Around 7 percent of all households don’t have a bank account, down from around 7.7 percent in 2013, according to the FDIC. The most common reason families cited was not having enough money to open and maintain a checking account at a mainstream bank. It’s no surprise, then, that about half of the decline in the underbanked population over the past two years wasn’t due to changes in the banking industry, but because some households started earning more. This allowed them to open an account and keep one open in the face of monthly maintenance or overdraft fees.
The 9 million households that don’t have bank accounts rely largely on cash and, increasingly, prepaid debit cards, the report shows. Both of those options come with major drawbacks. Using cash without a bank account means that individuals have limited options for spending, tracking, and safeguarding their money. And prepaid debit cards have been shown to include nebulous language that can disguise the fees, penalties, and limited legal options that users might be agreeing to. The FDIC also found that households that felt discouraged about applying for credit from banks—for fear of being rejected—were much more likely to turn to alternative lenders, such as payday or auto-title operations. And households that had previously been rejected by banks were also more likely to turn to alternative lenders, whose rates are often higher and whose terms and conditions are often less lenient. Among the unbanked, more than half of respondents said that traditional banks weren’t at all interested in serving families like theirs.
The fact that some feel banks aren’t interested in serving their communities is troubling but unsurprising. The underbanked population is largely made up of Americans who are poor, black, or Hispanic. Many haven’t finished high school or college. These are the same populations that the American banking system has willfully alienated for generations through concrete policies such as redlining and subprime-credit targeting. One of the FDIC respondents’ most commonly reported reasons for avoiding banks—aside from not having enough money—was that they didn’t trust the banking system.
While there has been progress in the efforts to tackle bad banking practices—with the Consumer Financial Protection Bureau issuing rules about how payday lenders and prepaid-debit-card companies can operate—few safe, mainstream alternatives have arisen to take the place of the costly and opaque services that so many families rely on. That creates a dangerous gap between the services currently provided by traditional banks and the actual needs of tens of millions of Americans.