On Thursday, October 20, the Federal Deposit Insurance Corporation, or FDIC, will release the results from its National Survey of Unbanked and Underbanked Households. This survey, which has taken place every two years since 2009, is the only major nationwide survey of financial inclusion and measures the behaviors and attitudes of households that may be excluded from the mainstream financial system.
In advance of the survey release, FDIC Chairman Martin J. Gruenberg shared some major findings in a speech on September 8. Notably, the share of households without bank accounts—a group commonly called the unbanked—continued to decrease in 2015. Only 7.0 percent of households were unbanked last year, a decrease from 7.7 percent in 2013 and a high of 8.2 percent in 2011. This means that between 0.5 million and 1 million net new households have opened accounts in the past two years. This promising increase in financial inclusion signals that fewer households are now paying more and incurring greater risk by relying on alternatives such as check cashers and pawn shops. Many, but not all, of the early findings have been similarly positive.
In advance of Thursday’s release, below is an overview of trends to watch in the new data.
Does the financial recovery match the economic recovery?
As the number of unbanked households increased from 2009 to 2011, some policymakers have blamed new regulations. As these trends reversed in 2013, however, researchers suggested that the drop in the unbanked population was part of the overall recovery as people regained employment. Some people who lost their jobs during the financial crisis and subsequent recession opted to close their bank accounts. Unemployed people—who can no longer count on having paychecks automatically deposited into an account—often see the cost of banking increase significantly because of minimum balance requirements on low-cost accounts. Yet without an account, the use of check cashers and money orders takes hundreds if not thousands of dollars out of families’ wallets each year just to pay for financial services.
Indeed, employment may be a key component to account ownership. This link will be even more significant if the number of unbanked households continues to fall and the unemployment rate remains stable at 5 percent. The connection between employment and financial inclusion is not surprising given increasing interest by employers to address workers’ financial health. At the same time, it behooves policymakers to ensure better options outside of the workplace, including addressing high fees on government-issued prepaid cards that are often used to distribute public benefits.
The use of alternative financial services forms of credit, or AFS credit, such as payday loans, is another important measure in the FDIC data because it reflects financial vulnerability. In 2013, 7 percent of households reported using a form of AFS credit. The Federal Reserve has recently released data that pointed to another sign of widespread financial distress: Nearly half of all Americans would be unable to come up with $400 without having to borrow or sell something.As regulators seek to address abuses in the alternative credit marketplace—most notably through the Consumer Financial Protection Bureau’s proposed payday lending rule—a reduction in alternative credit usage would be welcome news for both families and the broader economy.
Are prepaid cards continuing to substitute for bank accounts?
As the rate of unbanked households increased between 2009 and 2011, one finding in the data stood out: the increasing use of prepaid cards. Use of these cards has grown dramatically both for government payments and for consumers to buy and use. Many of the cards have the same functionality as a checking account; consumers can add money from cash or checks onto the card and make purchases in stores or online. Some cards have even experimented with savings features and rewards points based on card usage. If using a prepaid card was treated equally to holding a bank account, the number of households with some form of account between 2009 and 2011 would in fact have roughly stayed the same.
Despite some major functional flaws, such as last year’s RushCard outage that left thousands of card users without access to their funds, prepaid cards in general have continued to improve. In particular, they may be attractive to customers who have had trouble keeping a bank account open in the past. Most cards cannot be overdrawn, so users cannot spend more than the amount loaded on the card. Yet, in recent years, banks have also introduced checkless checking accounts that operate very similarly to prepaid cards, such as Citi’s Access Account and Bank of America’s SafeBalance Banking. And new rules released earlier this month will give prepaid cards many of the same protections as their bank account counterparts. The use of prepaid versus traditional bank accounts will reveal consumers’ preferences and needs moving forward.
How well are state and local efforts working?
The new data will also include statistics by state and metropolitan area, enabling policymakers to see where problems persist and where they have been successfully addressed. Given the particular interest of state and local governments in taking on these issues through entities such as the Cities for Financial Empowerment Fund, an effort begun in New York and San Francisco that works with dozens of cities to expand the financial well-being of their residents—these data may reflect, in part, measures of whether these efforts are paying off. Recognizing the value of investing in their residents, governments have developed innovative marketing partnerships and policy strategies to support bank account ownership, oppose predatory lending, and help residents deal with debt.
Conclusion
Trust in banks remains low—only about one in four Americans express “a great deal” or “quite a lot” of confidence in banks, according to Gallup. The FDIC unbanked data are an important measure to identify how to address these gaps in trust and confidence. Examining how the financial recovery follows the broader economic recovery, assessing the changing role of prepaid cards, and considering the success of states and cities to combat financial exclusion using the new data will all allow policymakers and advocates to better target millions of Americans on the fringes of the financial system.
Joe Valenti is the Director of Consumer Finance at the Center for American Progress.