Access for All?

The 2013 FDIC National Survey of Unbanked and Underbanked Households was released yesterday, and the number of unbanked and underbanked households in the U.S. hasn’t budged much in the last two years (the total percentage has declined slightly, to just under 28 percent, since 2011). Just under eight percent are unbanked–almost 1 million households. Of these:

  • Almost half (46 percent) have had a bank account in the past.
  • Seventeen percent currently don’t have a bank account due in part to their credit history.

Not surprisingly, the unbanked are highly reliant on alternative financial products:

  • 27 percent of the unbanked used prepaid cards, compared to 12 percent of households overall. Two-thirds of those that used prepaid cards in the last 30 days are unbanked or underbanked.
  • More than half used money orders in the last 30 days, versus less than 10 percent of all households.
  • Thirty-nine percent used checking cashing services, compared to just three percent of all households.

The FDIC and and the Consumer Financial Protection Bureau have been pretty vocal about the fact that they want to decrease consumer use of alternative financial services. Will these regulators make a move to ensure that more Americans have access to a bank account? Last summer, New York Attorney General Eric Schneiderman convinced Capital One Financial Corp. to amend its use of ChexSystems, a database used by many banks to screen applicants for fraud and credit risk. A 2009 report from the FDIC found that almost 90 percent of banks use a credit-screening database like ChexSystems, and one-quarter reject an account application due to a negative result. Earlier this month, Richard Cordray addressed the CFPB’s areas of concern on the matter, which boil down the three areas:

  1. The accuracy of credit reports and related data;
  2. Consumers access to reports, and the ability to correct errors;
  3. How the data is used; specifically, how these reports limit consumer access to accounts. Cordray said:

It is one thing to use a credit report or similar type of consumer report as a means of assuring that consumers do not take on more risk than they can handle. Indeed, the Bureau would be concerned if banks or credit unions were to grant credit to consumers without regard to their prior credit history – as we expressed in the “ability to repay” rule we adopted in the mortgage context. For most consumers, though, checking accounts are not inherently credit vehicles, but instead are products for depositing and transferring funds. So it is troubling then that banks or credit unions may use a credit report to exclude some consumers from these basic financial services.

The impact of the CFPB’s investigation into the issue remains to be seen, but I wouldn’t be surprised to see changes further down the line.

But some banks are making proactive changes to reach the unbanked now. In Bank Director magazine’s 3rd quarter issue, our chairman, Joan Susie, penned “A Missed Opportunity”. She wrote specifically about payday lending–another financial product relied on by the unbanked–and said that banks need to reach out to these “young, diverse and struggling populations” to bring them back into the banking system.

Large banks, nonbank financial services companies and a few community bank pioneers are quickly realizing there is an even better reason than CRA credits to bank new immigrants and other underserved populations. Offered well priced and carefully conceived products, these customers can be profitable now. We are in the middle of a major demographic change and banks that solve problems for these groups now will be able to continue to serve them as they build businesses and rise to accumulate wealth. If banks don’t seize the opportunity, competitors like American Express’ Serve prepaid card product, which added one million new customers in April alone, will. Credit unions are entering the fray, and Bank of America Corp. just rolled out Safe Balance, a low fee checking account that will not allow customers to overdraft. It is designed to make bank fees predictable and reasonable for customers living close to the edge. Vancity, a Canadian credit union, has launched a new personal credit line program designed to be both profitable and helpful to low-income families.

It is becoming clear that the biggest and savviest financial institutions are actively exploring ways to profitably provide access to credit and financial services for a significant segment of the population struggling financially. The payday loan, with its predatory history and image, isn’t the only way to address this growing market.



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