Unbanked

If a bank offers a low or no-fee checking account, does it matter? It matters if people sign up for accounts, leaving the ranks of the unbanked, and join the modern financial system.

The FDIC estimates that 10 million U.S. adults are completely cut off from the banking system.  Perhaps as many as 10 percent of American families have no bank account.

For many people, banks don’t make sense.  No amount of free toasters are going to change their mind, either.  They don’t like high account maintenance fees and they absolutely cannot abide by the risk of an overdraft charge.  For these individuals, check cashers work better.

Make no mistake about it, check cashing is a big business.  Check cashers are a reflection of neigborhood wealth.  They predominate in low-income areas. These are precisely the places that banks have decided to withdraw from.  The result is that in Southeast Los Angeles, for example, there are five times more check cashing branches than there are bank branches!

Banking is not unlike health care.  It works better when there is full participation.  Businesses save money because they can use direct deposit to make payroll.  Workers get their money faster, without check cashing fees. Banks develop more customers and enjoy the benefits of working with people with better asset histories. Families develop assets: those nest eggs shield their future from the risks of unemployment and giving new opportunities to borrow for homes or student loans.

Consumers hate risk.  They like to know how much things will cost.  Would you rather use Priceline, where you see the price and the product before you buy your plane ticket, or Hotwire, where you don’t?

In banking, customers don’t get a choice.  You don’t really get a clear expectation of how much you are going to spend on “services” and you can’t really compare one bank to another.  Credit card disclosures, written in seven point font, seem to try to obscure their meaning. All of this leads to uncertainty in the minds of customers.  That uncertainty drives people to transactional banking (check cashers) systems.  They know what they are going to spend.

In general, banks get along with the unbanked when they can work with three principles: be transparent, spend time on financial literacy, and partner with consumers who need low-dollar transaction services.