Living without a bank account

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Woman at a bank windowThere's a troubling trend in this nation: People are giving up their banks.

Exactly how many people are going "bankless" is hard to track, but in the late 1990s, the number bandied about in newspaper articles was approximately 10 million Americans, and the FDIC estimated that 13% of all American households were without a bank account.

Now that number has risen to nearly 17 million, although, because of population growth, the percentage of American households that are "unbanked" has decreased to 7.7%.
But those are only the people on the extreme end of the bankless trend. If we also include those who are "underbanked" -- people who may have a checking account but depend on payday loans and pawn shops to help them get by -- then we're talking approximately 75 million Americans, or 25% of the population who are underbanked or unbanked.

Whether somebody has a bank account or not may not seem like such a big deal, but it costs a lot of money to live without a bank. Candice Choi, a personal finance writer with the Associated Press, recently did an experiment, living for a month without her bank account, just to get a sense of the life of an unbanked person. Then, like any good journalist, she wrote about the experience.

I spoke to Choi on the phone about her unbanked experiment. She says she came up with the idea simply because in the past two years, ever since the recession started causing Americans to spend money in ways they hadn't previously imagined, she'd been writing a lot about public anger with banks and payday loans and realized that plenty of people were living a life unlike hers and the majority of Americans. It just kind of hit her that she should see what that life was like.

So for one month, Choi went about her life as usual -- minus her bank account. She took her paycheck to a check-cashing service and used prepaid cards, and in the process, she spent $93 in fees, which, added up, works out to be about $1,110 a year.

That's a lot, but Choi admits, "It probably wasn't as much as others would incur. I didn't put this in the article -- it just added a layer of complexity that took away from the point I was trying to make -- but I'm married, and my husband handles a lot of the bill paying. But I handle the rent, so I did pay that, but if I had to pay all the other bills, I would have spent more than $93."

Given the high cost of not having a bank, why would anyone choose to live month after month, year after year, like Choi briefly did? There are several reasons, none of them necessarily good, but all of them understandable.

Fear. It's not that poor people don't understand how banks work and thus are intimidated by them. In fact, they understand all too well how banks work, and because of that, they're rattled.

Ben Mangan is the CEO and co-founder of EARN, a California-based nonprofit that has made it one of its missions to help the unbanked come into the banking mainstream, and has been studying the unbanked for some time. In fact, Earn.org was instrumental in helping 50,000 San Francisco residents join a bank in the past several years, and the White House took notice. The Obama administration recently allocated $50 million for the 2011 fiscal year budget to help make it possible for other cities to adopt the San Francisco program.

Mangan says that in all the data it has mined, the company has found that many people felt that "bank fees were too complicated and that the system was designed to trick them into paying fees."

It isn't that the unbanked want free checking. They're happy to pay small fees if the bank rules are transparent, says Mangan. What they don't want is to suddenly, unexpectedly make a mistake that leads to a series of charges and then find themselves paying $235 in overdraft fees.

When you look at it that way, $93 a month is a bargain.

Geography matters. "It's all well and good to have these programs for the unbanked," says Richard Barrington, a spokesman and personal finance expert for MoneyRates.com, a comparison site with the best bank rates. "But they don't matter much if the banks don't have branches and ATMs in neighborhood." That said, Barrington notes that even among the poor, Internet connectivity is better than it once was, so he has high hopes that mobile banking will be able to help bring the unbanked to the banking system.

Cycle of poverty. Parents who don't have bank accounts aren't likely to teach their children how to open up a bank account, but they may just show them how to cash a check at a payday loan store.

And while that may be one of the main reasons the poor are among the unbanked, there are others as well. As Choi writes in her article, "Language barriers intimidate some would-be customers, or they simply feel banks aren't welcoming. For others, literally handling their own money offers a sense of control at a time of financial anxiety."

But what's even scarier is to imagine the United States' financial picture if, say, 10 or 20 years from now, 30% or 40% of our population is unbanked or underbanked. Take a look.

The classes will be even more separated. "Not having a bank account drives a wedge between the haves and have-nots," says Barrington. "It's not a healthy thing. I think it's in everybody's self-interest not to have a society where there's an underclass, where people feel alienated and outside the system. We're a capitalist society, and, yes, there are always going to be people doing better than others, but the ones who are totally on the outside, who have no stake in society, are going to tend to be destructive to society rather than constructive. It's better for society if you're actively participating."

Fewer people will live their retirement years in anything resembling luxury. Having a large percentage of the population unbanked will also mean that as a country, we aren't going to be a nation of savers or even spenders, but a nation of people who barely live paycheck to paycheck. Mangan says that one reason Earn.org is trying to bring the unbanked into the banking system is that if you don't have a checking account, you aren't likely to have a savings account. So instead of your money going toward your old age, it's funding the cash checking, prepaid card and payday loan industries.

The clueless shall lead the clueless. And what might be even more unsettling is how few people seem to understand how these unbanking financial tools even work. It's perfectly reasonable if a new customer doesn't know the finer points of these products, but shouldn't the people behind the counter understand how to use them?

Choi told me that reloading her prepaid card, something she had never done until working on this story, was surreal. "I needed help," said Choi, "and I was asking the cashiers, and they were confused about it. And the manager wasn't sure how to do it. It became a half-hour ordeal."

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.


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