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Financial Exclusion: Why it is More Expensive to be Poor

June 02, 2017

One out of every 13 households in the United States lives without a checking or saving account. The lack of access to traditional banking services makes millions of households turn to alternative financial services that charge exorbitant fees, leaving the unbanked and underbanked trapped in a cycle of poverty. Improved financial literacy among low-income consumers and the introduction of affordable products from private banks are necessary to increase banking participation and democratize access to basic banking services.

It is difficult to imagine living without having any access to basic banking services. From running daily errands to dealing with medical or financial emergencies, going about one’s daily life without owning a checking or savings account is not only inconvenient, but also costly. Individuals often must resort to alternative financial services such as check-cashing services, payday loans, pawn shop loans, and rent-to-own agreements, which incur extremely high fees. This kind of financial situation, however, is the reality for approximately 9.0 million households in the United States as financial exclusion remains as one of the most prevalent issues Americans face today [1].

The Issue in Depth

The issue of financial exclusion can be categorized into two segments: unbanked and underbanked. Unbanked households do not have an account at an insured institution, while underbanked households have an account but have used alternative financial services within the past 12 months. Working in partnership with the U.S. Census Bureau, the Federal Deposit Insurance Corporation National Survey of Unbanked and Underbanked Households reveals that a total of 7 percent of households in the U.S. (or 1 out of every 13) were unbanked [2].

Image: Household Unbanked Rates by Year. Source: FDIC.Image: Household Unbanked Rates by Year. Source: FDIC.

Yet these numbers alone do not even begin to represent the complexity of the problem. The rate of unbanked and underbanked households varies immensely among different states, regions, and neighborhoods. For example, based on overall percentage of unbanked households, many of the top 100 unbanked places (cities, towns, or census designated places with more than 250 households) are small rural towns, of which 36 are in Texas, 17 in Mississippi, and 10 in Arizona [3]. Of large cities with more than 100,000 households, however, Miami was ranked first with 20.1 percent unbanked and 21.4 percent underbanked, followed by Detroit, Cleveland, Dallas, Houston, and Baltimore [3]. Philadelphia was ranked as the 9th most unbanked large city with 14.3 percent unbanked and 23.5 percent underbanked, and New York City, one of the nation’s biggest financial hub, has 12 percent, or 360,000 households unbanked [4]. This national pattern of disparity in unbanked rates is apparent even on the local level. In New York City, for example, the unbanked rate in 2013 increases threefold from the least unbanked borough, Staten Island, to the most unbanked borough, the Bronx, and neither borough’s unbanked rate aligns closely with the city average of 12%. [4].

The Implications of Lack of Access to Banking Services

Before discussing factors contributing to this problem, it is important to understand the effects of being unbanked to highlight the extent of the problem. There’s a great economic burden on unbanked individuals to complete even the most basic financial transactions. Cashing a check, for example, costs an average individual with a full time job up to $40,000 over the course of his or her lifetime [5]. Retailers, which many visit for check-cashing services, charge non-trivial fees. For example, Walmart charges a $3 fee for any check up to $1000 and $6 for checks greater than $1000 [6]. Payment for basic transactional services can accumulate huge costs. Since a large portion of unbanked households are low- and medium-income families, this takes away from money reserved for daily consumption. If these costs could be avoided, each individual from the 9 million unbanked households could have an extra $108 every month for food, gasoline or clothing [5]. These additional savings for unbanked households are enough to cover the government’s entire food stamp program and still be ahead by $15 billion, considering that the government had allocated $74 billion for low-income Americans in 2014. This would allow the government to increase its budget for low-income Americans by over 20% if every unbanked household opens a bank account [7]. Other alternative financial services also charge high fees. For example, auto title loans charge an annual percentage rate (APR) that generally exceeds 300 percent and payday loans charge APRs of 500 percent [8].

