Tapping the Unbanked Market

Banking the Poor - FDIC Conference
Tapping the Unbanked Market Presentation

Michael S. Barr
University of Michigan Law School
November 5, 2003
Msbarr@umich.edu

©2003 Michael S. Barr, based on "Banking the Poor," Yale Journal on Regulation, Volume 21.
(forthcoming 2004; references for slides may be found in that text)

Low income families lack access to mainstream financial services
  • 22% of low-income families were unbanked (10 million households) in 1998
    • Growth of working poor
    • Increase in immigrant portion of working poor
    • Concentration of working poor
    • Decline in cross-subsidization/fee-driven
    • But decline in unbanked from 1995 to 1998 (from 25% of low-income households)
Reasons cited for being unbanked
  • Low income
  • High bank account fees
  • High minimum balances for accounts
  • Low check-writing usage
  • Low or no personal savings
  • Distrust/ don't like banks
  • Privacy
Alternative financial services providers serve the poor
  • Check cashers
    • 400% growth since 1992 to about 10,000 outlets
    • Half of unbanked use to cash checks
    • Services: check cashing, bill payment, money orders, wire funds; convenient location & hours.
    • Fees: Avg. 2-3% of check (but wide range), 180 million checks, totaling $55 billion, $1.5 billion in fees.
    • 80% payroll checks, 16% government checks
    • Loss rates under 0.25 percent of face value of check (compared with interbank rate of 0.64 percent)
Alternative financial services providers serve the poor
  • Payday lenders
    • 12,000 providers
    • $2 billion in revenue; $12 billion in loan volume; 65 million loans to 8-10 million households.
    • APR avg. 474% ($36/2 week/$200 loan)
    • Rollovers repeatedly during year
    • Credit problems & credit histories
    • Federal pre-emption and "renting" charters
AFS Providers: Refund Anticipation Loans/Tax Preparation Services
  • Nearly half of $32 billion in EITC refunds to over 18 million families distributed through RALs
  • Cost EITC recipients $1.75 billion in tax preparation, electronic filing and loan fees, not including check-cashing fees.
  • Example for $1500 Refund in Washington DC
    • $100 tax preparation and filing
    • $90 RAL
    • $30 check cashing fee
Other AFS
  • Pawnbrokers
  • Auto title lenders
  • Rent-to-own
  • Money transmitters
  • $23 billion in remittances from U.S. to Latin America and Caribbean
Barriers to account ownership
  • Checking products ill-suited to poor
    • High risk overdraft; high fees
  • Problems with accounts in past
    • 7 million in ChexSystem
  • Distribution system (e.g., fewer ATMs per capita in low-income neighborhoods)
  • Unbanked too poor/low profit
  • Lack of financial education
Costs of Unbanked/Underbanked
  • Basic transaction services expensive (receive income, store value, pay bills)
  • Reduces government transfer programs (e.g. EITC)
  • May decrease WTW & EITC work incentives
  • Harder to borrow on reasonable terms
  • May make it harder to save
    • cushion against short term crises
    • education, homeownership, retirement, or other goals
  • Risk of loss/theft
Should we care?
  • Income transfer requires converting government payment to usable form
  • May lessen government work incentives
  • May reduce savings or access to credit that cushion low-income families from reliance on government programs or bankruptcy
  • Payment systems externalities
    • Checks vs. debit
    • Off-line vs. on-line
    • ACH bill payment & direct deposit
    • ATM functionality & location
  • Broader social inclusion
Federal steps to increase access to financial services
  • Encourage low-cost, electronically-based products
    • Treasury's ETA & First Accounts
    • Private financial sector initiatives
    • Create new tax credit for FIs providing low-cost electronically based accounts
  • Encourage employers to offer direct deposit
  • EITC, tax refund, and tax preparation reforms
  • Enhance federal oversight of depositories & permit state regulation to function
  • CRA services test
State steps to increase access to financial services
  • Shift state EBT to account-based products
  • Permit former welfare recipients to retain accounts opened through EBT programs
  • Consider using TANF funds for financial access
  • State & local linked deposit programs
  • Improve regulation & enforcement of non-depository financial service providers, e.g.:
    • APR disclosures, rollover limits, but remove anti-competitive requirements (e.g., geographic rules)
  • State education campaigns
Private sector steps
  • Employer-based initiatives
    • Direct deposit, bank accounts, financial education, payroll cards as transition, & payroll savings plans
  • Banks, Thrifts and Credit Unions
    • low-cost, debit-card based accounts, with direct deposit
    • accounts with savings "buckets"
    • card-based remittances, linked to accounts
    • automatic check-cashing, bill payment, money orders
  • Others
    • debit networks-surcharge free alliances for the poor
    • tax preparation services-direct deposit to accounts
  • Leapfrogging (cell phones, internet kiosks)
Steps to increase savings
  • Account ownership
  • IDA programs
  • Employer-based savings plans
  • Progressive savings & pension reform
  • Financial education
Conclusion
  • Reaching out to improve access to financial services and savings is still relatively new.
  • Initial efforts suggest policies designed to
    • Induce financial institution involvement
    • Increase access to financial services
    • Increase access to savings vehicles
Last Updated 12/02/2003 communications@fdic.gov