In December, the Federal Deposit Insurance Corporation (FDIC) released the 2011 Survey of Banks’ Efforts to Serve the Unbanked and Underbanked. “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).
In September 2012, the FDIC released its 2011 National Survey of Unbanked and Underbanked Households, updating its findings from its original 2009 report, and found large increases in the number of unbanked and underbanked households. According to the report, 8.2% of all households in the U.S., 17 million adults, are unbanked; and 20% of all households, 51 million adults, are underbanked. This is a 7% and 16% increase from 2009 respectively.
The FDIC report released in December examines how banks interact with unbanked and underbanked (un/unbanked) and underserved people and updates the survey that was done in 2009. The purpose of this new report is to understand the current banking practices that affect un/underbanked people, and the extent to which insured depository institutions reached out to the un/underbanked. Unfortunately, since the 2011 survey instrument was considerably revised from the 2009 one, it is largely impossible to compare results from the two surveys. Thus, while the number of un/underbanked households has continued to grow, it is unclear whether or not banks’ efforts to bring these households into mainstream banking has kept pace.
The report shows that 48% of banks required a minimum $100 deposit to open a basic checking account. While the minimum opening deposit may serve as an entrance barrier for people living paycheck to paycheck, 65% of banks did not charge monthly maintenance fees for their basic checking accounts, which can be of great benefit to many low-income people. Based on the report it appears that a large percentage of banks surveyed have low-cost checking and savings products that would greatly benefit people relying on costly AFS products, such as check cashing and payday loans. However, as the FDIC’s September report on unbanked and underbanked people shows, these low-cost products are not being utilized by the millions of un/underbanked people. The high rates of un/underbanked appears to be largely related to shortcomings on the part of the banks in marketing these low-cost checking and savings products to the un/underbanked.
Only 37% of banks in the survey said they actively marketed products to underserved populations. Of these banks, a plurality, 39%, said that their primary tool for marketing was forming community partnerships. Community partnerships are valuable when trying to reach underserved populations, because many community organizations are in direct contact with un/underbanked clients. Bank-On programs across the country have shown that such a partnership strategy is very effective. In 2011 nearly 70 cities/states/municipalities used the Bank-On model, which is driven by partnerships between municipal leaders, community organizations, financial institutions, and other community stakeholders, in order to provide low-income consumers access to mainstream financial services. The primary strategy of Bank-On is to market low-cost checking and savings products to the un/underbanked. Community organizations coordinate with banks to provide their clients the opportunity to feel comfortable walking into a bank and opening a low-cost checking and savings account. The community organization educates its clients about the opportunity to open a bank account and encourages clients to visit the partnering bank. Yet, according to the FDIC’s December report, too few banks, approximately 14% of all banks surveyed, are involved with community partnerships in an effort to bank the un/underbanked. Overall the survey shows that banks have affordable checking and savings product yet they appear to be avoiding marketing these products to underserved populations. The question is why? The answer lies in misperceptions held by banks. In the survey, banks reported that they believed obstacles for offering financial products and services to the underserved were fraud (32%), underwriting (28%), and profitability (24%). However there is no evidence that underserved people cause a burden to a bank’s bottom line. In fact there is evidence suggesting that the un/underbanked market would be safe and profitable for banks. In 2011, the FDIC launched the Model Safe Accounts Pilot in which banks offered low-cost savings and checking account products to un/underbanked participants. The results of the pilot study showed that these accounts were safe and profitable for the banks. Thus, the anxiety that banks have about the un/underbanked population appears to stem more from ingrained prejudice and stigma than from reality.
Since 2011, the FDIC has produced several research studies and reports that build an extremely compelling case for why banks should reach out to un/underbanked people. The studies have shown that millions in the U.S. lack access to mainstream financial services, that many banks already have low-cost products, and that un/underbanked people would in fact be a valuable market for the banks to tap into. It seems to be a win-win situation for everyone involved. Yet, banks are not acting on this opportunity. More work must be done to encourage and facilitate partnerships between banks and community organizations.
Chicago-area community organizations interested in participating in Bank-On Chicago can contact Alex Hoffman at the Shriver Center or the visit the City of Chicago Treasurer’s Office’s Bank-On Chicago website.