1 in 10 in Ohio without checking, savings accounts
Dayton Daily News - September 21, 2012
Almost one in 10 households in Ohio do not have a checking or savings account, and consumers are increasingly relying on some fee-heavy alternative financial services, according to a new federal study and interviews with experts.
More U.S. consumers are shunning banks and other insured depositories, and these people are more likely to use pawn loans, check-cashing services, rent-to-own stores and non-bank money orders and remittances, according to a survey released this month by the Federal Deposit Insurance Corp. Even people who participate in the standard banking system are more regularly using non-traditional financial services, including payday loans.
Some of the alternative products being used have high interest rates and fees, and critics say they do not allow consumers to save and build credit.
“Obviously, going completely unbanked is a real bad option, because it is more expensive all around, and you pay more for everything,” said David Rothstein, project director for asset building with Policy Matters Ohio.
About 414,000 of Ohio’s 4.72 million households did not have a checking or savings account last year, and about 9.9 million households nationwide were also “unbanked,” according to the FDIC survey. Additionally, about 912,000 households in the state were “underbanked,” meaning they had bank accounts, but still used alternative financial services that typically come with high fees. Across the country, about 51 million adults and 16.6 million children live in households that are underbanked.
Unbanked, in the report, meant people using neither a bank nor a credit union. The number of unbanked households in the United States grew by 800,000 between 2009 and 2011, and the majority of these consumers said they do not have enough money for an account, or they did not need or were not interested in maintaining one, according to the survey. Other reasons cited in the survey for not using banks included an inability to open an account because of financial history, a distrust or dislike of banks, and dissatisfaction with banking fees.
About 60 percent of residents of households without bank accounts are unemployed or not in the labor force, and more than eight in 10 unbanked households have annual incomes below $30,000, according to the study. Three-fourths of unbanked households do not have education beyond a high school degree, and most unbanked consumers are under the age of 45. About two-thirds of U.S. households without bank accounts are black or Hispanic.
Many Americans do not have savings and live paycheck to paycheck, and the traditional banking sector does do not meet their real-world financial needs needs, said Ken Rees, CEO of Think Finance, a Texas-based company that offers financial products for underbanked consumers.
“They need their money quickly, they want convenient access — typically online, because the majority of Americans are technology focused — and unfortunately, banks aren’t set up to deal with them,” Rees said.
Rees said 45 million Americans do not have access to traditional credit because of bad credit histories, and non-bank financial institutions are providing services to a segment of the population the banking system has neglected. He said also banks also do not typically offer small loans in amounts available through non-traditional lenders, and most consumers can manage the fees associated with alternative financial products, and they are less likely to get in meaningful financial trouble than if they had credit cards or other bank products.
The FDIC survey shows that more people with bank accounts are using alternative financial products such as payday loans, and this makes clear that consumers like their convenience, said Amy Cantu, a spokeswoman with Community Financial Services Association of America, the largest trade association representing non-bank lenders.
“Consumers are doing their research and making informed decisions about the products that are available to them, and they are choosing payday loan products,” she said.
But Rothstein, with Policy Matters Ohio, said non-bank financial products usually have higher interest rates and fees than services offered through the mainstream banking sector. He said they can create debt cycles, in which consumers are forced to take out multiple loans because they are unable to pay back the money they originally owed. Also, non-bank products usually do not allow consumers to save, invest and build credit scores, which can improve loan and credit terms. He said banks have fees, but unlike using check-cashing and money-order services, they usually do not have fees for every transaction. Direct-deposit accounts through credit unions or community banks often are the cheapest and most sensible option for consumers, he said.
Banks have not improved access to some of their financial products, and consumers have responded by seeking those items from alternative financial services providers, said Shawn Cassiman, University of Dayton assistant professor of social work.
“By making it more difficult for people to participate in traditional banking institutions, we’ve set people up to pay larger amounts of money for insurance and other things,” she said.
Paulette Lynch, 21, of Dayton, said she has never had a checking or savings account and she never needed one. Lynch uses a prepaid debit card for shopping and money orders for bills, and she said there are virtually no fees involved in accessing and replenishing her funds.
Although Lynch said she loathes bank fees, such as those associated with maintaining a minimum account balance, she admits she will likely have to open a bank account soon when she gets a good job. She said it is nearly impossible to avoid the banking system forever.
“I hate it, but it is coming soon,” she said.