The Chasm Between Banks and America's Poor

December 29, 2009

Are the ranks of the unbanked swelling because Americans just don't like and/or trust banks? Or is it that banks just don't care enough to reach a sector of the economy that spends an estimated $15 billion a year on non-bank financial products.

The pollsters at Gallup have been reporting plummeting consumer confidence in the nation's banks for more than a year now. And there is plenty of anecdotal and concrete evidence suggesting many banks just aren't interested in serving what are seen as low-margin customers.

In early December Gallup reporting results of its annual honesty and ethics survey said the public perception of bankers had sunk to an all-time low with just 19% of adult Americans giving bankers high marks for honesty and ethical behavior, down from 23% in 2008.

A report recently released by Mercator Advisory Group, meanwhile, suggests federally regulated banks are getting shut out of entire swaths of the banking public – namely working class, young and emerging consumers.

“This flight from banking is occurring principally for two reasons: economically dislocated consumers feel they cannot afford an overdraft-prone checking account and more vendors are creating fairly priced non-bank-centric products that are conveniently sold by major retailers,” the Boston-based consultancy said in announcing a new report, Retail Banking's Canary in the Mine: Marketing to the Underbanked Customer.

If banks are to get serious about reaching out to working class and young Americans they need stop trying to prop themselves up with onerous overdraft fees, and to focus more on innovative products and services delivered using alternatives to traditional bank channels, like brick and mortar branches, the report advises.

According to Elizabeth Rowe, director of Mercator's Retail Banking Advisory Service and author of the report, the prolonged recession has disintermediated “many solidly banked consumers who may never return” to the mainstream, federally-regulated banking system. Non-traditional financial products (like prepaid cards and payday loans) have been mainstreamed sufficiently that there is no longer any stigma associated with using these outlets, Rowe reported.

“In previous recessions, consumers were forced to remain with their banks or to return to them when their household incomes improved,” she said in discussing the report. “Today's consumers can easily and rationally choose to stay outside banking and to use the safe, reasonably priced financial services products marketed by major retailers. This is a chilling possibility for the banking industry.”

And it is an equally chilling possibility for the U.S. economy and the working class Americans who have driven economic recoveries throughout history. Rowe's report suggests the recently and long-term unbanked Americans “may well find themselves dropping into a shadow economy not experienced in the U.S. in over 50 years. That is unless they can get to Wal-Mart.”

Taking Note in Washington

The Federal Deposit Insurance Corporation (FDIC) estimates that one in four American households (60 million adults) are either unbanked or under-served by the federally-regulated banking system. Households earning less than $30,000 a year represent 71% of the unbanked in America, according to survey data released by the FDIC earlier this month.

The situation of the unbanked and under-banked has not gone unnoticed in legislative circles, either.

“Access to bank accounts and financial literacy are central to financial freedom,” said Rep. William Lacy Clay (D-MO), who recently threw his support behind The Bridging Bank to Recovery Act of 2009 (H.R. 3171). Introduced in July by Rep. Joe Baca (D-CA), the Bridging Bank would be for unbanked and under-banked consumers (many of them victims of predatory lending and the subprime mortgage meltdown) who lack sufficient credit to be served by mainstream banks.

“For our nation, our communities, and our neighborhoods to recover from the current recession, we must ensure underserved Americans have access to the financial and banking tools necessary to move forward,” said Baca.

53% of adults, worldwide, are unbanked

_{-Financial Access Initiative}