What is surprising to me is the level of unbanked and underbanked in the United States. The FDIC released statistics from a Jan 2009 study that estimates more than one quarter (10 million) of US households are underserved. Minorities and lower income earners are more likely to be underserved with about 20% of all black and hispanic households or those earning less than 30k a year being underserved.
Just to be sure everyone understands what this means, Unbanked is defined as not having access to any bank accounts and Underbanked is the use of alternative services such as payday loans, pawn shops, auto title lending, rent to own or other services.
Why should this matter to you if you are not one of the 1 in 4 in the US? First of all, with near 10% unemployment in the US in this economy more people are experiencing the pain, so it could affect you, your friends or family.
More importantly as you will read, falling into this category can make life much more difficult by increasing fees, denying credit and making it harder to even make simple payments or cash checks. This makes it harder to get out of the poverty cycle and get back to financial health. Not good for America.
I talked with one underbanked person who we will call Tom to gain some insight on why no bank account and what life is like. Tom explained "When you live paycheck to paycheck or even less the bank fees can drag you under. Eventually you are faced with paying the bank fees or your rent, electric bill or car. Then the banks shut you off and you can't get an account anymore. Then it's on to check cashing, money orders, prepaid debit cards and long lines."
Tom went on to tell me how he had received two pay checks (one a bonus check) from a large well known restaurant corporation. He went to deposit his checks in his recently new account at Bank of America at a branch where they encouraged him to make the deposit at the ATM outside. After doing so, he quickly discovered that all but $100 dollars out of $2380 was put on hold for 10 days. This put him in a financial bind as he would not only be late paying his rent and gas bill but bounced checks for rent, gas, dry cleaners ($31) and a 7Eleven (4$) store. Each bounce was a $35 fee making the $4 dollar transaction $39 dollars for example. The $100 dollars available quickly became -$40 dollars.
When trying to discuss with BOA he was simply told that it was bank policy and nothing could be done. This pattern and others lead to some of the main reasons that many avoid banks. Many are burned by fees and policies that turn them away. Others simply do not trust banks, don't feel welcomed or comfortable or face language barriers. Many are unable to open accounts because of bad credit or bounced checks like Tom.
This places them in the underbanked and underserved market using paycheck cashing services, prepaid debit cards, money orders and carrying cash. The high fees don't stop when the banks are out of the picture.
Check cashing fees vary greatly from state to state with percentages as high as 5%! Fees to load prepaid debit cards with money can cost $5 per load. That could be 10% for $50 dollars. Even using a prepaid debit card at an ATM or POS can cost money. Often the people who are in this category are not good at managing what little money there is and not having a savings account compounds the issue.
And forget about traveling easily. Trying to rent a car or a hotel room with a debit card is painful. They will hold significant amounts of money for long periods of time. And occasionally it can take many calls and complaints to get a hold removed even after 10 days.
The question is: Why don't banks offer more assistance for this category of people despite the fact that it represents 25% of the US population?
Profit and risk. Most banks are geared for high network individuals and higher profits and are concerned increasingly with risk. They simply do not believe that there is profit in services for the underbanked.
Banks of course cannot completely escape the underserved entirely because the Community Reinvestment Act (CRA) mandates that they provide some services to lower income areas and the community. This is not enough to make a difference in the numbers of the underserved and is usually accomplished on the loan side or education areas.
But there may be some help on the way from both the FDIC and other private businesses who believe they can provide services for the underbanked using different risk models without gouging them.
The FDIC is starting a program in Jan of 2011, working with 9 different banks using a 1 year pilot program. The pilot banks will offer products that closely reflect the needs of the underserved. The bank products will offer features specified by FDIC guidelines such as:
* Mostly or all electronic to limit costs to the bank
* FDIC insured, reasonable rates and fees and have regulatory protections
* Checkless transactional accounts using only ATM, POS, ACH or other electronic means
* No overdraft or non-sufficient funds fees (presumably because these transactions would be denied)
The features of the products can differ and have other services tied to more traditional products and may serve as a gateway to mainstream banking eventually in some cases. We will have to wait and see what the services offered will be.
While this is a positive step forward, it may not be for everyone. Other private providers are also stepping in to help.
These services are mainly built around prepaid debit cards and related services such as MoneyPak. MoneyPak allows a person for a one time fee of $4.95 to load cash onto prepaid debit cards. Used in conjunction with the some of the service providers discussed below and others it allows you to avoid having a bank account or credit card to store money and make payments.
MoneyPak is widely available at places like WalMart, KMart, WalGreens 7-Eleven and many other retailers. There are limits to how much cash you can add depending on the solution and the information you are willing to provide. This is due to money laundering and terrorism concerns of course.
While there are many others, we must start off with PayPal. Well known with a great reputation, using PayPal a person can avoid using bank accounts up to certain limits. As with other providers this is accomplished with a PayPal account and linked debit card loaded through MoneyPak. The catch is you can only load $250 a year unless you provide PayPail with name, address, Date of birth and social. The information is not used for credit checks or marketing purposes.
Another service is Obopay. Obopay is like PayPal for mobile which allows you to send money to anyone who has a mobile phone using SMS. Of course, they will have to sign up with Obopay to receive the money as well. There is also an option of tying the payment to a prepaid MasterCard. There is a .10 cent charge for sending money and a 1.5% charge for adding money to your account with the prepaid card.
Mango Money in Texas is using the YAP network for text message based (SMS) mobile money transfers. Both parties must join Mango Money to facilitate the transfer. What is beneficial about Mango Money is that they are offering a prepaid debit card with no fees for sign up, activation and no transaction fees (signature or PIN, exclusive of banks fee for ATM). There is a $5 monthly fee which is waived if you load at least $500 the prior month. There is a .50 cent fee to send money via SMS domestically by SMS and no fee to receive money. They also offer a savings account with direct deposit that pays around 5% on the first 5,000 dollars. The drawback is that there is a fee to withdraw money from an ATM ($2 domestic, plus bank's ATM fee) which can be pricey. They also charge .50 to check your balance by an ATM.
Another provider named Bill Float is an interesting concept. It helps people extend bills by providing small loans up to 1,000. This can make a big difference for those living payment to payment. Bill Float has a power scoring system that reduces the fees as you pay back responsibly. The two drawbacks are that loans while small can be at 36% interest. Secondly you must have a bank account to link to, although it appears it can be just a savings account.
So it is clear that US Banks are not meeting the needs of all America but there are options and those options are improving. These services when offered in other countries are making a big difference in helping the poverty level. While the needs may be different somewhat in the US it can make a difference here too.