Millions of Americans are living outside the formal banking system - and it is costing them. The shame of this is not just that cost, but the fact that in many cases, there are solutions available.
The FDIC regularly surveys people about their banking attitudes and habits, and these surveys lend some insight into why some people feel shut out from the banking system. Understanding those reasons makes it possible to identify how those concerns might be addressed to bring more people into the banking system.
Why some people avoid banks
According to the latest FDIC survey, some 9 million U.S. households, comprising 15.6 million adults, were unbanked. This means that no one in the household had access to a checking or savings account. A further 24.5 million households comprising 51.1 million adults were classified as underbanked, which meant that while they had a traditional bank account, they also made use of alternative services such as money orders, payday lenders or check cashing-services.
Why are so many people operating outside of the banking system? The FDIC survey found the three things most commonly cited as the main reason for not having a bank account were:
- Not having enough money to keep in an account
- Not trusting banks
- Account fees were too high
Other reasons cited were problems producing the necessary identification, prior financial problems and inconvenient locations or hours.
The cost of avoiding banks
Whatever the reasons people have for avoiding banks, those reasons need to be weighed against the cost of doing so. Those costs are considerable, and come in a variety of forms:
1. Excessive fees
People may be concerned about bank fees being too high, but they are typically nowhere near as exorbitant as those charged by alternatives such as check-cashing services or payday lenders.
2. Wasted savings opportunities
Think about it: When are you more likely to spend money, when you cash a check and have that money in your wallet, or when your paycheck goes into a bank account for you to withdraw as needed? Failing to save money not only costs you the opportunity to start earning interest, but it also means you have no reserve for emergencies and may be forced to turn to expensive forms of short-term credit.
3. Lost interest
People who keep their money in cash or use pre-paid cards as an alternative to cash have their money sitting idly, rather than putting it to work for them by earning interest in a bank account.
4. Poor security
Carrying all your money around in cash is a risk, as is storing it in things like pre-paid cards that are not FDIC-insured.
People outside the banking system are typically have low or inconsistent incomes, but the above costs only make their financial problems worse.
How online banking may be a solution
People who have gotten used to living outside the banking system may not realize the extent to which online banking has changed the game. Online accounts might be a solution to many of the concerns people have about banks.
Low minimum deposit requirement
For example, the FDIC survey found that unbanked people feel they don't have enough money to qualify for an account. However, the average minimum requirement to open an online checking account is just over $26, compared with $121 for a traditional, branch-based account, according to the most recent MoneyRates.com checking account fee survey.
Free checking accounts
As for fees, nearly 70 percent of online accounts offer free checking, compared with just 25 percent of traditional accounts, the fee survey found. Finally, banking online also solves the problems of inconvenient locations or hours.
While online banks may ultimately be an important part of the solution for unbanked and underbanked households, there is still a difficult stumbling block: internet access.
Like use of the banking system, access to the internet varies greatly by income. According to the Pew Research Center, 93 percent of U.S. adults earning $75,000 or more per year have broadband at home, but this number drops to 53 percent for people earning less than $30,000 a year. Home internet access is crucial because banking experts often advise against accessing online bank accounts on public servers.
While this gap has narrowed over time, increasing access to secure internet may be a key to addressing the problem of unbanked and underbanked households.
How to open a new bank account and get the most for your money
While internet access remains a stumbling block, it is not a problem for all low-income households, and online banking is not the only solution for such households. For unbanked or underbanked people looking to enter the formal banking system, here are some tips for getting the most out of that system:
1. Check the minimum account size
The MoneyRates.com checking account fee survey found you can start an account at some banks with as little as $1, while others require as much as $5,000. So, the account minimum should be the first thing you look at when shopping for a bank.
2. Look for free checking accounts
This means choosing an account with no monthly maintenance fee. While online accounts are more likely to be free of these fees, some traditional banks still offer free checking accounts as well.
3. Use an FDIC-insured institution
If you are concerned about trusting a bank, you should know that the government provides insurance in case your bank goes under. FDIC insurance limits will cover up to $250,000 per depositor, per institution - as long as you choose an institution insured by the FDIC, or its credit union equivalent, the NCUA.
4. Check on ATM locations and fee policy
ATMs that are not owned by your bank or part of a network to which your bank belongs often charge heavy fees each time you use them. When choosing a bank, look for one with ATM locations that are convenient for you. As an alternative, look for an online bank with a policy of refunding ATM transactions.
5. Opt out of overdraft protection
It may sound nice to have the bank temporarily cover for you when you overdraft your account, but the fees they charge can be excessive. Do not agree to sign up for overdraft protection.
6. Compare savings account interest rates
When you have built up enough money in checking to cover routine expenses, shift some money to savings accounts to earn higher interest rates. Shop around to find options with the best savings account rates.
It may take some initial effort to come into the banking system from the outside. However, once you make that effort, it should become much easier to manage your finances.