The costly, inconvenient financial lives of “unbanked” Americans

What would your life be like if you didn’t have a bank account? Ask a member of one of the 9 million American households who manage their money without access to a checking or savings account, and you’ll find that their lives can be quite inconvenient, requiring them to spend many hours and hundreds of dollars each month conducting transactions that you assume to be routine.

Many of America’s “unbanked” are families and individuals who receive public assistance. A recently released [March 11, 2012] report from the New America Foundation documents the disadvantages of being “unbanked” and offers some suggestions for public policy that could make things work better. The report comes from a qualitative study of the financial attitudes and behaviors of individuals currently receiving Temporary Assistance for Needy Families (TANF) cash assistance benefits—commonly known as welfare—in  California. The findings are based on in-depth interviews with 37 recipients in two major California cities. [To qualify for public assistance in California, a single parent with two kids must earn less than about $12,000 annually; the maximum benefit is just over $600 a month.

Some of the issues that emerged during interviews included:

The cost of getting cash

In many states, the mechanism for receiving public-assistance benefits is an EBT [Electronic Benefits Transfer] card issued by the state. The card is issued through a bank, but it doesn’t mean that you have an account. You can use the card to buy qualified items, by swiping it at the point of sale. You also can use the EBT card to get cash, but you’ll pay a fee—perhaps as much as $5 per transaction—for that service. That’s a lot, if you just want $25 to tide you over.

To avoid transaction costs, recipients commonly withdraw the entire cash value of benefits at one time. Another tactic is to get cash back at the point of purchase—for which there is no fee.

No bank account by choice or by blacklist

According to the study, “unbanked” people often choose to opt out of the banking system. Reasons include lack of trust, bad experiences with previous accounts and/or customer service, and unreasonable and/or hidden fees imposed for minor overdrafts or routine transactions. Others can’t get accounts because of previous problems they’ve had with banks, including being overdrawn—even by a very small amount—or refusal to pay fees and penalties—both of which can result in having your name placed on  Chexsystem’s banking blacklist, which can prevent you from getting an account at other banks for as long as five years.

Using pre-paid cards

Many of the people interviewed for New America’s study reported using pre-paid cards instead of bank accounts. Reasons for this strategy included a basic desire to stay away from banks, the ability to use MasterCard- or Visa-branded pre-paid cards to make purchases where state-issued EBT cards are not accepted, and safety. The downside of pre-paid cards are the associated fees, which tend to be high. But interviewees said that, even though the fees were high, they were predictable and transparent—unlike the fees they had encountered in traditional checking and savings accounts.

Emergency money

Without a bank account, the low-income individuals interviewed for New America’s study generally had nowhere to go for a conventional loan in an emergency. Without steady employment and a credit history, they couldn’t qualify for short-term credit, and they had no liquid cash to dip into. Many said they relied on friends or family to help them out in a pinch—a strategy that may avoid conventional-bank interest charges, but may involve an emotional cost and uncertainty.

When asked about alternative financial sources, such as high-interest payday and title loans, many interviewees said that those were the routes that had helped get them in financial trouble before they applied for state assistance.

Institutional barriers

Another reason cited by TANF recipients for not having a checking or savings account was the fear that their benefits would be reduced or revoked if they had savings. While there are asset-limit rules, they’re not well understood by recipients, says New America. Another strong impression among interviewees was that state agencies were monitoring TANF recipients’ bank accounts, as well as all of their financial transactions—an impression that made interviewees even more wary of maintaining bank accounts. In addition, TANF recipients said they stayed away from banks because they thought that state agencies could raid them for wage garnishments, child support payments and money owed to the state for restitution of crimes.

Policy changes that could help

Reading over that list of reasons for avoiding banks, it’s clear that, while some strategies are the result of choice, many others are problems created by a banking and public-assistance system that is sometimes less than user friendly, and often punitive toward low-income families and individuals.

So, New America’s report concludes with some suggested policy changes that could make financial life less cumbersome and potentially more stable for low-income families. Among these improvements are:

Create basic bank accounts: States should work with banks to create accounts that are safe and affordable for low-income customers—accounts with “a transparent fee structure and stripped of many of the complexities—such as overdraft and its variants—that often ensnarl low-income families and burden them with tens to hundreds of dollars in fees.”

Offer Automatic Savings Options: Provide those who receive assistance with the option of having a small percentage of their benefits withheld in savings. These savings can then be tapped when needed to cover an emergency expense or used to make a productive investment. Savings could be matched with public or private dollars

-Offer small loans for those transitioning off assistance: Current…recipients are rightfully wary of taking out a loan against their benefits, as current payments are already seen as insufficient to make ends meet. States could, however, consider creating a small-dollar loan program for those transitioning off assistance. This would provide these families with the flexibility they need to cover emergency expenses without having to fall back on assistance or turn to high-cost credit products such as payday loans.