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Marcos Villa, 40, immigrated to the United States from Mexico in 2016. Before leaving his home country, he says, he had great credit and a solid financial background—but that financial history went unrecognized here.
Without a Social Security number, it was really difficult to get access to all kinds of services, but especially banking, Villa says. Though he knew how to use credit wisely, pay off balances, and save money, the inability to open a credit card or take out a loan hindered his progress toward goals of building wealth and buying a home.
The limited access he did have to basic financial services came with high monthly fees and commissions; Villa was underbanked for several months as a result.
Millions of Americans face a similar uphill battle.
Who Does the Banking System Leave Out?
Villa’s experience is indicative of the challenges unbanked and underbanked populations across the country face, whether they don’t have the cash flow to justify opening an account, only have access to the most basic financial products, or lack community-wide education to support entering the banking mainstream.
Over 6% of U.S. households, or a total 14.1 million American adults, are unbanked, according to the most recent National Survey of Unbanked and Underbanked Households by the Federal Deposit Insurance Corporation (FDIC).
Though the rates of unbanked people are declining overall, they remain high in communities also experiencing income inequality and systemic injustices.
Black (16.9%) and Hispanic (14%) households, for example, are around 5 times as likely to be unbanked as White households (3%). But the strongest indicator of unbanked people is income level. On average, 19% of households with a family income of less than $30,000 are unbanked, compared to just 2.4% of households making more than $30,000 annually.
Additionally, the population of underbanked Americans, or those who do have an account but obtained non-bank alternative financial services in the past 12 months, totals 18.7% of households, or 48.9 million adults.
Without access to affordable or attainable financial services, unbanked and underbanked populations throughout the country must find alternative means of completing regular financial tasks, from cashing checks and saving money to taking out loans and even making transactions.
Often, these alternative methods lead to predatory lenders, sky-high interest rates, hefty fees, and other expenses that leave people in a cycle of living paycheck-to-paycheck or otherwise unable to meet financial goals.
“In my case, it wasn’t that I didn’t know how to use it,” Villa says. “The problem was access, not knowledge.”
And that lack of access is an experience which he finds repeatedly throughout his community: “Without a credit background, nobody wants to lend to you, and the loans that are available often take advantage of our community.”
Why Are People Unbanked?
For many people, financial services are too expensive.
Though alternative services cost more over time, financial institutions often have fees, minimum deposit requirements, and other upfront costs that create steep barriers to entry for people without much cash at any given time.
For example, the monthly maintenance fee is $12 for an advantage plus checking account at Bank of America, one of the largest banks in America, and can only be waived by depositing at least $250 every month or maintaining a daily minimum balance of $1,500 or more. Bank of America did not immediately respond to NextAdvisor’s request for comment regarding account fees.
Further obstacles, such as not having a valid ID or living far from a bank branch, play a role in limiting access to underserved communities.
“What you find a lot of times is that people who get cash advances on their paychecks fall into this system where the debt keeps resetting,” says John Holdsclaw, chairman of the Community Development Financial Institution (CDFI) Coalition, an organization which advocates for and supports institutions serving financially disadvantaged populations. Without access to checking or a way to begin building credit, the cycle repeats.
“You’re literally living paycheck-to-paycheck because you don’t have any other way or opportunity to receive money that you’re owed or a way to cash a check in a consistent manner.”
Distrust is another factor.
“In a lot of these communities, there is a certain level of distrust for banks.” Holdsclaw says. This could stem from a personal bad experience, he says, or exclusion from financial education initiatives and experiences.
Disadvantages of Living Outside the Financial System
While greater financial inclusion requires systemic change, the disadvantages unbanked community members face are inherently personal. Here are just a few costs of being unbanked in America today.
Those with the fewest resources often pay the highest prices for financial services.
The average financially underserved household has an annual income of about $25,500 and spends $2,412 annually on interest and fees—equivalent to 9.5% of their income—for alternative financial services, according to a report by the U.S. Postal Service. To put this in perspective, consumers with checking accounts pay, on average, just over $100 annually in overdraft and non-sufficient fund fees.
Payday lenders, especially, prey on impoverished consumers without access to credit cards or bank loans by offering fast loans with interest rates as high as 500%.
“People with lower income tend to borrow for emergencies,” says Michael Sullivan, personal financial consultant with Take Charge America, a national nonprofit credit counseling agency. “And if you don’t have a banking relationship, you’re going to borrow from the least savory lenders: the payday lenders.”
In order to take on loans at reasonable interest rates, qualify for credit cards, and obtain financing for a car or home, credit history is essential. Borrowing money enables you to grow your assets and build wealth over time.
But only 7.2% of unbanked households have access to credit via a credit card, one of the most common entry points to credit-building.
Many unbanked people do use prepaid debit cards as a solution for non-check payment services and conducting online and cashless transactions, but these may come with their own fees and won’t help with credit building.
Lack of savings
Unbanked households save for emergencies or other unexpected expenses at a much lower rate than both underbanked and banked households (17.4% savings rate for unbanked compared to 56.3% underbanked and 61.6% of fully banked), the FDIC report shows.
Of unbanked households that do save, many store their savings through informal, and insecure, means, such as in the home, with family and friends, or on prepaid cards that don’t earn interest and are subject to fees.
Especially amid economic recession defined by massive furloughs, income loss, and other pandemic-related disruptions, establishing a savings fund within a secure savings vehicle is more important than ever.
Unbanked During a Pandemic
In communities that entered the pandemic with few assets and little access to assistance, already-difficult situations have only worsened.
