Ordinarily, I would be worried, and maybe even angry, when I learned that almost 10 million households in the United States didn’t have a checking or savings account at a bank last year and that unmarried women are the largest group without a banking relationship, according to the latest survey of unbanked and underbanked households from the Federal Deposit Insurance Corporation.
Whether they are heading a household and have children at home or are living alone, unmarried women account for almost half of the American households that don’t have a bank account at an insured institution.
But, I’m not upset, and you probably shouldn’t be either, as you’ll soon learn.
People have all sorts of reasons for not having a bank account. They don’t have enough money to open an account. They want to avoid the hidden fees that strike them when they bounce a check, exceed the monthly withdrawal limit or get money from an ATM outside of their network.
Many of these fees and the uncertainty over fees would disappear if they kept enough money in their bank accounts. But a lot of unbanked families can’t do that. Eighty percent of the unbanked households earn less than $30,000 a year, according to the FDIC’s survey, so they’d probably find it hard to meet the minimum balance requirements needed to avoid the fees.
The major banks also don’t make it easy for the low-income population to establish a banking relationship, as more and more federally-insured banks are charging for their services. Just 38 percent of the major banks offer free non-interest-bearing checking accounts, down from 76 percent five years ago, according to a survey of the 10 largest banks and thrifts in 25 large cities by BankRate. Just 4 percent of interest-bearing checking accounts are free, while ATM surcharges and fees for using out-of-network ATMs reached record highs this year.
Many people may avoid banks simply because they just don’t like dealing with them or don’t trust them. The banking sector ranked 13th, just above tobacco and government, among the 15 sectors surveyed by Harris Poll.
Many also have practical reasons for not having a bank account — there aren’t many banks left in their neighborhoods. Over 90 percent of the more than 1,800 banks that closed in the five years following the financial crisis of 2008 were in low-income neighborhoods.
There’s an easy solution to this problem. Since 6 out of every 10 post offices happens to be located in what’s known as a “bank desert” — a Zip code that has no or just one bank — Sen. Elizabeth Warren (D-Mass.) says that banks should be allowed to open branches in the local post offices.
However, Rep. Darrell Issa (R-Calif.), chairman of the House committee with oversight over the post office, doesn’t like this idea. He says that the U.S. Postal Service should stick to delivering the mail and not embark on a “massive expansion” of government power.
Even if they can find a bank, in many cases the bank won’t allow them to open an account because they have a history of banking problems — maybe they bounced too many checks — or they don’t have the proper identification — maybe they don’t have a driver’s license.
These women, of course, still have bills to pay, checks to cash, and deposits to make.
So, where do they conduct their financial transactions?
Many of them turn to alternative lenders and some of them find themselves overwhelmed by debt. All you have to do is watch this video that reveals the devastating financial troubles that some people who use these services face to know that these alternatives aren’t a very attractive way to do banking.
Yet, contrary to popular belief, most people without bank accounts aren’t using payday loans, pawning their jewelry or putting their car up as collateral for an auto title loan.
No, most of them are using rather common and widely accepted means to manage their finances. They’re getting money orders or using check-cashing services with what the FDIC calls “non-bank, alternative financial services (AFS) providers.”
According to the FDIC, among all the unbanked households that used alternative financial services in the past year, 75 percent of them obtained a money order without using a bank and 57 percent cashed a check at a non-bank location. By contrast, 15.6 percent used pawnshops, but only 4.3 percent took out a payday loan and just 2.7 percent obtained an auto title loan over that same time period. More than 80 percent of the unbanked population has never taken out a payday or auto title loan.
Money orders and check cashing services are common ways to get money and pay bills for a simple reason: They’re inexpensive, convenient and basically act as substitutes for a bank. People can go to stores like Wal-Mart, 7-Eleven, Safeway or CVS in their neighborhood, where they may be friends with the clerk to conduct basic financial services, like cashing a check. Or, they can go to the post office, which as mentioned above is right around the corner, to get their money orders.
Although they also go to standalone providers, roughly two-thirds of the unbanked population cash their checks or get money orders at grocery, liquor, and convenience stores and at the post office, according to the FDIC’s most recent survey. By contrast, just 24 percent use companies like ACE Cash Express, Check ‘n Go, or 100DayLoans, to cash a check and just 18 percent used one of them to get a money order.
Many of these unbanked women have decided that it’s easier to avoid the banking system entirely. Half of them aren’t even likely to open a bank account in the near future, according to the FDIC.
Given all the difficulties with opening a traditional banking account and the limitations of money orders, these households are turning to a new means — prepaid debit cards and mobile money — to make basic financial transactions. According to the FDIC report, prepaid cards are the fastest growing payment method in the United States. In 2013, 27 percent of unbanked households had used a prepaid card, compared with just 12 percent in 2009.
A sensible route for an unbanked consumer might be to go to Wal-Mart and open a Bluebird financial account or a GoBank “full-featured” checking account. These accounts act a lot like banks without actually being banks. They offer mobile checking and debit card services, direct deposit, money transfers and bill payment, at low fees. GoBank operates with the federally-insured Green Dot bank, while Bluebird is run with American Express. Kmart is working to serve this population by reducing its check-cashing fees.
Wal-Mart has an advantage for many low-income people. Whereas it may be difficult to find a commercial bank in many low-income neighborhoods Wal-Marts tend to be located right around the corner, as shown by FiveThirtyEight.
Finally, with two-thirds of unbanked households having access to a mobile phone, mobile money is another innovation that helps bring the unbanked into the financial system.
It’s not all that common in the United States, but banking by phone has been used for years in the developing world, largely because the banks are generally located in metropolitan areas while the majority of people live in rural areas.
Although 2.7 billion people in low- and middle-income countries worldwide don’t have access to financial services, 1 billion of them have a mobile phone. And, with a mobile phone, they can send and receive money. This is facilitated through the 251 mobile money services that are active in 88 countries as of October, according to Anne Bouverot, director general of GSMA, an association of mobile operators and related companies. Bouverot adds that mobile money is revolutionizing the lives of millions of people who have never had access to traditional banking services.
These “revolutionary” services include M-Pesa, MTN Mobilemoney, EasyPaisa and Mobile Money by Tigo. M-Pesa, which is used in Kenya and was developed by Vodafone, has been particularly successful. Sixty percent of adult Kenyans use M-Pesa, according to Safaricom, and they use it a lot. Kenya’s mobile money customers made 40 percent more transactions in March than they did a year earlier, according to GSMA.
Mobile money is popular because it allows the unbanked population to conduct financial transactions in a simple and low-cost way. It hasn’t taken hold in the United States for various reasons, mostly relating to the well-established American banking system. Yet, change is coming. Apple Pay is the latest entrant to this burgeoning field, joining Google Wallet, Softcard, PayPal and LoopWallet, among others, in the competition to provide banking services by phone.
Since they’re not only the largest share of the population without a bank account but also are the ones who generally run the household’s finances, women are likely to lead the revolution in mobile money in the U.S. As Bouverot points out, “women tend to reinvest up to 90% of their earnings in their families, compared to 30-40% for men,” meaning that mobile money helps empower women within their communities.
With their mobile phone helping put money in their hands, more and more women will see mobile money as a solution to the problem of not having a bank account. As a result, the fact that a large segment of the population is unbanked will no longer be much of a concern.
A bigger concern will be getting them into the mobile money system.
But, with Google and Apple leading the way, I don’t think we have much to worry about. And neither should you.