Spotlight Exclusives

The Unbanked: A Financial Crisis on Main Street

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The term “financial crisis” has been heard a lot in recent years, whether in the context of the economically disastrous events following the collapse of Lehman Brothers in late 2008 or the ongoing sovereign debt crisis currently underway in the Eurozone.    

There is another financial crisis, however, that is taking place much closer to home. It۪s the crisis of America۪s “unbanked,” those who don۪t have access to traditional financial institutions. And unlike problems in Europe or on Wall Street, this is a problem that community leaders across the United States can actually do something about.  

A relationship with a traditional banking institution is a prerequisite for financial success in today۪s society. It is a critical first step in building a credit history and it provides opportunities to build the assets necessary to buy a home, start a small business, or pay for a college education. To participate fully in the contemporary economy, you need a bank account.

Despite this, approximately 9 million Americans remain unbanked. To understand why, I worked with the UMass Dartmouth Policy Analysis Research Team (PART), a team of graduate student researchers, to study how low-income residents in the economically challenged city of New Bedford, Massachusetts interact with traditional and non-traditional financial service providers.

Through a series of focus groups, interviews and a detailed survey, we found that a lack of awareness of local, low-cost banking options, combined with a short-term perspective on financial matters was keeping low-income New Bedford residents from using traditional financial services.

These findings, summarized in a forthcoming issue of Communities and Banking, tell a sad and troubling story. Our survey of 173 low-income residents found that 27 percent are unbanked. As many as 18 percent previously used a bank but stopped, while nine percent have never had a formal relationship with a bank or credit union at all. The unbanked rate in New Bedford is more than seven percentage points higher than the national ratein 2009, about 20 percent of low-income households were unbanked.

Despite the disadvantages of living without a bank account, it is actually not that surprising that so many choose to stay unbanked. If a person cashes checks infrequently, doesn۪t save or borrow money, and uses supermarkets or other low-cost, nonbank check-cashing outlets, the cost of being unbanked is not high in the short run.

The problem is over the long term. As savings opportunities are missed and income grows, the cost of being unbanked rises significantly.

Low-income people offer many reasons for avoiding banks. When asked why they were unbanked, nearly 24 percent of low-income New Bedford area respondents said they “do not have enough money” to use a bank. Other reasons included a “dislike or mistrust” of banks, the lack of a need for a bank account, and a belief that “fees are too high.”

Yet our study also showed that most of these reasons are based on bad information or misperceptions about the financial services available.  

First, the research team found no evidence that access to low-cost banking services is a problem in the New Bedford area. Notably, several institutions offering no fee, no minimum balance accounts are located within walking distance of New Bedford۪s most economically disadvantaged neighborhoods.  

Second, there are significant gaps in the financial literacy of the city۪s low-income population. The study documents a short-term perspective on financial matters and a lack of awareness of local, low-cost banking options. This kind of financial shortsightedness insidiously works against efforts to revitalize low-income communities by restraining entrepreneurship and stymieing important efforts to encourage asset development in low-income households.

Our study and its findings can tell us something important about what community leaders should do if they want to create and restore much-needed pathways to economic opportunity in our nation’s low-income communities. Specifically, they must ensure that residents of these communities have the knowledge and skills to effectively manage their financial affairs. The “Bank On” movement and other similar community based programs offer promising models for how we can improve financial literacy and empower America’s low-income families.  

Other communities could begin to tackle the crisis of the unbanked by following the Bank On approach. This means offering low-cost bank accounts to typically unbanked individuals or those who have a troubled banking history, accepting alternative forms of identification, and working with community groups to identify customers who are interested in opening accounts.

There۪s no question that these efforts will not solve all the problems low-income families face, but the crisis of financial ignorance on Main Street is one we have the power to solve. We just need the will.  

To print a PDF version of this document, click here.

Michael Goodman is an associate professor, chair of the Department of Public Policy, and director of the Master of Public Policy program at University of Massachusetts Dartmouth. He also currently serves as Co-Editor of MassBenchmarks, the journal of the Massachusetts Economy published by the UMass Donahue Institute in cooperation with the Federal Reserve Bank of Boston.

The views expressed in this commentary are those of the author or authors alone, and not those of Spotlight. Spotlight is a non-partisan initiative, and Spotlight۪s commentary section includes diverse perspectives on poverty. If you have a question about a commentary, please don۪t hesitate to contact us at info@spotlightonpoverty.org.

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