What about financial access in the U.S.?

At FAI, we spend most of our time thinking about financial access overseas. Yet, increasingly, we can’t ignore the conversation happening right here in the U.S. Last year, the FDIC released its first-ever survey of un- and under-banked households, which revealed that some 9 million American families have neither a savings nor a checking account, and an additional 21 million families that do have such accounts also patronize non-bank financial outfits such as check cashers and payday lenders.

Households operating outside the financial mainstream are nothing new, but the attention they are receiving certainly is. The past few years have seen a rush of interest from policy makers, socially minded nonprofits, financial educators, journalists, and even big banks hoping to add to their retail ranks. Conversations about the unbanked tend to revolve around two main premises. First, that the reason people don’t have bank accounts is because they don’t realize they’d be better off if they did. Second, that the host of financial firms people use in lieu of banks—such as check cashers, pawnshops, payday lenders, rent-to-own stores, and tax refund advance outfits—exploit customers with higher-than-warranted interest rates and wind up trapping people in a cycle of debt.

It would be great to know the extent to which either or both of these notions are true. Unfortunately, much as in the international space, there is a shocking lack of data on the daily financial lives of low-income households. There is no Portfolios of the Poor for the U.S.

Now, there have been plenty of surveys that ask people, point blank, why they don’t have bank accounts. In the recent FDIC study, the top reason people gave for never having opened a bank account, picked by 37% of respondents, was not having enough money to need an account. The next four reasons were not writing enough checks to justify an account, minimum balance requirements being too high, not seeing the value of an account, and banks not feeling comfortable or welcoming. Interestingly, the breakdown of reasons people had for giving up bank accounts was quite similar. This is useful information to have—but simply asking people why they don’t have bank accounts is a very narrow way of understanding household financial decision-making. 

John Caskey, an economist at Swarthmore College, has done a lot of work to try to understand the flip side of the coin—why people forgo mainstream banks for what he calls “fringe banks” (all those payday lenders, pawnshops and check cashing outfits). In his meticulously researched 1994 book Fringe Banking, Caskey concludes that some people turn to these institutions because they don’t have other options such as savings accounts or access to credit. But a big chunk of fringe bank customers do have other options. Caskey points to a Roper survey conducted for the Consumer Bankers Association which found that 67% of people frequenting check-cashing outlets had a deposit account at a bank or credit union. Fringe banks, it seems, have an appeal beyond being a last-ditch alternative.

The bigger question, then, which Caskey poses in his most recent research, is whether fringe banks, on net, exacerbate or relieve customers’ financial difficulties. We could ask the same thing about the net effect of not having a bank account. In other words: how does the presence, or absence, of various financial tools change the way families are able to conduct their economic lives? Very little of the literature on the unbanked comes at the question from this direction. Much has been written about low-income families, but almost all of that writing uses either a lens of low-wage jobs (such as Katherine Newman’s Chutes and Ladders and David Shipler’s The Working Poor) or one of welfare benefits and reform (such as Kathryn Edin and Laura Lein’s Making Ends Meet and Jason DeParle’s American Dream). As Caskey points out, no one has sat down with unbanked or fringe banked families and asked to see a detailed history of income and expenditures and to talk about the logic of those choices.

Our interest had been piqued by that observation—and this discussion more broadly. We’ve started to talk to people at organizations that work on financial inclusion in the U.S., including the Center for Financial Services Innovation in New York City and Bankable Frontier Associates in Boston.  All of which is to say, expect to hear more from us about the U.S. soon.