Unbanked consumers on the rise

The Federal Deposit Insurance Corp. is calling on banks to court into their fold some 17 million adults who use payday lenders or check-cashing stores like Wal-Mart instead of their local banks.

In Arkansas that’s 12% of households which are considered “unbanked” according the FDIC report released Wednesday (Sept. 12). On the national scale the number is 8.2% or one in 12 households.

Local credit analysts say it’s not surprising to see more Arkansans avoiding banks given the lower mean income levels and influx of immigrants over the past decade.

“We still see a lack of education and major distrust for financial institutions among the demographic we serve,” said Aaron Randall, of the Economic Opportunity Agency of Washington County.

Randall oversees the agency’s Individual Development Account program which is a matching savings plan for working residents at 200% above or below the federal poverty level. For a family of three that’s an annual income between $22,000 and $37,000. He said a large percentage of his clients are either unbanked or underbanked, which means they may have a checking account or savings account, but they routinely pay with cash or money orders and use check cashing services.

“In the past two years since the other study was done, more local employers have required direct deposit, which has affected some of my clients,”  Randall said.

Local employers such as Wal-Mart and Tyson Foods do require direct deposit or payment downloaded to debit card. Last year these companies estimated about 10% of their workforce opted for the debit cards.

Randall says it’s not surprising given there is a fairly high minority count among the certain industries. He said Latinos and Marshallese populations are more apt to distrust local banks because of language barriers, lack of knowledge and corruption they’ve seen in other parts of the world.

While minorites did have a higher percentage of unbanked and underbanked in the nation, Hispanics and Pacific Islanders — the two largest minorities in Northwest Arkansas — were reported as “not available”  at the state level.

There were a total of 321,000 households, or 28% underbanked, in the state, according to the FDIC report. This is higher than the 20.1% reported nationally.

The survey, conducted every two years by the FDIC in partnership with the U.S. Bureau of the Census, provides the banking industry and policy makers with insights and guidance on the demographics and needs of the unbanked and underbanked.

According to the 2011 Survey, 821,000 more U.S. households have become unbanked since the first survey in 2009. More than half of all unbanked households said they do not have an account because they believe they do not have enough money or that they do not need or want an account. In addition, the report shows that three in ten households nationally do not hold a savings account.

"The results of the 2011 National Survey of Unbanked and Underbanked Households indicate that insured financial institutions have an important chance to grow their customer base by expanding opportunities that bring unbanked and underbanked individuals into mainstream banking" said FDIC acting chairman Martin J. Gruenberg.

Dr. William Bailey, who teaches family finance at the University of Arkansas and serves on the board for Credit Counseling of Arkansas, says the level of distrust and lack of education among thousands in Arkansas is a major concern. He said they are constantly blasted with advertisements from out-of-state predatory lenders which are “a major rip-off for poor people. These lenders prey upon those with the least knowledge and ability to resist.”

Arkansas cast out in-state payday lenders in 2010, but Bailey said it hasn’t stopped those lenders out of state from buying airtime on local television and radio channels.

FINANCIAL LITERACY
Bailey and Randall say a lack of overall financial education is a larger reason so many consumers don’t use banks.

“In a recent study of 5,000 high school seniors across the country the mean or average score on a 32-question survey for standard financial literacy was 58%. It has been as low as 52% in recent years,” Bailey said.

In a another survey by the American Economics Association, Arkansas ranked No. 48 out of 50 states on a short, basic economic quiz, he added.

“I would love to see financial literacy classes taught K-12 and there is a new initiative for it by JumpStart, a nation coalition that is gaining exposure," Bailey said.

WAL-MART PAYDAY
Wal-Mart Stores Inc. began aggressively marketing check-cashing and moneycard services to this growing demographic more than two years ago. The moneycard is a pre-paid debit card that allows consumers to load their paychecks on the card without a fee.

With roughly 1,500 financial centers dispersed across Walmart’s network of U.S. stores, the company’s infrastructure is on par with Citibank. Wal-Mart does not break out sales from its financial services unit, but analysts estimate it’s several hundred million dollars a year.

Walmart faced stiff opposition from the banking sector when it sought out a federal bank charter in 2007. But that didn’t’ stop the retailer from finding a backdoor into what is now a $57.2 billion prepaid debit card market, according to Ben Jackson, senior analyst with Mercator Advisory Group. He said federal regulation is likely another year or so away and by then the market could swell to $116.9 billion.

Mercator estimates debit cards will be downloaded with $81.8 billion this year, a hefty 42.4% gain over 2011 as more retailers get into the game. Jackson said most of the major big-box dealers are already playing in hopes of attracting the ranks of consumers looking for banking alternatives.

The moneycard revenue by Wal-Mart that was cleared through its partner Greendot totaled about $306 million last year, according to Greendot records.

Bailey said Wal-Mart and other retailers know if they offer lower-fee check cashing, customers are likely to spend some of the cash while in the store.

“I guess if Wal-Mart weren’t offering the lower fees, many of these unbanked would have to pay more somewhere else. At least the Wal-Mart fees are fair,” Bailey said