Reasons for Being Unbanked from the Consumer Side

If it costs so much to not have a bank account, why are so many people still unbanked? There are many interconnected causes, both from the consumer and supplier side, which contribute to the overall problem of financial exclusion. First, the question of whether to open a bank account could sometimes just come down to the volatility and quantity of the person’s income. According to the previously cited FDIC Survey, “unbanked rates among households with income that varied somewhat or a lot from month to month were 8.7 and 12.9 percent, respectively, compared to 5.7 percent among households with income that was about the same each month” [2]. This means the more volatile one’s income is, the more likely one is unbanked. In addition, 49 percent of unbanked Americans express that they do not have enough money to use an account [9]. Because most banks require a mandatory minimum deposit to open and maintain an account, not having a sufficient or steady flow of income could automatically exclude low-income households who live paycheck to paycheck from using banking services. At first glance, this information may seem contradictory because alternative financial services incur higher costs but are predominantly used by low-income households. However, it is important to recognize that alternative financial services do not require a consistent balance in an account and thus are much more accessible up front. The high costs of alternative financial services manifest either over an extended period of time (due to repeated usage of one-time transactional services such as cashing a check), or at the end of a lending service, for which the interest rate is often two or three times higher than that of a traditional bank. In other words, since the cost of bank accounts is visible before even obtaining an account, whereas the cost of alternative financial services surface later, alternative financial services may be more appealing to low-income households.

Another reason for unbanked households is behavioral and attitudinal, as many unbanked households distrust banks. 55.8% of unbanked households thought that banks were not at all interested in serving households like theirs, compared to approximately 17 percent of underbanked households and 12 percent of fully banked households [2]. Although there are numerous objective obstacles posed by banking institutions themselves that prevent low-income families from opening a bank account, such unfavorable attitudes towards banks could be alleviated by improving financial literacy among low-income households. A study conducted by the Department of Economics at the University of South Carolina and University of Nebraska found that “financial literacy variables decreased the significance of race and ethnicity variables” [10]. This means that “education can help improve banking participation among racial minorities” [10]. Taking this one step further, improving financial literacy may be the key in aiding the decision-making process when unbanked populations choose between traditional banking services and alternative banking services. By helping them understand the concept of cost as not an isolated event but a cumulative event, in which a high cost up front does not necessarily mean a high cost overall, they may no longer overweigh the initial cost of accessing traditional services and start considering the long-term fees and high interests associated with alternative financial services.

Reasons for Lack of Access to Banking Services from the Supplier Side

However, as noted earlier, the reasons for being unbanked do not lie only with the consumers. The actions, or rather inaction, of private sector commercial banks play just as large of a role in the issue. The previous discussion of low-income households not having access to traditional banking accounts due to the high minimum balances underscores the lack of affordable banking services for this particular consumer segment. Some large private banks have started addressing this issue by offering bare bone bank accounts that only require a low monthly-fee or prepaid cards that act as debit cards. Bank of America, for instance, created a new product called SafeBalance Banking, which is similar to a traditional bank account but only charges $4.95 a month. It offers many services similar to those of a regular account, including deposits, withdrawals, online bill pay, and a mobile app [11]. Likewise, American Express began to offer its Bluebird Card that customers can buy for only $5. The card has some of the membership benefits of a regular AMEX card and allows customers to make cash withdrawals and deposits via Wal-Mart checkout registers, as well as direct deposits, bank transfers and photo check deposits [11]. However, these efforts are not nearly enough to excuse the private sector from its responsibility to promote economic inclusion in our community. Bank of America’s SafeBalance Banking, while an improvement, requires a $25 initial deposit that acts as a deterrent, and these products are not advertised or promoted as they are less profitable than other banking products. Hence, the potential impact of such initiatives on low-income, unbanked households is significantly decreased [12].


Financial exclusion is a problem that originates from different sources and cannot be solved through a single, unilateral approach. Instead, it requires contribution from every part of the market, starting from the private sector diversifying its products so that low-and-medium-income households can also access traditional banking services, to the government passing new legislation mandating cooperation from the private sector and an increase in effort in promoting financial literacy in schools and local communities. More consumer-friendly banking alternatives such as credit unions and microfinance initiatives should be strengthened and made aware of, while the economic impact of financial exclusion should be studied more extensively as it not only impacts unbanked and underbanked households, but also the federal government as funds allocated to welfare programs could be avoided or lessened by bringing banking services to every household in the United States.



  [1] https://www.fdic.gov/householdsurvey/

  [2] https://www.fdic.gov/householdsurvey/2015/2015execsumm.pdf

  [3] https://cfed.org/newsroom/experts/ethan_geiling/the_most_unbanked_places_in_america/




  [7] https://www.fns.usda.gov/pd/supplemental-nutrition-assistance-program-snap


  [9] http://blogs.worldbank.org/allaboutfinance/why-are-so-many-americans-unbanked

  [10] http://www2.isu.edu/peer/links/full/breitbach.pdf



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