Nate Green recalls a time 20 years ago when things were "working well" for him financially. His job as a human relations specialist for a health care network in Michigan paid between $30,000 and $35,000 a year. He had a checking account he used to pay his monthly rent and utilities, until, as he recounted, he "ran into a little problem" with overdrafts. His account was shut down, and he says he has not had a banking relationship since.
Instead, he pays $7.50 to cash his payroll check from his custodial job, then stands in line at the post office where he purchases money orders to pay his rent and utilities. Whatever is left over he holds in cash or puts on a prepaid card. Now that he's got a steady job again, he is planning on re-establishing a bank account in the coming months, citing the convenience of direct deposit and easy bill paying as the primary reasons.
Marion Neal, like Green, dropped out of a banking relationship years ago, complaining that "banks have a lot of hidden fees. … It's just murder." Neal, who has worked at the commissary at Target Field for the past three years, is not planning on re-entering a banking relationship anytime soon, where he fears fees will eat away at his money. Pointing out that he lives "month to month" he said: "When you ain't got a lot to save, there's no sense putting it in a bank."
Todd Lohre, like Green and Neal, dropped out of a banking relationship for several years as a result of overdrafts on his personal checking account. For six months he was forced to use check cashing services that "cut deeply" into his profits at his advertising sales business. He recounted how he had to re-establish his credibility over several conversations with a banker. He was finally able to set up a business account after demonstrating the income his business was generating. "A checking account is very near and dear to me," he said.
I recently spoke with all three men, who are clients and volunteers at the Dignity Center, an adult coaching and counseling service affiliated with Hennepin Avenue United Methodist Church in Minneapolis. They are among an estimated 16.7 million adults living in nearly 10 million households with no "mainstream banking relationship," according to a 2013 study by the Federal Deposit Insurance Corporation (FDIC).
The FDIC estimated an additional 24.8 million households had a bank account but used "non-bank alternative financial services" such as money orders, check cashing services, payday loans, remittances, refund anticipation loans, auto title loans, rent-to-own services or pawnshops. Together, they account for nearly 28 percent of all households. Minnesota's and the Twin Cities' rates of either unbanked or underbanked households are about 16 percent, according to the FDIC.
As mobile banking via smartphones and use of prepaid cards have become more common, access to convenient and low-cost payment options have become more available. But mobile banking is still dependent on consistently maintaining a phone account, which is a financial stretch for many among the unbanked, according to a recent study by the Pew Research Center. And while use of prepaid cards is popular among the unbanked, it does not provide a secure savings account, nor does it provide a path into mainstream financial services.
To bring this population into the financial mainstream, both the FDIC and the Consumer Financial Protection Bureau have recently urged banks to offer low-risk deposit accounts. These accounts do not have paper checks, but customers have access to direct deposit services, ATMs and debit cards that do not allow them to draw down more than is in their account. As a result, they limit the bank's risk and there are no overdraft fees, one of the major hurdles for the underbanked. A handful of banks have launched these accounts, and the industry sources suggest that more are planning to, recognizing 35 million households as a potential untapped market.