While the financial effects of the pandemic have been widespread, populations already more likely to be underbanked have been hit even harder. Assistance programs offered by lenders, creditors, and financial institutions have been essential in keeping many people financially afloat, but those options are largely unavailable to the unbanked.
Even receiving government assistance is challenging, particularly for the undocumented immigrant community in the U.S.
“As it relates to losing your job and getting unemployment benefits, having a proper bank account and being able to receive those benefits is easier with direct deposit,” says Jason Ray, CFA, founder and CEO of Zenith Solutions, an organization which works to provide financial education and advice to underserved populations.
The Treasury Department recently took steps to address the concern of stimulus payments for unbanked Americans. Nearly 4 million prepaid debit cards, or Economic Impact Payment (EIP) cards, will be delivered to Americans without banking information on file with the IRS. If you’re still waiting on your stimulus payment, you can check your status and see your payment type through this page on the IRS website.
“To help unbanked people avoid check cashing fees, prepaid cards can be used to deliver tax refunds and government benefits, which can help unbanked people avoid fees associated with check cashing and other services,” says Signe-Mary Mckernan, vice president for labor, human services, and population and co-director of the Opportunity and Ownership initiative at the Urban Institute.
A combination of community organizing and innovation is working to make the path toward financial health more accessible.
For Villa, change came through Hope Credit Union, a financial institution dedicated to equal access to and education about financial services within typically underserved communities in the southern U.S.
“Just having an account that doesn’t charge you, that was a big thing,” Villa says. And with access to accounts that fit his needs, Villa could begin working toward his long-term financial goals. “I already had a car, so one of my first goals was to buy a home.”
Don’t lose hope if you’re unbanked and don’t know where to begin. Here are a few resources that can help you begin reaching financial literacy, finding a financial institution that works for you and achieving your long-term goals:
Community Development Financial Institutions, or CDFIs, are banks, credit unions, and other private financial institutions that prioritize making financial products and services more accessible to traditionally underserved communities and businesses.
“If people are unbanked, they’re not going to just come to us. We’ve got to meet people where they are,” says Felicia Lyles, senior vice president of retail operations at Hope Credit Union. “Part of the education process is helping the unbanked and underbanked understand that there are options for them outside of predatory lending.”
CDFIs work one-on-one with you to offer financial literacy tools and resources to sharpen your money management skills. Like large banks, CFDIs accept deposits, make loans, and provide a wide array of financial services.
You can find CDFIs near you through the Opportunity Finance Network’s CDFI locator tool.
Fintech and mobile-first solutions
“Financial technology is democratizing the ability to bank, get access to credit, see analysis on your business and better manage your financials,” Ray says. “I think it’s a great opportunity … to address some of the inequality that we’re seeing in the world.”
Distance from physical bank branches or limiting business hours is a common barrier, since many tasks traditionally require in-person service. But as more banks become mobile-friendly or even move fully online, secure access to financial products and services can become more widespread throughout unbanked communities.
“If banks and credit unions are able to provide more online and phone-based services, it’s going to help…either by being able to deposit a check by taking a photo, checking their account or reaching out to ask a question,” Holdsclaw says.
Empowerment through education
“The way that you build trust and confidence in people’s ability to use and leverage the system to their benefit really lies in awareness,” Ray says. “Understanding the different options available to them provides a sense of confidence for people to go out and explore and try to use the banking and credit systems to their advantage in the long-term.”
Villa, who now does nonprofit work for economic advancement opportunities within his Tennessee community, says additional teaching methods are essential to overcoming the unique barriers that immigrant communities face.
Translating materials for Spanish speakers and having translators in each branch is an important first step, for example, but it’s only the beginning. “Having someone that speaks your language and, ideally, that looks like you, that really makes a big difference,” Villa says.
“Information takes out fear. It empowers you to continue, understand that you are doing things right, and get support.”
Financial Resources for Immigrants
- Federal benefits available to undocumented immigrants.
- Financial assistance during COVID-19 (updated on weekly basis).
- Join a lending circle to build credit.
- Apply for the citizenship and assimilation grant program to avoid immigration loans.
- Funding options for immigrant small business owners.
CDFIs are often great resources for education. Many offer courses or community programs designed to boost financial literacy and education for unbanked and underbanked populations.
Look for other community initiatives and local assistance programs that can help you learn which products may be most useful for you or provide resources for obtaining bank accounts and credit. Federal programs can also be a starting point, especially for short-term assistance:
- MyMoney.gov is a useful resource for all things related to federal financial literacy, including education programs and grants.
- Call 1-800-FED-INFO with any questions about federal agencies, programs, or benefits related to financial literacy and education.
- Money Smart, the FDIC’s financial education program, helps people of all ages to improve their financial skills.
- For questions and general information about financial services that impact everyday consumers, browse through the Consumer Financial Protection Bureau’s website.
- The Financial Literacy and Education Commission offers information on building healthy financial habits, including youth savings programs and college savings and financing resources.
- FAQ on coronavirus stimulus payments.
“I suggest at least opening a savings account because everybody has to save, and having that vehicle is important,” says Sullivan, who has taught financial education to underserved and unbanked communities for nearly 30 years.
Mckernan, citing data from the Urban Institute, says even a small emergency savings account can provide resilience. Families with a savings cushion of just $250 to $749 are less likely to be evicted and miss payments after a job loss, health issue, or large income drop.
Sullivan always tells people to save 10% of what they earn, although he recognizes that’s difficult — if not impossible — if you’re living paycheck-to-paycheck or have low income.
“Save something,” Sullivan says. “Even if it’s $5 a week, that is something and it will add up. That could make a difference over a period of time.”