consumers without bank accounts and increased knowledge may help bring unbanked consumers into the banking system.
Connecting financial stability and personal finance management skills to growing wealth may help the unbanked climb the economic ladder. When consumers do not have bank accounts, the opportunity to create assets is unlikely. Creating a good banking relationship and having a place to grow your money is vital to building wealth. Banks can offer investment products like mutual funds and brokerage accounts. Banks can also offer credit card products that help build your credit history.
Unbanked cannot get a mortgage loan
If you plan to purchase property and need a mortgage loan to do so, you need a bank account. Prepaid cards may lull the unbanked into thinking it’s okay to live without a bank account. But unless you have cash to make a property purchase, most lenders will require up to 12 months of bank account statements. Lenders are looking for regular deposits, spending habits and how well you manage money in order to pay a mortgage. Prepaid statements are not acceptable.
If ChexSystems is your reason for being unbanked find no-chexsystems and second chance banks. A ChexSystems record, even if paid, can remain on your ChexSystems report for 5 years. That’s a long time to go without bank account.