FDIC Study Finds 1 in 4 Families Are Underbanked

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WASHINGTON — The Federal Deposit Insurance Corp. provided new insight Wednesday on the vast segment of the country that lacks a meaningful relationship with a bank, releasing a study that showed one in four families go elsewhere for financial services.

In the first study of its kind, the agency said 30 million U.S. households — or roughly a quarter — were either unbanked or underbanked, translating into roughly 60 million adults. The report found unreached consumers overwhelmingly to be among minority and low-income populations.

The data — produced for the FDIC from U.S. Census data collected in January — prompted some to call for greater efforts by institutions to reach the underserved, while others noted the difficult challenges for banks to attract consumers unfamiliar with mainstream banking.

"The number of the unbanked and underbanked is going to increase unless the regulators and Congress both force and cajole the industry into a new paradigm of banking," said Robert Gnaizda, a counsel for the Black Economic Council. "Banking has to be friendly to the 70% of Americans who live paycheck to paycheck. It is not friendly. It is the exact opposite."

But other observers defended industry efforts, saying financial institutions are constantly trying to broaden their customer base but face competition from less traditional and lower-cost nonbanks, and regulatory hurdles such as anti-money-laundering rules.

"I don't think it's for a lack of effort by banks to attract new customers," said James Barth, a finance professor at Auburn University and a fellow at the Milken Institute.

The study, part of broader FDIC efforts to expand economic inclusion, said nearly 8% of households — or 9 million — were unbanked, meaning they claimed not to have a checking or savings account. That translates into roughly 17 million adults. (The survey questioned about 47,000 households, which participated in a supplement to the Census' standard population survey.)

Underbanked households — defined as those with a bank account but who rely mostly on alternative financial services — were found to make up 18% of Americans, totaling 21 million, or about 43 million adults.

The study also broke the results up along racial and ethnic lines, and showed which states and regions of the country had the heaviest proportions of underserved households.

Minorities and lower-income groups were more likely to be unbanked or underbanked, with 22% of black households being unbanked and 32% being underbanked. Among Hispanic households, 19% were unbanked, and 24% were underbanked. Meanwhile, only 3% of white households were unbanked and 15% were underbanked.

Among regions, underserved areas were most prevalent in the South. The highest percentage of unbanked households was in Mississippi (16%), while Alaska had the highest proportion of underbanked households (25.5%).

The results also addressed why consumers who had never used a bank — or had previously used a bank — do not maintain an account now. Among the top reasons were that they lacked enough money to need banking services, did not see the value in a bank account, found that service charges and minimum balances were too high and did not write enough checks. Among underbanked consumers, respondents cited convenience, speed and cost as reasons they use nonbanks for check-cashing and money order services.

In a conference call with reporters, FDIC Chairman Sheila Bair said the study shows many consumers are finding nonbank institutions to be more cost-efficient for their needs. "This gives us a better understanding … of why folks do and do not use banks," she said. "One of my key takeaways … is that a lot of this is a product of rational economic decision-making. A lot of the folks who do not use banks now … found it not to be cost-effective for them.

"Our challenge is to make sure banks have the appropriate range of products and services that meet the needs of all low-income communities and have the right fee mix that is cost-effective, and that we can find that intersection of the products that are also cost-effective for the banks."

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