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Will the Unbanked Ever Become Bankable? With the rise of pre-paid debit cards, payday loans and pawn shops, we learn more about a large segment of the population that lurks in the shadows of the financial system in our country called the “unbanked.” These are people from a variety of backgrounds and for any number of reasons simply don’t show up on the radar of the banking system or they have been denied access to checking and savings accounts.
They somehow manage to conduct their financial transactions using alternative “financial services” such as check-cashing services and non-bank money orders in the banking underground. Who exactly are the unbanked and what, if anything, can be done to bring them into the banking mainstream?
Who are the Unbanked?
The unbanked population, which is estimated to number about 9 million households, falls into two primary categories: Those who fell out of the banking system, and have been denied access due to credit problems and/or past problems with check writing.
People who get on the wrong side of banks due to excessive overdrafts or unpaid negative balances are likely to wind up in the Chex Systems database which, like a credit-reporting agency, reports on consumer activities having to do with bank accounts. They can remain in the system for five years during which banks that use the system will likely refuse their business.
The second group is comprised of people who are not financially literate or have a language barrier that prevents them from seeking a banking relationship. Immigrants, minorities and low income households comprise a significant portion of this group. It’s estimated that as many as 20 million adults don’t have a Social Security number, which is a necessity for establishing a bank account. Many simply live paycheck to paycheck so they don’t feel the need to “complicate” their lives.
Another, larger segment of the population falls into the category of “underbanked.” These are people who have a checking or savings accounts but underutilize other forms of banking services such as credit cards or loans. Poor credit, lack of financial literacy, or lack of access to a physical bank location are cited as reasons why as many as 40 million people are underbanked.
The Banking Underground
With the proliferation of non-bank alternatives, the unbanked and underbanked can remain outside of the banking mainstream and manage their transactions albeit at a significant cost in terms of time and money. Check-cashing stores, payday loan shops, pawn shops, and non-bank money order services provide all of the essential services to meet their needs, but the fees can seriously eat into their cash flow.
Many of these services can charge up to 5% of the value of the transaction which, for a family that earns $30,000 a year can amount to $1,500 or more. That doesn’t include fees paid for money orders used to pay bills. Still, many of the unbanked find these services more available and more convenient than trying to work with a bank that is located way on the other side of town.
With banks even more concerned with profits and preventing losses, many of the unbanked are not likely to find any inroads into the banking mainstream anytime soon. Those who want access, but have been denied, can and have worked towards demonstrating their responsibility to banks. Clearing up any past due balances, paying bills on time, and frank conversations with a local banker can sometimes get the unbanked back in good stead.
Financial literacy initiatives by the government, the banks ,and community organizations could lift millions out of the shadows. Many banks and credit unions are reaching out to lower income communities by developing special banking products, hiring more multi-lingual employees and adding locations in local grocery stores. In the meantime, the unbanked are finding even more access to non-bank services as companies like Wal-Mart are stepping up with inexpensive check cashing. Pre-paid cards are quickly becoming a preferred alternative but they need to be thoroughly shopped and compared as some come with many fees attached.
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