The Green Sheet Online Edition
October 08, 2012 • Issue 12:10:01
Banks underserve the underbanked - AFS providers step in
The number of Americans who bank infrequently, if at all, is large and growing. The 2011 National Survey of Unbanked and Underbanked Households, a report just released by the Federal Deposit Insurance Corp., revealed households that are either unbanked or underbanked now account for 28.3 percent of all U.S. households.
Included in the total are 821,000 households that have left the banking system since 2009, when the FDIC published its first National Survey of Unbanked and Underbanked Households. The report also noted that unbanked individuals represent 20.5 percent of the adult population.
"Banks are continuing to lose customers," said Ed Bachelder, lead researcher at Blueflame Consulting based in Melrose, Mass. He suggested the real number of underbanked households is larger than the FDIC's numbers suggest, because the FDIC narrowed the definition after its 2009 survey.
The news is good for the thousands of alternative financial services (AFS) providers that, by default, have become bankers to low- and moderate-income U.S. consumers. These companies, together, handle more than $320 billion a year in customer transactions, according to a separate FDIC document, titled Alternative Financial Services: A Primer. They include check cashers, payday lenders, remittance transfer shops (like Western Union Co. and MoneyGram International Inc.), automobile dealers, and open-loop prepaid debit cards.
Experts agree prepaid card companies are poised for significant growth as more consumers abandon banks. According to Mercator Advisory Group, U.S. consumers spent $184.1 billion in 2011 using open-loop (reloadable) prepaid cards, an increase of 24 percent over 2010 prepaid card spending.
"It's really going to blast off next year," Bachelder said. That's when the Social Security Administration will stop issuing checks. Benefit recipients without bank accounts will receive payments posted to government-issued prepaid debit cards.
Most AFS providers are licensed at the state level. However, the Consumer Financial Protection Bureau has proposals outstanding for federal supervision of several categories of AFS companies, including payday lenders and prepaid card companies.
Outside the mainstream
The FDIC defines unbanked households as those in which no one has an account at a bank or credit union. In underbanked households, folks may have bank accounts, but they also use AFS providers, such as check cashers and payday lenders.
Here are some key findings reported in the 2011 National Survey of Unbanked and Underbanked Households, which was undertaken with help from the U.S. Census Bureau:
- One in five U.S. households (representing 51 million adults) is underbanked.
- Nearly three in 10 (29.3 percent) have no savings accounts.
- Ten percent do not have checking accounts.
- One-quarter of U.S. households have used at least one AFS.
- Nearly one in 10 have used two or more types of AFS products.
- Twelve percent have used an AFS in the past 30 days.
These households, by choice or misfortune, are banking outside of the mainstream. And while many said they're not likely to ever open accounts at banks, one-third of the unbanked indicated they are "very" or "somewhat" likely to do so. This is most common among households that only recently became unbanked and young households, the FDIC report noted.
In releasing the 2011 survey, FDIC Acting Chairman Martin J. Gruenberg prodded banks to do more to attract underserved households. "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," he said in a statement. "There are many positives to establishing a relationship with an insured financial institution.
"Access to an account at a federally insured institution provides households with the opportunity to conduct basic financial transactions, build wealth, save for emergency and long-term security needs, and access credit on fair and affordable terms."
Household location has a lot to do with banking status. Geographically, Southern states have the highest rates of unbanked households at 10 percent, while the Midwest and Northeast have the lowest rates at 7.1 percent. Contrasts in unbanked population levels are even more pronounced on the state level. In New Hampshire, for example, only 1.9 percent of households are unbanked; in Mississippi it's 15.1 percent. Underbanked household status ranges from a low statewide rate of 12.5 percent in New Hampshire to 31.2 percent in Nevada.
Race and ethnicity also play a role in household banking status. For example, unbanked rates are higher among non-Asian minority households. Among blacks, 21.4 percent are unbanked; among Hispanics, 20.1 percent are unbanked; and among American Indians, the rate is 14.5 percent. Unbanked households are disproportionately represented among households with foreign-born noncitizens (22.2 percent) and households where Spanish is the only language spoken (36.9 percent), the FDIC reported.
Significant variations between generations exist, as well, with older households most likely to be banked. Among households with adults 65 and older, 80.9 percent are fully banked, compared with just 60.3 percent of households led by adults ages 25 to 34.
The FDIC survey is the first in a series of reports expected in 2012 on the unbanked and underbanked that include strategies and actions for connecting these consumers with banks and credit unions. The next report on what banks are doing to reach the unbanked and underbanked is expected out in late fall.
Exploding micro-lending market
The Center for Financial Services Innovation, meanwhile, published results of an in-depth analysis of the consumer market for small-dollar loans, with an eye toward promoting the "development of high-quality credit products" for low- and moderate-income Americans.
