Federal legislation passed in 2005 requires that the FDIC regularly study the efforts of banks to bring into the mainstream banking system families that “have rarely, if ever, held a checking account, a savings account, or other type of transaction or check-cashing account at an insured depository institution.”

In the aftermath of the enormous losses of national income and wealth inflicted on the US by the banking sector through mismanagement of derivatives, you would think the banks might be looking for some way to make some social restitution for the economic damage they have caused to society.  And you might also figure that one way would be for the banks to provide greater (maybe “any” is a better word) services to two sets of households in the US that the agency calls the unbanked and the underbanked–especially since Congress is very interested in having this happen.

What do the terms unbanked and underbanked mean?  The FDIC defines them as follows:

—unbanked households are those which do not have either a bank checking or savings account;

—underbanked households are those which, although they have a checking or savings account, also make regular use of non-bank financial services, such as

—–non-bank money orders

—–non-bank check cashing services

—–payday loans

—–rent-to-own agreements

—–pawn shop loans.

Households are also classified as underbanked if they have taken out a tax refund anticipation loan within the past five years.

The FDIC queried the banks about their marketing to these potential customers, as the 2005 law requires it to do.  It turns out most banks have basic marketing materials, like pamphlets explaining services offered, that are targeted to families that now use few, if any, bank offerings.  But the FDIC report in February shows these potential customers, although they make up a quarter of all American families, are not a high priority.

The banks said they were apprehensive about the two sectors for three reasons, in order of importance:

these customers are likely not very profitable;

they might present regulatory compliance problems under, for example, the Patriot Act; and

they think these customers might bring increased risk of fraud.

So the FDIC decided to study this market more carefully.  It teamed up with the Census Bureau to try to collect more information about unbanked and under banked Americans.   The two agencies prepared a set of questions for a survey that the CB conducted in January.  The FDIC published the results on Wednesday.

This is what they found:

1. Unbanked and under banked make up over 25% of all households. The survey estimates that 9 million of households (7.7%) in the country are unbanked and 21 million (17.7%) are underbanked.

2.  Minority group members are more likely to fall in the two classes. 21.7% of unbanked households are black and 19.3% Hispanic vs. 3.3% white.  31.6% of underbanked households are black, 28.9% American Indian/Alaskan, and 24.0% Hispanic vs. 14.9% white.

3.  Incomes are low. Households with yearly incomes under $30,000 make up over 70% of the unbanked.  The underbanked tend to have incomes below $50,000.

4.  The highest concentrations of banked and underbanked, relative to overall population, are in the deep South and Southwest. The lowest concentrations are in the Northeast and Michigan/Minnesota.

The unbanked

The main reason the unbanked, which tend to have family incomes below $30,000, are unbanked is that they have no money. One-quarter of the unbanked appear to transact solely in cash.  The main benefit the unbanked see in having a bank account is not to write checks or obtain credit, but to have physical security for their money.

The unbanked divide roughly evenly into those who have previously had a bank account and those who have never had an account.  The former say the costs of their account were too high, as a reason for not having an account now; the latter say that they don’t have enough need for bank services.

The non-bank services the unbanked use are  primarily for check-cashing and writing money orders.  Only 9.9% say it is “very likely” they will have a bank account in the future.

The underbanked

Like the unbanked, the underbanked seem to primarily need transaction services.  Despite having bank accounts, however, they also tend to use non-bank money order-writing services and non-bank check-cashing services.

More than 80% of the underbanked purchase money orders from non-banks.  The primary reason is convenience, but 27.7% say they do so because bank money orders are more expensive.

About 30% of the underbanked use check-cashing services.  Again, the primary reason is convenience, but 17.6% say they get the money faster from a check-cashing service than from a bank.

The underbanked also make some use of pawn shops to obtain cash and of rent-to-own stores to obtain merchandise.  They appear to do so because they can’t qualify for bank loans or because the credit process is simpler at these non-banks.

My thoughts

At the risk of being much too simplistic, I’d summarize the FDIC survey findings by saying that the unbanked don’t use banks because they have no money.  The underbanked don’t use banks because there are no branches nearby.  Neither group needs more than basic services.  Although there may be much social good done by outreach to the underbanked, establishing new bank outlets in underbanked areas will involve capital outlay.  And the return on this investment is unclear.  So one can understand why the banks might not regard this market as a great untapped profit opportunity.

There is an obvious way, I think, of addressing the needs of the unbanked and underbanked–let Wal-Mart open a bank and provide financial services in its stores.  But Congress has already rejected this idea.

In a way, then, it’s not so surprising to see the present retail banking effort to substantially increase the fees charged for credit services to existing customers.  I think there is some risk of consumer backlash, however.  For example, I have a credit card from Citigroup that gets me a discount on gasoline.  I recently received a notice that the interest rate on unpaid balances will be rising from 19% to a minimum of 27.5%. This comes at a time when the Fed is providing short-term credit to the banks for just about free.  I also have the choice of “opting out” from this increase, i.e. closing my account and paying off the balance.

Luckily, I don’t keep unpaid balances so this is not a practical issue for me.  But at some point–and I think we’re close, the rate itself becomes close enough to loansharking to taint the reputation of the credit provider.  This is what happened in Japan with the sarakin and finally provoked a severe regulatory crackdown.