THE BLOG
01/09/2013 02:32 pm ET Updated Mar 11, 2013

Helping the 'Unbanked' Get Affordable Financial Services

According to a recent survey by the Federal Deposit Insurance Corp. (FDIC) and the U.S. Census Bureau, 17 million American adults now live in "unbanked" households, while another 51 million are considered "underbanked." In other words, over 28 percent of households either have no traditional checking or savings accounts (unbanked); or their basic financial needs aren't being met by their bank or credit union so they also rely on alternative lenders like check-cashing services or payday loans (underbanked).

If those numbers seem high, they are: The FDIC survey revealed that 821,000 additional unbanked households have been added since their previous survey in 2009 -- a 0.6 percent increase. And, according to the World Bank,we rank only 21st among the world's richest economies when measured by percentage of adults having a bank account.

There have always been millions of Americans who are either unable to -- or choose not to -- conduct their financial transactions through a bank or credit union. Common reasons cited include:
  • Don't have enough money to need an account.
  • Don't write enough checks to justify monthly fees -- just buy money orders when needed.
  • Fees, service charges and minimum balance requirements are too high.
  • Lack of proper identification to open an account.
  • Denied accounts due to bad track record -- too many bounced checks, foreclosed loans, etc.
  • Language barriers or lack of understanding of the U.S. banking system.
  • Bad previous banking experience or lack of trust in banking institutions.

Big retailers and other alternative financial services providers have rushed to fill the void for customers who can't -- or won't -- use banks or credit card issuers. For example, Bankrate.com lists dozens of prepaid cards that offer many of the same functionalities as regular credit or debit cards, including direct deposit, online purchases and bill pay, ATM access, etc. (For more on prepaid cards, see my previous blog, The 411 on Prepaid Cards.)

Other businesses provide such varied services as check-cashing (for a flat fee or percentage of check amount), money orders, wire transfers, and payday, pawn shop or car-title loans. Some companies have even tapped the large population of unbanked people who want to use their smartphones for financial transactions (like Boom, which offers a lower-cost alternative for wiring money abroad).

However, charges for these services can quickly add up. By the time you've paid a fee to cash your paycheck and bought half a dozen money orders to pay your monthly bills, you probably will have spent far more than the $5 to $15 a month a regular checking account typically costs.

Although monthly checking and savings account fees at large banks have risen, you still may be able to find free or low-cost accounts at banks and credit unions. To find competitive bank account rates, use this Bankrate.com search engine. To find a credit union for which you might be eligible, visit the National Credit Union Administration (NCUA). (Note: Credit unions are much easier to join these days.)

High fees aside, there's also a safety risk factor to being unbanked. Carrying or storing cash at home tempts robbers; also, money can easily be destroyed in a fire or other natural disaster. Plus, money deposited in FDIC-insured banks is insured up to $250,000 per account (similar insurance is available to credit union accounts through NCUA).

It's also more difficult for unbanked consumers to improve their credit scores due to lack of access to credit-building products like credit cards and loans. People with poor credit scores are usually charged higher loan and credit card rates and offered lower credit limits -- or perhaps disqualified altogether. And, lower scores can also lead to higher insurance rates and harm your ability to rent an apartment or even get a cell phone. (See my previous blog, Improving Your Credit Score, for reasons why a sound credit score is so important.)

To help bring unbanked and underbanked people into the system, an increasing number of public/private programs like Bank On are being formed. Bank On programs are voluntary partnerships between local or state governments, financial institutions and community-based organizations that provide low-income unbanked and underbanked people with free or low-cost starter or "second chance" bank accounts and access to financial education.

In addition, many financial education resources are available, including:

There's no law that says everyone must have a traditional banking relationship. But if you choose to go unbanked, carefully investigate the financial consequences -- you may not be saving money after all.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.