Steve Herndon, Managing Director for Financial Services, Federal Government Solutions
How important is having an account with a traditional brick and mortar bank in today’s digital world? If you ask baby boomers this question, they might tell you that having a physical bank is a major part of their lives and the town or city they live or grew up in. They probably visit the bank each week to cash their paper check and know all of the tellers by name. Like many things, times have changed; banking especially.
These days, many Americans opt for online banking as opposed to visiting a physical bank location. Employees have direct deposit and for the most part, banking is done online. A 2012 survey by the American Bankers Association found that nearly 40 percent of Americans chose online banking as their preferred means of managing their accounts, more than twice the population who preferred visiting their local brick and mortar branch (18 percent). The same study also found that mobile banking is now preferred by six percent of customers, a 100 percent increase from 2010, and by 15 percent amongst 18-34 year olds, the “millennials.”
The use of cash is also declining. Almost every part of our lives is shifting because of mobility and the speed and frequency of card versus cash transactions reflects this shift.
Given the many options for banking today, it’s easy to assume that most Americans are banked in some fashion. That is surprisingly not true. In fact, almost one in 12 American households and 17 million adults nationwide are unbanked, according to the Federal Deposit Insurance Corporation. Additionally, the report states that 20.1 percent of U.S. households are underbanked, meaning that they have bank accounts but also use alternative financial services like check cashers, payday lenders and pawn shops. This represents one in five households, or 24 million households with 51 million adults. These alternative services are growing rapidly among low-and moderate-income people. In fact, it is estimated that there was more than $58.3 billion done in check-cashing transactions in 2010, up from $45 billion in 1990.
Since these financial services companies charge customers to cash checks, they turn out to be expensive alternatives for the millions of Americans who are already strapped for cash and rely on the federal benefits payments they receive such as Social Security, unemployment insurance, and Veterans benefits.
Furthermore, sending paper checks to beneficiaries also costs the federal government up to $3 per check. Besides the cost to distribute and cash these checks, they can easily be lost or stolen resulting in unavailable funds and fraud.
So why do some populations prefer to use these alternative financial services rather than traditional banking institutions?
Banking is becoming increasingly expensive with bank enrollment fees, minimum balance rules, and overdraft and transaction fees. The Center for American Progress found that “only about half as many banks offer free checking accounts as they did in 2009, and on average, monthly maintenance fees for accounts that are not free have more than doubled in the past few years.”
Because the unbanked and the underbanked population are not utilizing financial institutions, they have no way to save money and accumulate assets. Additionally, this means they are removed from the financial mainstream and struggle to learn how to manage their money wisely and build good credit scores to buy a car or house, all of which are important steps to getting off public assistance and out of poverty. By bringing individuals back into the financial mainstream they can become more self-sufficient and confident because they are able to grow their savings and increase their financial security.
Financial empowerment programs to help Americans not only attain a bank account, but understand the importance of having one, are gaining in popularity and are proven to reduce debt and build savings. The New York City office reports that since 2006, these programs have helped their clients pay down more than $14.7 million in debt and build more than $2.4 million in savings. One way government agencies are teaching Americans these important lessons is through pre-paid debit cards instead of paper benefit checks. Through programs like DIRECT EXPRESS and Xerox’s electronic payment card services, citizens are able to receive their funds on a pre-paid card that is accepted anywhere. The card is linked to a bank where they are able to receive financial assistance. Cards are also more secure and give citizens immediate access to their funds without having to wait to cash them. The number of pre-paid card transactions reached a total of 9.2 billion transactions in 2012 and increased 3.3 billion from 2009 to 2012. It is estimated that the shift from paper to electronic will save the federal government $1 billion over the next ten years.
Beyond benefit programs, there are other areas of government that are working to simplify and automate processes for unbanked citizens. Transportation, for example, is making strides in urban areas like New York City. The Metropolitan Transit Authority Reloadable Cards allow E-Z Pass customers to present their cards at more than 2,500 retailers and pay cash that is then directly transferred to their E-Z Pass account.
Other states offer program incentives like one-on-one education programs to counsel people on ways to reduce their debt and save; waiving overdraft fees so citizens will enroll in bank accounts; and developing debit features for citizen ID cards to provide basic online banking features, including the ability to receive checks through direct deposit.
Government agencies have also joined with cities across the nation to incorporate financial literacy education programs into the curriculum for school-aged children. Teaching students the skills and importance of managing money connects directly to the lack of proper financial services, a common problem in urban communities. The program, “Bank On,” is a partnership between local government officials, financial institutions and community organizations to provide the unbanked and underbanked population with free or low-cost bank accounts and financial education.
The government has a financial stake in the game of helping those who are unbanked and underbanked. Federal, state and local government agencies need to continue developing programs like the ones mentioned above to help those citizens who are not in the “financial mainstream” transition into the ever-growing cashless economy.