Which Way Will The Unbanked Pendulum Swing?

When taken on a global scale, the access to mainstream (bank-backed) financial services and products in the United States is impressive.  Worldwide, 38 percent of the population is considered unbanked; that’s about 2 billion people.  In the U.S. on the other hand – based on the most recently available data – the vast, vast majority of citizens have access to at least a checking account.

To be more specific, 92.3 percent of Americans have a bank account. On the one hand, that speaks to the access and availability of products that fit a range of needs – but it also casts a shadow over the issues of the unbanked in the United States. The picture, admittedly, is far better that the picture in the rest of the world.

But the fact remains that 7.7 of the population does not have a bank account – which is roughly 10 million households nationwide. Those households – according to the FDIC’s 2013 data – are more likely to be low income, more likely to have suffered a recent economic shock and more likely to be hit by high costs when attempting to access their funds.

Moreover, if one looks for consumers who are underbanked – those with regular deposit accounts, but without easy access to low-cost mainstream credit and lending products – the figures appear far worse. That brings the total number of unbanked households to about 20 percent of American households – or one out of every five households.

As of 2013 – the last year cover by the FDIC biennale release – a little over a quarter of the U.S. population was either unbanked or underbanked.  If past is prologue, we will see the latest set of figures – for 2014 and 2015 – sometime this fall.

The question is what will those numbers show – have the unbanked/underbanked figures gone up, gone down – or stayed flat? The answer depends, it seems, on who you ask.

The White House Council of Economic Advisors would probably tell you they will go down – since the overall trend is toward decline.

The Federal Reserve Bank of Cleveland, on the other hand, might note the unbanked numbers will go up – citing issues related to access and fees.

And the Pew Charitable Trusts might tell you that this question no longer makes sense at all – or at least that it needs significant refining in the face of mobile payments and banking. Unbanked/underbanked could well mean something very different, notes Pew, if consumers are voluntarily abandoning mainstream banking as opposed to being locked or pushed out of it.

Unbanked/Underbanked On The Decline

While noting that that nearly a quarter of the population being underbanked or totally unbanked is far from ideal – the Council of Economic Advisors notes that the good news is that the trend line is pointing down.

From 1989 to 2013, the percentage of U.S. households with bank accounts climbed from 86 percent to 93 percent, and the percentage of households in the bottom income quintile with bank accounts increased from 56 percent to 79 percent. The report from also noted that minority communities had seen the biggest gains – with the number of banked households jumping from 65 percent to 87 percent.

“Multiple factors likely have led to the increase in financial inclusion over time, potentially including growing financial capability, direct deposit (and increased use of direct deposit by government programs), and funds directed to community development institutions, among others,” the report noted.

The report also notes that there is still work to be done in regards to making financial access available more broadly – and also applauds the power of FinTech players to generally broaden inclusion. The tone is positive, since the trend is moving in the correct direction.

Which is, broadly speaking, true – over the last 15 years, as the report notes.  But it is worth noting that that last five years have been a little more hiccupy than most.  At the end of 2009, the unbanked rate was at 7.6 percent – it then jumped up to 8.2 percent in 2011 and fell back to 7.7 percent in 2013.  That means technically two reports past the official end of the Great Recession, the numbers haven’t made it below the Great Recession figures. There is some reason to think 2015 will be the year – the Council of Economic Advisors thinks it will.

But Bonnie Blankenship, a regional community development adviser for the Cleveland Fed, isn’t so sure.  She thinks the numbers are likely going to start going up again before they go down.

Downward Pressure

Blankenship’s argument is pretty simple.  From a street level view, there are two clear pressures on underbanked and unbanked customers.  One is access and the other is fees.

The reality for underserved communities is that if there isn’t physical access to a mainstream bank within walking distance of community members, the odds are against those consumers becoming “adequately banked.” The reality of the last several years, she notes, hasn’t been more branches opening, but instead more branches closing. Especially underperforming ones in economically depressed areas.

Plus being unbanked is expensive, she notes – but so is being banked, in many cases. Banks charged $32.5 billion in fees last year – and consumers, in many cases, can’t pay them. According to data from the Pew Charitable Trusts – 28 percent of consumers who report closing a checking account report doing so in response to overdraft fees.

“It’s just murder,” one man interviewed by Pew noted. “When you ain’t got a lot to save, there’s no sense putting it in a bank.”

Blankenship also noted that these communities are served by check cashers, pre-paid card sellers and payday lenders – all of whom offer better consumer access, generally through things as simple as having later hours.

“I know that payday lenders are looked at in a very negative way, but they are supplying a need for some individuals,” she noted.

She also noted that as access is down and fees are up, it’s a need they might well be providing for more consumers going forward.

Asking The Right Question

Without the 2015 numbers in hand, it is hard to know what to make of the direction of the unbanked and underbanked numbers – The Great Recession was a seismic event, which means the ripples travel far.

But it was interesting to note how Pew – the resident non-profit fact checkers to the consumer access game – approached the 2015 figures.  In a letter to the FDIC on the upcoming release, Pew praised the entity’s efforts at keeping tabs on these numbers – and then politely informed them they might be asking the wrong question. Or at least not asking a complete enough question – because, as Pew notes, nonbank lenders have changed – a lot – since 2009.

“As the Federal Reserve’s survey research has demonstrated, year over year, the unbanked and underbanked have a higher rate of mobile smartphone usage than the banked. Therefore, mobile banking and payment features specifically designed for users of smartphones tells a much richer story of the financial services available to, and adopted by, the unbanked and underbanked.”

Pew does not think digital banking analogs – or mobile payments – have the power to totally replace banking – yet – but they were sure that the question is different with such players on the field.  The previous questions about underbanked and unbanked were about accessibility of services alone – the newer questions might have to be about desirability and competitiveness.

“At the same time, consumer use of nonbank mobile payments products has implications for the competitiveness of bank offerings, in terms of these products potentially competing with bank offerings, so it is important for the FDIC to collect data across this market,” the Pew letter noted.

So what comes next for the unbanked and underbanked? Will their numbers swell, fall or take on a wholly new character entirely? Given the educated parties in disagreement, we will not hazard an opinion.  But we will keep you posted in a few weeks when the latest iteration of the figures goes public.