The Federal Deposit Insurance Corporation (FDIC)’s recently released report, 2011 National Survey of Unbanked and Underbanked Households, updates the FDIC’s findings from its original 2009 report and has found large increases in the number of unbanked and underbanked households.
Specifically, the new report finds that 8.2% of all households in the U.S., 17 million adults, are unbanked; this is a 7% increase from 2009. In addition, 20% of all households, 51 million adults, are underbanked; this is a 16% increase from 2009. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services (AFS).
The report also examines the demographics of unbanked and underbanked populations. Young, minority, and low-income households were found to be the most likely to be unbanked and underbanked. African Americans have the highest unbanked and underbanked rate: 21.4% and 33.9% respectively. Hispanics also have a high unbanked and underbanked rate compared to the overall population: 20.1% and 28.6% respectively. Unmarried female-led households are also more likely to be unbanked (19.1%) and underbanked (29.5%) compared to the overall population (8% unbanked and 20.1% underbanked).
Most notably, the 2011 survey added questions about the types of accounts held by a household, as well as the reasons households do not have accounts. Twenty-nine percent of all households lack a savings account, while 10% lack a checking account. The most common reasons why households reported for not having a bank account is that they feel they do not have enough money for an account, or they do not need or want one. Yet, households that have previously had an account are less likely to report that they do not need or want an account relative to those that have never had one.
The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday lenders, rent-to-own stores, or pawn shops. This year’s report also revised the definition of AFS to include remittances, and revised questions related to the timeframes during which households used AFS. The number of households that have used AFS has increased. In 2009, only 36.3% of U.S. households had used an AFS product, whereas in 2011, 40.9% of households had used AFS products. Specifically, almost two-thirds (64.9%) of unbanked households had used at least one AFS product in the last year, and close to half (45.5%) used AFS in the last 30 days. The proportion of households that use AFS is higher among younger, less educated, and lower-income populations, and higher proportions of black and Hispanic households use AFS than white households.
While overall AFS use has increased since 2009, the report found that transaction AFS services (non-bank money orders, non-bank check cashing, and non-bank remittances) were more widely used than AFS credit products (payday loans, pawn shops, rent-to-own stores, and refund anticipation loans). Among unbanked households, 45.8% used only transaction AFS, 2.7% used only credit AFS, and 14% used both transaction and credit AFS. Among underbanked households, 75.7% used only transaction AFS, 9.4% used only credit AFS, and 13.5% used both. For example, 1.6% of unbanked and 7.9% of underbanked households had used payday loans within the past 12 months. Such results are consistent with Pew’s recent report on payday lending, Who Borrows, Where They Borrow, and Why: Payday Lending in America.
In terms of non-bank remittances, 3.7% of all U.S. households, including 9.2% of unbanked and 14.4% of underbanked households, used a non-bank remittance in the last year. Not surprisingly, convenience (32.5%) and speed (23.5%) were the most common reasons why households use non-bank remittances. The fact that unbanked households do not have a banking relationship is another common reason why these households use AFS providers for remittances (29.5%). The Consumer Financial Protection Bureau (CFPB) did, however, issue final regulations requiring AFS remittance providers to enact certain consumer protections. Moreover, since banks have only recently started offering remittances, many households may not even know banks provide such services.
While the report provides an in-depth analysis about the current prevalence of underbanked and unbanked households and individuals across a range of demographics, the report does not provide a clear explanation of what leads to these outcomes. This could mislead people into blaming the victims instead of understanding the structural and societal problems that contribute to banking behaviors. The importance of this report lies in the wealth of data describing the unbanked and underbanked populations. As the report correctly notes, unbanked and underbanked households come from many different cultures, communities, and background, and understanding these differences will allow banks and advocates to tailor bank access programs to fit the needs of specific communities.
In terms of transactions, the FDIC should continue to encourage banks to capitalize on the opportunity to take business away from AFS businesses by offering consumers a safer, cheaper, and higher quality product, such as the FDIC’s Model Safe Account. More banks should also be encouraged to participate in Bank-On programs wherein local banks and communities partner to provide low-cost comprehensive bank accounts for the unbanked. Although the data show that the use of AFS transactions is more common than credit, the FDIC should require more banks to provide affordable and responsible small dollar loans, similar to the ones the FDIC piloted to illustrate how banks could profitably offer affordable small-dollar loans as an alternative to high-cost credit products, such as payday loans and fee-based overdraft protection.
Hopefully advocates and banking regulators can leverage this message in order to convince banks to reach out to greater numbers of people who are unbanked and underbanked.
This blog post was coauthored by Alex Hoffman.