According to its just released report, A Complex Portrait - An Examination of Small-Dollar Credit Consumers, an estimated 15 million U.S. consumers each year turn to nonbanks for small-dollar loans that often ensnare them into an endless cycle of debt.
"Every year, millions of American consumers use small-dollar credit products for quick access to cash," said Rob Levy, Manager of Innovation and Research at the CFSI, and lead author of the report. "Our goal with this study was to see where the market is today, and encourage development of high-quality credit as defined by affordability, transparent marketing, a structure that supports repayment without creating a cycle of repeat borrowing, and offering the opportunity for credit-building."
To that end, the report provided several key insights on consumers who use small-dollar credit (SDC) products provided by nonbanks. For example:
- Only 27 percent of SDC customers have credit cards, compared with 61 percent of those who don't use SDC companies.
- Utility bills top the list of reasons for turning to SDC products, with 36 percent of borrowers saying that's what triggered their need for loans.
- The second and third most common reasons are general living expenses (34 percent) and rent (18 percent), respectively.
- Nearly two-thirds (66 percent) of SDC customers have no savings.
- On a yearly basis, customers of payday loan companies take out an average of 11 loans or extensions and are in debt for approximately 150 days.
- Consumers who borrowed from pawn shops each took out an average of seven loans and remained in debt for approximately 200 days.
- Among all AFS customers interviewed for the report 30 percent said they paid more for their loans than expected; 27 percent said the loan took longer to pay off than they expected.
SDC companies, especially payday lenders, have been taking heat lately, with states and municipalities tightening licensing rules and employing other legal remedies to slow their growth.
San Francisco recently prevailed in court against Dollar Financial Group Inc.'s local storefront operations, Money Mart and Loan Mart, which are now under the gun to refund $7.5 million in overcharges related to "oversized payday loans" made to low- and moderate-income city residents between 2005 and 2007. Seven years ago, San Francisco placed a moratorium on the establishment of new payday loan businesses in the city; it continues to this day.
San Francisco is also where the first Bank On program was started. Bank On currently consists of a network of local coalitions of public and private organizations that help connect the unbanked and underbanked with participating financial institutions. These programs promote low-cost deposit accounts at participating financial institutions (including some of the biggest names in banking) throughout over 100 different municipalities, according to program officials.
Federal watchdog on the lookout
In April 2012, the Federal Trade Commission filed proceedings in a federal court in Las Vegas accusing a "web of defendants," including four Internet-based payday lenders, of overcharging on loans and using threatening collection techniques when borrowers fell behind on payments. The FTC said it was acting in response to more than 7,500 consumer complaints over the past five years about the lenders.
Meanwhile, a skirmish broke out in Washington over federal treatment of payday and other SDC companies. The CFPB proposed regulations for the largest of these firms, and lenders endeavored to convince Congress all would be better served if they were chartered federally by the Office of the Comptroller of the Currency.
The OCC is an agency of the U.S. Department of the Treasury that supervises federally chartered banks - from large national brands like Bank of America Corp. to the smallest community banks.
The CFPB was created, in part, to supervise large AFS companies, and in January 2012, the federal watchdog agency let it be known that SDC firms were on its regulatory radar. In response, several large payday lending companies lobbied Congress for the regulatory switch to the OCC. The result was H.R. 6139, the Consumer Credit Access, Innovation and Modernization Act, introduced by Rep. Blaine Luetkemeyer, R-Mo., and H.R. 1909, the Federal Financial Services and Credit Company Act, introduced by Rep. Joe Baca, D-Calif.
Opposition to both bills is significant. In testimony before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, presented in July 2012, Grovetta Gardineer, Deputy Comptroller for Compliance Policy at the OCC, voiced concerns that the legislation would negate recent congressional actions. Not just the 2010 Dodd-Frank Act, but also laws that cap SDC interest rates charged members of the military, Gardineer said.
Consumer interest groups have voiced similar concerns. Ed Mierzwinski, Senior Fellow at the U.S. Public Interest Research Group described the legislation as a "get out of regulation free" card for payday lenders and similar businesses.
Gardineer said the OCC is concerned about safety and soundness issues, including the ability of third-party partners to these firms to comply with complex rules like the Bank Secrecy Act and anti-money laundering laws. And she said the pending bills, especially H.R. 6139, raise "serious consumer protection, compliance, and safety and soundness concerns by creating a national charter for companies concentrating on products that are most prone to abuse and that are most often targeted to minority populations, low-income neighborhoods and communities with high concentrations of our military service members."
The Center for Responsible Lending, a pro-consumer think tank, accused proponents of the bills of trying to create a two-tier financial system that will "flourish unchecked nationwide." In August 2012, the CRL warned, "Under the guise of access to credit for underserved communities, H.R. 6139 will legitimize a broad range of defective financial products and services nationwide, including 400 percent payday and car title loans, installment lenders, prepaid card issuers, check cashers and others that are known to prey on low-income and minority communities and have been proven to do more harm than good."
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org.
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