The Unbanked: Not a Problem in the US
For the third consecutive survey period, the FDIC reported a decline in the percentage of US households it considers to be "unbanked," from 8.2% in 2011 to 7.0% in 2015, and to 6.5% in 2017. According to FDIC Chair Jelena McWilliams:
“The good news is that our nation’s banking system is serving more American households than ever before. The bad news is that even as the overall number of people who are unbanked has declined, 8.4 million households continue to lack a banking relationship."
The FDIC's report also noted that almost one in six unbanked households visited a bank branch in the past year, and suggested that these visits may represent opportunities to inform unbanked households about products and services that can meet their needs.
It's time to retire the term "unbanked" (in the US). With the advent of neobanks and P2P payment providers, not having a checking account with a bank isn't the problem it once was. While some of the so-called unbanked are truly excluded from the mainstream financial services market, the FDIC's numbers and research mask the realities of many of these consumers' financial lives.
Some findings from the FDIC survey:
- Nearly half of the unbanked (48%) said they had a checking or savings account at one time. What we don't know from the data is whether or not the current "unbanked" status is a willing or unwilling situation. It's possible that some of the 6.5% of unbanked willingly left the system.
- Three in 10 unbanked households use prepaid debit cards. Again, these households may have decided that using prepaid cards is a better alternative to placing themselves in situations where they would be subject to high overdraft fees. Of those with a prepaid card, 14% got one from a bank--so wouldn't that make them "banked"? Almost half (45%) of unbanked prepaid card users said they got a card from a non-bank store or website--which makes me wonder if neobanks like Simple and Moven could be included in that description.
- Six percent of unbanked households who received income did so through direct deposit or electronic transfer into a bank account. Not quite sure how this is possible since they supposedly don't have a checking or savings account. Investment account maybe? In addition, nearly one in five (19%) said they received income through direct deposit or electronic transfer onto a prepaid card, bolstering the argument that a prepaid account is a viable alternative to a checking account. The same percentage (19%) used a prepaid card to pay their monthly bills.
- In 2017, of the unbanked who set aside any money in the past 12 months to use for unexpected expenses or emergencies, 2% kept it in a checking account and 2% kept it in a savings account. I guess we should ignore the fact the unbanked are unbanked because they don't have a checking or savings account. By the way, 4% of the savers kept the money in a CD or brokerage account, which, again, challenges their categorization as being "unbanked."
- Of the unbanked who have visited a branch, nearly four in 10 did so 10 or more times. As the FDIC noted, visits to a branch "may represent opportunities to inform unbanked households about products and services that can meet their needs," but 10 or more visits in the past year suggests these folks aren't simply going in to ask questions about checking or savings accounts. In addition, 22% of all unbanked consumers (not just those visiting a bank) said they they used a mobile phone to check email from a bank about an account. Ten or more visits, checking email about an account--kind of suggests some kind of relationship, no?
Are you seeing the trend here? Some of the unbanked may not really be unbanked, as many (or at least some) of the banked have access to services that may just as good (and possibly less expensive) than bank services.
Financial Health is the Problem to Be Addressed--Not Bankedness
The more important issue to worry about is financial condition or financial health. One challenge facing many consumers categorized as unbanked (in contrast to the banked) is income variability. Among banked consumers, 4% said their monthly incomes varies a lot. Among the unbanked, that percentage grows to 10%. Add in the percentage of the unbanked who said their income varies somewhat, and we're talking about nearly three in 10 unbanked consumers without a stable monthly income.
The impact of income variability is their inability to stay on top of their monthly bills. Nearly four in 10 (39%) unbanked consumers said they fell behind on monthly payments in 2017. As they fall behind, they find themselves needing payday loans or other forms of funds to cover their bills.
This isn't a problem that simply being "banked" can fix (for some really good work on this, see CFSI's The Financial Diaries).
The Foolishness of Monthly Bills
Have you ever thought about why we receive monthly bills? The answer is simple: Because it’s not economical for billers to send us a bill every day. Not that they wouldn’t want to.
If billers mailed a paper bill—through the US Postal Service—to each of its customers every day, the cost of billing operations and collections would be astronomical. The cost of billing would likely exceed the amount of money actually collected.
The monthly bill concept is rooted in the mindset that a biller needs to send a “bill”—a paper document, or an electronic document that looks like a paper document—to its customers to inform them of what they owe the biller. And the concept dates back to a time when most people's monthly income was stable and predictable. That stability and predictability has changed—but the monthly bill concept hasn't.
The pundits love to talk about how personalization is going to distinguish the winners from the losers in financial services, but why can't the amount, timing, and frequency of our bills be personalized?
Bottom line: In the US, unbanked is not an issue worth addressing. It's time to retire the term "unbanked." If Ms. McWilliams and the FDIC are concerned about the 8.4 million households that are supposedly unbanked, she and her organization would do a lot more to help them by helping them align their monthly bills with their varying monthly income—not by getting them a checking account.
Director of Research