5 challenges the unbanked faced coming into COVID-19

November 24, 2020 10:45 AM

Being unbanked can be downright expensive, as many households use alternative financial solution providers such as payday lenders that can charge exorbitant fees for financial services. Additionally, in the current pandemic those who rely on cash are being further frustrated, as fewer merchants want to handle paper bills.

“Since the COVID-19 pandemic began, we’ve seen a huge shift to digital payments — for many, it makes more sense right now to order items online that you’d traditionally buy in-store with cash, or to purchase groceries in advance and then pick them up curbside,” said Brad Hanson, president and CEO of Meta Financial Group and co-president and CEO of MetaBank. “Many of us take these conveniences for granted, but for millions of Americans who rely on cash it’s not that easy, and may leave them more vulnerable."

Improvements have been made in reducing the number of unbanked households over the past few years, but progress hasn't been even across different communities. There are also new obstacles coming to light, as COVID-19 drives more banks and consumers to digital channels to acquire and service new financial products.

CORONAVIRUS IMPACT: ADDITIONAL COVERAGE

Based on data from the FDIC's 2019 household survey “How America Banks: Household Use of Banking and Financial Services,” the level of unbanked households rests at about 5.4%. This is a drop of 110 basis points in the number of unbanked households since the 2017. The last major peak was recorded at the end of the last major recession in 2011, when the figure reached 8.2%.

COVID-19 has caused major changes in employment, household makeup and where people live — all of which can have impacts on the level of banked households. A more recent survey, called the Future of Money and conducted in September 2020 by PaymentsSource, shows the level of unbanked households is now about 6.5%, representing a possible reversion back to 2017 levels.

The World Bank Findex Database provides a good reference of how well the U.S. is getting its population banked. According to the World Bank there are several countries that have reached 100% levels of banked households including Denmark, Finland, Norway, the Netherlands and Sweden, just to name a few. Germany and New Zealand are at 99%, while Japan is at 98% and the U.K. is at 96%. America’s neighbors reveal a strong contrast with Canada at 100% and Mexico at 37%.

Probably the biggest changes in banking adoption can be seen in some of the largest developing economies between 2011 and 2017, with India going from 35% to 80%, China going from 65% to 80% and Brazil moving from 56% to 70% over that time period.

The change in unbanked households has gone from 7% down in 2015 to 5.4% in 2019, a change of 160 basis points or 1.6 percentage points, according to the FDIC survey. In examining how the unbanked breaks down according to a household’s ethnicity, some of the biggest gains in the last few years appear to have been made among Blacks and Hispanics. White households, in contrast, have gone from 3.1% in 2015 to 2.5% in 2019.

Both Black and Hispanic households experienced a 25% drop in unbanked levels from 2015 to 2019. However, Native American households experienced the exact opposite effect with their levels of unbanked rising by about 7%, going from 15.3% in 2015 to 16.3% in 2019.

One positive factor influencing the growth in banked adoption was from the strong economy and rising employment levels during this time period. According to the Bureau of Labor Statistics, the overall unemployment rate in January 2015 stood at 5.7%. Over the course of the next few years the economy had boosted employment payrolls to the point where the unemployment rate at the end December 2019 was 3.5% — a reduction of almost 40%.

Employment by Black Americans experienced dramatic change overall, going from just over 10% in 2015 to 5.9% at the end of 2019, according to the Bureau of Labor Statistics. CNN noted that major improvements were being made in Black unemployment levels when the rate reached 9.6% in April 2015, which was the first time it broke the 10% barrier since the economic crisis of 2008-2010, when Black unemployment stood at a peak of 16.8% in March 2010.

Given the growth in online and mobile banking over the last decade, not having internet access could be a major impediment to becoming fully banked, particularly if a local branch is not conveniently located. Further, the various state and national lockdowns have forced bank branch closures, which has compounded the banking barrier for those lacking digital access.

According to the FDIC’s 2019 “How America Banks” survey, 73.9% of banked households accessed the internet through a smartphone in 2015, compared to just 49% of unbanked households. Fast forwarding to 2019, the smartphone access gap shrank only by 2 percentage points. Almost 87% of banked households accessed the internet through a smartphone in 2019 compared to 63.7% on unbanked households.

The difference in home internet access among banked and unbanked households was even greater and the change in the size of the gap, barely shrank at all over the period studied. In 2015, 80.7% of banked households accessed the internet through a home connection compared to just 31.5% of unbanked households. In 2019, banked households accessing the internet from home grew almost 2 percentage points, to 82.6%, while unbanked households grew to only 33.8%, leaving an almost 50 percentage point gap — the same as four years earlier.

One of the biggest impediments to owning a bank account can be the high minimum balance requirements many financial institutions impose in order to avoid the standard monthly fee.

According to a study by New America, the average minimum balance to open and maintain a fee-free checking account of banks in Black-majority neighborhoods was $870.50 and Hispanic-majority neighborhoods was $748.50. White-majority neighborhoods, in contrast, had banks that on average only required a $625.50 minimum balance to maintain a checking account free of monthly fees.

The FDIC’s 2019 survey “How America’s Banks” found that 48.9% of unbanked households cited the inability to meet bank minimum standards as a reason for their being unbanked, while 29% reported it as the main reason for being unbanked. High bank fees were cited by one third (34.2%) as a reason for being unbanked, while 31.3% cited the unpredictability of bank fees as an important reason.

Outside of high fees and minimum balances, the unbanked pointed to a lack of trust and privacy when dealing with banks as important reasons for not having a checking or savings account. When combined, the lack of trust (16.1%) and lack of privacy (7.1%), account for almost a quarter (23.2%) of the main reasons unbanked people don’t have an account.

The universal solution for unbanked consumers when they need to use a payment card for in-store and online shopping or to get a direct deposit sent to them electronically is to use a prepaid card.

“General purpose reloadable prepaid cards can be an economical and convenient way for unbanked and under-banked consumers to access our country’s financial system, so it’s no surprise the FDIC found nearly 30% of unbanked households use this payment tool,” said Hanson. “For these folks, prepaid cards deliver a valuable electronic option for direct depositing paychecks, paying bills and completing e-commerce or contactless transactions. These days, having a digital payment option is more important than ever.”

The rates of prepaid card adoption among the unbanked is more than three times the rate of the banked population, according to the FDIC 2019 survey “How America Banks." Almost 28% of unbanked households used a prepaid debit card in 2019, down from 29.6% in 2015. Banked households used prepaid cards at a rate of 7.4% in 2019, down from 8.8% in 2015.

Prepaid cards have come into the spotlight over the last year as a result of the COVID-19 pandemic, which has made more customers shy away from cash usage in store; and the growth of earned wage access (EWA) companies such as Ceridian, Branch and PayActiv, offering the unbanked a means of getting their payroll paid electronically.