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Why It Doesn't Pay To Be 'unbanked'

In September 2012, the FDIC released a report on unbanked and underbanked households. This report provides some insights into why people outside of the banking system may struggle in poverty.

Here are some important points from the report:
  • 10 million households, representing about 17 million adults, are unbanked, meaning they have no bank account at all.
  • Another 24 million households, representing about 51 million adults, are underbanked. This means that they have a bank account, but still regularly rely on alternative financial services such as payday lenders.
  • People who have never had a bank account are less likely to view having one as a positive thing.
  • Over half of people who use bank alternatives such as check cashing services and money orders cite simple convenience as a reason for doing so.

The trouble with being unbanked

The problem with alternative financial services is that they tend to be extremely expensive and offer none of the consumer protections of conventional banks. Consumers may be able to get lower fees at banks, but even bank customers don't always get the best deals available from the banking system. Here are four things consumers should know about getting more out of the banking system:
  1. Online banks create new opportunities. With lower fees and minimums and broader geographic access, online banks can break down some of the barriers that have kept people out of the banking system. Make sure you are aware of these options.
  2. Savings account interest is not the only incentive for saving money. It's easy to look at savings account interest rates and see little incentive to save money. However, another benefit of saving is to have ready access to emergency funds. Often, people resort to payday lenders and other alternative financial services because of unexpected expenses. Unfortunately, those services add a significant layer to those expenses. Having even a modest pool of money to dip into for emergencies can save you those added expenses.
  3. Overdraft protection can be as expensive as a loan shark. It's not just alternative financial services that can be exorbitantly expensive. Paying a $30 fee to cover a $50 overdraft amounts to a 60 percent cost. You need to develop responsible banking habits for keeping track of your account balance and pending transactions, and never resort to deliberately overdrawing your account to gain access to a little extra money.
  4. The path to financial security starts with breaking negative cycles. People may think they don't have enough money to enter the conventional banking system, but the expense of alternative financial services helps prevent them from accumulating enough money to open a regular bank account. That cycle needs to be broken. Sometimes, poverty makes that impossible, but two noteworthy things about the FDIC study are the fact that people who have never been part of the banking system are less likely to try to open an account, and that people often turn to alternative financial services simply out of convenience. Those two reasons for failing to open a savings or checking account are simply habits, not necessities.

For all its faults, the conventional banking system offers consumer protections and lower expenses than alternatives typically do. It's worth fighting for your right to be part of that system -- and then continuing to fight to get the best out of it.

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