About one in four households in the United States are either unbanked or underbanked, according to a 2009 FDIC survey. Outside the financial mainstream, people turn to an alternative banking market of rapid anticipation loans, payday loans, bill pay, prepaid debit cards and check cashing services. The unbanked rely on cash, pay excessive fees for basic financial services, are susceptible to high-cost predatory lenders, and have difficulties buying a home or otherwise acquiring assets with little or no credit history. They miss opportunities to establish credit and build wealth.
The unbanked are defined as those without an account at a bank or other financial institution. According to the 2009 survey, an estimated 7.7 percent of U.S. households, approximately 9 million adults, are unbanked.
Underbanked households have a checking or savings account but rely on alternative financial services. Underbanked households haved used non-bank money orders, non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or refund anticipation loans at least once in the past five years. The cost of these services is typically higher than using a bank.
People stay unbanked or underbanked for a number of reasons. Some don’t see the need, feel they do not have enough money or have had poor banking experiences in the past such as a mishandled account, overdraft fees, monthly maintenance fees, or minimum balances. Others lack appropriate identification, have language barriers or are intimidated by their lack of understanding of mainstream financial services. By contrast, check cashing and predatory lending services offer cash fast without any delays.
Low income adults in the U.S spend over 5 billion dollars paying off fees and debt associated with predatory loans every year. On average, a payday borrower pays back $800 for a $300 loan, with $500 purely going toward interest. Banked individuals have a greater capacity to resist these services and break the cycle of poverty.
Efforts to engage and educate the unbanked on the value of banking have often been disjointed and failed to combine the different strengths offered by the public, private and nonprofit sectors. Another survey by the FDIC of member banks showed 63% provide financial education to unbanked individuals but concluded that few banks engage in the types of outreach most effective at attracting the unbanked and underbanked.
On the bright side, credit unions, Community Development Financial Institutions and community banks such as Albina Community Bank in Portland have been successful in their outreach efforts. These include a first-time homebuyer’s program, promoting the Earned Income Tax Credit, providing financial education training and internship opportunities at a local school and supporting local entrepreneurs. All of these programs were accomplished with respected community partners. This illustrates how connecting people to banking services can be done in conjunction with other programs serving the low income community.
Applications can help convene the public, private and nonprofit sectors and leverages the power of technology to introduce this underserved sector of the economy to banking and educate them about the benefits that come with computerized banking and savings. Institutions have a large financial stake in attracting deposits and in serving their customers outside the old brick and mortar model.
Apps Out There
Here are some apps and resources that can help promote banking of the unbanked.
The Center for Responsible Lending educates consumers on abusive financial practices, from credit cards to payday loans, through resources, research, and tools.
Financial education programs, such as the FDIC’s MoneySmart curriculum as well as countless others available on NEFE’s Financial Education Clearinghouse aid in the delivery of financial literacy at the community level.
One Economy’s Resource Locator tool, is a zip code-based database of local services that allows users to search for services in their local area and directs users to local banks, credit unions and community organizations that can help them set up bank accounts. To ensure this database contains the best resources, Applications for Good will partner with local banks, credit unions and governments agencies to leverage existing resources already encouraging these activities, such as local “bank on” campaigns.
In five minutes or less, Mint helps users see where they are spending money as well as teaching them how to build wealth. Email messages, SMS alerts and automatic updates occur whenever there’s an important change in your finances. Mint finds personalized ways to save money by analyzing current spending. For example, if charged a fee for a bank account, a user receives a descriptive alert advising how to avoid it in the future. For students and others living on limited incomes and perhaps budgeting for the first time, Mint is an excellent tool for becoming financially skilled. And it’s free!
MyTaxBack is an easy to use Earned Income Tax Credit (EITC) calculator. It estimates the user’s tax refund and registers her for SMS or email reminders to file at MyFreeTaxes.com. It’s available on multiple platforms, including Facebook. At tax refund time, users are reminded of savvy options to pay off credit card debt, invest or save.
Apps That Should Be
To get the brainstorming started, here are a few ideas for mobile and Internet applications that would help address the challenges faced by the unbanked and underbanked.
A fun simulation game could show the advantages of traditional banking versus payday loans and check cashing services. Making the game available on the web, perhaps via Facebook, would make it very accessible.
A simple educational app could illustrate the costs of payday lending and check cashing versus traditional banking. Before individuals decide to use alternative financial services, they will be able to use this tool to understand the costs associated with each service. This tool would make the costs associated with the alternative financial services more transparent and shed light on the benefits of using traditional financial institutions for financial transactions. Call it Laughing All the Way to the Bank?
Using One Economy’s Resource Locator database API, it would be possible create a mobile tool to help users locate banks and ATMs. By providing a simple way for individuals to find a local bank or ATM, they will be less likely to choose a check cashing services which are often more accessible than banks in low-income communities.
How about a banking bargain hunter? Since the minimum balance, monthly fees, and overdraft fees of banks often scare off users, this app could, with a smooth presentation, track nationwide banks (and local ones if practical) and compare who charges fees for what and the main things to watch out for (Watch out, you’ll get charged X fee if your balance is too low in a checking account). Use case: “I don’t even get close to one of them big banks unless I checked my Risks app first” or “Oh look, I checked my Bargains app and X Bank has the best interest rate for loans”. This would also appeal to the banked population.
Center for Responsible Lending, Payday Loan Costs – Interest Rate Survey
FDIC, National Survey of Unbanked and Underbanked Households
FDIC, Tapping the Unbanked Market
Grio, Blacks without banks count on check cashing alternatives
Nicolas Paul Retsinas, Eric S. Belsky, Building assets, building credit: creating wealth in low-income communities