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Why banks shun 30 million Americans

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While these onetime fees are more appealing to some people than the ongoing and often hidden fees associated with many big banks, it’s questionable whether financial services offered at retailers are actually a bargain. Wal-Mart, for example, charges $3 to cash a check between $300 and $1,000, and levies a host of fees on the prepaid Walmart MoneyCard. Compared with the average 2 percent to 4 percent charged at most street-corner check cashers, Walmart is generally cheaper. But if you cashed two $500 checks, used an automated teller machine (ATM) twice, and reloaded your prepaid card once, you’d incur $16 in fees – far more than mainstream checking accounts.

Even more worrying, however, is the indirect harm of remaining unbanked: Those without access to mainstream financial services are far less likely to save for retirement, college, or emergencies. Bank accounts are more secure than relying on cash. Directly depositing part of your paycheck into a savings account helps you adhere to your budget. The unbanked, however, do not receive these incentives or safeguards.

What about credit unions?

Unlike either banks or retailers, credit unions are not-for-profit. They’re member-owned, and pay their “shareholders” in the form of lower interest rates and higher yields. In addition, most credit unions have less than $10 billion in assets, and so are exempt from the Durbin amendment. Oddly enough, checking account costs can be 50 percent lower for small institutions. Larger banks face high overhead costs from bank branches, ATMs, and so on, while credit unions and community banks can outsource call centers, payment processing, and ATM networks. 

But while credit unions aren’t put off by low-income members, they may not be as highly motivated to recruit this population as chain retailers that stand to make a profit. This may in part explain the low profile that credit unions tend to have as compared with their for-profit counterparts.

Given the low fees of credit unions, why do so many people seem to prefer less conventional options to fulfill their financial needs, and why are they content to live without checking or savings accounts? There are several possible explanations. For one thing, the term credit union is still only vaguely familiar to many people. People may not be clear about what services credit unions offer, and they’re often unaware that credit unions are not-for-profit institutions, where profits are funneled back to members in the form of lower fees and better interest rates.

In addition, so many people have had bad experiences with unexpected fees at banks that some feel they are better off avoiding financial institutions altogether. Paying a fee at Walmart to cash a check is a one-time deal: You know exactly how much you’ll have to pay, and there won’t be any surprise fees down the road.

Serving the underserved

This “‘underserved’ market is considered one of the fastest growing segments in the United States and represents significant potential for banks willing to develop new products and services,” a 2011 study by the consulting firm KPMG concluded. Altogether, the unbanked and underbanked have around $1.3 trillion in income, and spend $5 billion each year paying off predatory loans. A 2009 survey by the Federal Deposit Insurance Corp. found that some 9 million households were unbanked and another 21 million were underbanked. Nearly a third of African-American households and a quarter of Hispanic households were underbanked. 

The KPMG study highlights a number of services that may be important for banks to offer as the number of unbanked and underbanked people rises. For instance, check cashing and bill-pay for noncustomers, as well as international money transfers, are services in demand among these groups. The study found that the number of unbanked and underbanked people is growing as a result of falling credit scores caused by “negative events” in their personal lives that are often linked to the downturn in the economy. Sudden unemployment, for example, can cause a previously banked individual to be forced to leave his or her financial institution. 

As the ranks of unbanked and underbanked Americans continue to swell and big banks avoid serving them, big retailers stand to make a profit by finding cost-effective ways to offer financial services to the underserved. In an ironic twist, stores like Walmart have an advantage in many consumers’ eyes because they aren’t affiliated with a mainstream financial institution. In the end, the task will continue to fall to credit unions, big banks, and big retailers to make their case to the unbanked and underbanked and provide services that truly meet the needs and financial limitations of these groups.

 

 

– Tim Chen s the CEO of NerdWallet, a credit-card search website.

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