Banks face pressure to reach out to underserved as FDIC survey documents gap

Regulators will be bringing pressure on banks to make greater efforts to serve poorer communities after an FDIC survey showed that more than a quarter of U.S. households have little or no financial activity through banks.

The survey, conducted through the Census Bureau, found that 25.6 percent of the nation’s households – representing some 60 million adults – are “unbanked” or “underbanked” and rely on expensive non-bank services such as payday loans, check-cashing services, money orders or pawn shops to conduct their financial transactions.

Minorities, particularly African Americans, are disproportionately part of this group. More than half the black households fell into the two categories.

The FDIC, operating under the mandate from a 2005 law to bring more people into the financial mainstream, is pushing for banks to offer products such as low-cost transaction accounts and small-amount short-term loans, officials told reporters in releasing the report this week.

“Access to an account at a federally insured institution provides households with an important first step toward achieving financial security – the opportunity to conduct basic financial transactions, save for emergency and long-term security needs, and access credit on affordable terms,” FDIC chairman Sheila Bair said in a statement.

FDIC vice chairman Martin Gruenberg said the survey “breaks new ground in the effort to expand access to basic financial services.” The survey, he said “will provide the information base for future efforts to address the financial services needs of unbanked and underbanked households in the United States.”

In a conference call with reporters, Bair said the FDIC wants to “provide the appropriate incentives to banks to offer a better mix of products that makes it cost-effective” to reach out to these underserved groups.

One such incentive might be extra credit in the evaluation of compliance with the Community Reinvestment Act for proactive efforts to offer products to these groups. Likewise, efforts to promote financial literacy would be encouraged.

She said the agency wants to make it a “rational economic decision” for banks to offer products to the unbanked and underbanked.

“The key issue is access to financial services that are low-cost and offered on a responsible basis for people,” Gruenberg said on the call. “It’s important for banks to compete for this market.”

In a survey of banks released last February, the FDIC found that improving access to underbanked communities was a business priority for fewer than 18 percent of the 685 banks surveyed.

Given the controversy over lax lending standards for subprime mortgages, both regulators and banks are likely to be cautious in the scale and number of their efforts to develop the low-income market.

But the political sensitivity of the issue – particularly the disproportionate impact on minorities – has been highlighted by the recent insistence of the Congressional Black Caucus to deal with its concerns before its members would support the House’s financial regulatory reform bill.

The black lawmakers want greater involvement of minority-owned institutions in Treasury Department and FDIC programs. The caucus members are unhappy not only about the lack of a White House focus on job creation, but also about credit flows to African American communities.

The new FDIC report found that of the households surveyed, 7.7 percent were unbanked, which represents 9 million households nationally, or approximately 17 million adults, the FDIC said. An additional 17.9 percent – 21 million households or 43 million adults – were found to be underbanked.

Households with no adult holding a bank account were identified as unbanked and those that have a checking or savings account but use non-bank financial services as underbanked.

Some 1.3 million households that had bank accounts closed them in 2008. Some 31 percent said they closed them because of overdraft fees, service charges or high minimum balance requirements. Just more than a third, 34.1 percent, said they did not need an account because they didn’t have enough money.

Other key findings of the study include:

• Minorities more likely to be unbanked include blacks (21.7 percent of black households), Hispanics (19.3 percent), and American Indian/Alaskans (15.6 percent). Racial groups less likely to be unbanked are Asians (3.5 percent) and whites (3.3 percent).
• Minorities more likely to be underbanked include blacks (an estimated 31.6 percent), American Indian/Alaskans (28.9 percent), and Hispanics (24.0 percent). Asians and whites are less likely to be underbanked (7.2 percent and 14.9 percent, respectively).
• Households with income under $30,000 account for at least 71 percent of unbanked households. Nationally, nearly 20 percent of lower-income U.S. households - almost 7 million households earning below $30,000 per year - do not currently have a bank account. In contrast, only 4.2 percent of households with annual income between $30,000 and $50,000 and less than 1 percent of households with yearly income of $75,000 or higher are unbanked.
• Households with an annual income between $30,000 and $50,000 are almost as likely as lower-income households to be underbanked.