When finding the nearest ATM is the least of your problems

Banks make it possible to build credit, wealth, and security. But for the 7 percent of U.S. households that don’t have a checking or savings account, those benefits remain out of reach.

In 2014, three roommates in New Paltz, New York discovered that their $20 thrift store couch wasn’t lumpy with age, but envelopes stuffed with cash. More specifically, the life savings of a widow whose husband wanted to be sure she was taken care of when he was gone. Unfortunately, not knowing what the old couch contained, the woman’s well-meaning children surprised her with a new one. (Don’t worry, this tale of star-crossed furniture has a happy ending: the roomies returned the $40,000).

The seemingly odd storage choice made by those two New York retirees isn’t an aberration. Whether due to lack of access to the banking system or mistrust of it, many people prefer to deposit savings at home, or with friends and family. They’re part of a larger group for whom securely storing and accessing money is hardly ever as simple as going to an ATM.  

Outside the financial mainstream 

In Pennsylvania, 4.7 percent of households are unbanked, meaning they don’t have a checking or savings account. Another 18.8 percent of households are underbanked: they maintain a checking or savings account, but also use alternative financial services such as payday lending or check cashing to manage their money. The FDIC, which monitors the U.S. financial system, conducts a biennial survey of unbanked and underbanked households in partnership with the U.S. Census Bureau. They recently released the results of the 2015 survey.

In Pittsburgh, 7.3 percent of households are unbanked. In Philadelphia, that rate is 4.1 percent, down from 7.8 percent at the time of the last survey in 2013.  While the overall numbers may seem fairly low, lower-income households, individuals with less education, young, black, Hispanic, and disabled households are all unbanked and underbanked at higher rates than the population as a whole.

One of the biggest barriers to being a part of the financial mainstream is income volatility. That is, the same amount of money isn’t coming in every month, making it much harder to maintain a bank balance or pay bills.

While it makes sense that not knowing how much you’ll earn makes it harder to manage your affairs, “putting these numbers in focus helps us understand the magnitude of that effect, and which populations are experiencing those sorts of challenges,” said Keith Ernst,  an associate director of consumer research at the FDIC. 

Without a checking or savings account people miss out on numerous benefits, said Ernst. “A secure way to receive their paycheck, a place to store those funds, to access savings opportunities, to access responsible credit to build credit.”

And the thing is, money in a bank is protected from loss, theft, and couch changes, and it is insured.

The costs of being unbanked

Having a relationship with a bank also just makes the earnings of low- and moderate-income families go further, said Cathy Niederberger, managing director of community development banking for PNC.  

“Alternative financial systems come with very high fees. For example, in a payday loan situation you borrow money, and the rate is so high that it’s hard for you to pay it off. And you refinance it and you build up more and more debt. Those types of cycles are vicious.”

But for many people, those alternative services may be the only choice. A bounced check in the past can preclude opening a new account. Or a person may not have the required amount of money to avoid fees. Ernst said he’s seeing more banks reach out to those customers by creating Safe Accounts, a national model that provides accounts without overdraft fees.

It’s crucial to reach as many people as possible, said Niederberger, so they can build wealth and stability. And maybe even more importantly, credit.

“If you entrust your money with the bank, and the bank is giving you more options for how to manage your money, you’re more empowered. You might get a small loan that helps you build credit, and having a good credit score is important for getting favorable pricing on loans.”

It is not an overstatement to say that in finance, a credit score is everything: it’s integral to buying a car, renting an apartment, or starting a small business. But without access to a bank, credit is out of reach.

Out of the shadows 

José Quiñonez saw the chicken and egg problem of needing credit to build credit. Quiñonez is the founder and CEO of Mission Asset Fund, a San Francisco-based nonprofit and tech startup that helps people build credit by formalizing lending that falls outside the traditional banking system. Specifically, lending circles: everyone contributes a set amount of money each month which goes to a rotating recipient.  Lending circles are traditional in Latin America, Asia, and Africa. MAF created a reporting structure for lending circles so that the practice would be visible to credit bureaus.

“I think we need to be humble enough to understand or accept the complexity of the financial marketplace and how it’s even more complex for poor people to navigate the financial marketplace,” said Quiñonez, in an interview about MAF at the Federal Reserve Conference in Philadelphia last month. (Fun fact: Quiñonez is a 2016 MacArthur Fellow).

As a country, we have assumptions about poor people, he said. Often that assumption is that they’re poor because they’re doing something wrong or make bad choices.

“We need to call out those assumptions as being false. We need to start seeing poor people as valuable individuals. Because when we write them off, as a country, we do not just them a disservice, but as a country overall,” he said.

Formalizing lending, helping build credit, it really comes down to bringing people out of the shadows, said Quiñonez.

“We are leaving a lot of talent, a lot of genius on the table.”

The national unbanked rate was lower in 2015 than 2013, moving from 7.7 percent to 7 percent.