Minorities and low-income households are less likely to have a bank account or more likely to use alternative financial services compared to the population as a whole, according a new report by the Federal Deposit Insurance Corp.
Nationally, nearly 20% of lower-income U.S. households — almost 7 million households that earn below $30,000 per year — do not currently have a bank account, reports the FDIC.
The report found that 21.7% of black households are unbanked, compared with 3.3% of white households, and about 31.6% of households are underbanked, compared with 14.9% of whites. The report also found that among the four Census regions, the percentage of unbanked households in the South (9.5%) exceeds the national percentage of 7.7%. Unbanked and underbanked households are those where no one currently has a bank account or where a checking or savings account is open, but alternative financial services are relied on instead, according to the 2009 FDIC “National Survey of Unbanked and Underbanked Households,” which is a special supplement to the U.S. Census Bureau’s Current Population Survey (CPS).
Unbanked or underbanked households are more likely to use AFS like nonbank money orders, nonbank check cashing services, payday loans, rent-to-own agreements, refund anticipation loans (RALs) or pawn shops, and rely heavily on cash transactions, according to the report.
Although these instruments are useful to low-income communities, FDIC banks are more conducive to long-term wealth building and obtaining other banking products such as a credit card, a mortgage, or a car loan, says Leslie Parrish, senior researcher at the Center for Responsible Lending (CRL).
“Being part of the financial mainstream is the first step on a longer path toward savings and asset accumulation, which is really what gets people ahead–being able save and pass it down to future generations,” Parrish says. “If you don’t have a savings account or a basic checking account, you never get to those other steps.
In addition, being under the umbrella of the FDIC means that your savings and your financial services are protected by the U.S. government, says Deborah C. Wright, CEO of Carver Federal Savings Bank (No. 1 on Black Enterprise’s BE Banks list with $789.9 million in assets), and a member of the FDIC advisory committee on economic inclusion, which commissioned the report to increase access to mainstream banking systems.
“The core concern is the cost of financial services [outside of the] banking environment as well as the risk of fraud because … the FDIC does not regulate check cashers and payday lenders,” Wright says.
Thc CRL reports that some alternative financial services, such as payday loans have been known to charge customers excessive interest rates and fees. However, Wright mentions that overdraft fees, which are quite punitive for poor people, are also an issue of concern in the mainstream banking sector.
More than 30% of those previously banked closed their account because of the costs (i.e., minimum balance requirement, service charges, and overdraft fees) of maintaining it, states the report.