Four months after the GOP passed a tax bill that sliced tax rates for big banks nearly in half, large financial institutions are reporting record profits and returning billions of dollars to wealthy shareholders. And yet, these same banks continue to fall short for the millions of “unbanked” or “underbanked” Americans who still lack access to basic financial services and struggle to attain economic security.
Recent data show that one in four American households are unbanked or underbanked, representing nearly 34 million families. This includes nearly 2 million households in Florida and more than a third of households in New Mexico. Unbanked and underbanked households either completely lack a bank account or rely on alternative financial services, like payday or auto title loans, for credit. Lack of access to the mainstream financial system results in significant costs for families, including having to bear higher transaction fees and not being able to build credit to finance critical investments in education or a small business.
The typical unbanked household, with an average income of $22,000, often pays more than $1,000 each year in extra fees from alternative credit sources. These households pay substantial fees for basic services, like cashing a paycheck, and often have thin or no credit files, which forces them to rely on expensive alternative lenders for everyday cash needs.
Payday lenders, for instance, can charge interest rates as high as 400 percent on a single small-dollar loan, and many payday loans are rolled over multiple times, trapping borrowers in a vicious debt cycle. One study estimates that expanded banking access could deliver $108 each month to currently unbanked households.
However, inclusion in the mainstream financial system is not a silver bullet. Many underbanked and unbanked households make use of alternative financial services because corresponding fees from traditional banks, like overdraft charges, can be even more expensive. In fact, unbanked households often intentionally use payday loans because they lack sufficient credit history to satisfy traditional lender requirements or have prior negative experiences with mainstream financial institutions.
In a future edition of Consumer Corner, we explore how the federal government and financial innovation can help integrate underserved communities into the mainstream financial system and rebuild consumer trust in banking and lending markets. This work includes financial technology companies developing alternative underwriting methods for qualified, but “credit invisible” consumers and federal opportunities to update laws that encourage lending in underbanked communities.
