) -- Desperate to continue their recent success in attracting cheap new deposits to fund their balance sheets, banks are making efforts to tap the approximately 20% of the U.S. population that does not have checking and savings accounts.

The so-called "unbanked" and "underbanked" are a huge, and potentially profitable, source of deposits for banks weaning themselves off of wholesale borrowing. The can also act as a source of significant fee revenue.

Separately, banks will also battle for the hearts and minds of this customer base and their inherent mistrust of financial institutions that is pushing them towards non-traditional providers of financial services.

"Underbanked consumers are often making very rational decisions on where they go for financial services, because they've had negative experiences at banks," said Kimberly Gartner, associate director of the Center for Financial Services Innovation.

Banks have been in overdrive to gain deposits and improve their interest spreads in an environment of low interest rates and weak loan demand, following the 2008 financial crisis. According to data supplied by SNL Financial, noninterest-bearing deposits for all U.S. banks and thrifts increased 10.3% over the year ended September 30.

Meanwhile, the industry's aggregate net interest margin - the difference between banks' average yield on loans and investments and the average cost of funds - improved to 3.75% in the third quarter from 3.51% a year earlier.

Banks would like to keep those numbers increasing and are focusing on signing up new customers that currently don't have deposit accounts. But first they must get past government identification requirements which are especially difficult in large immigrant communities that shy away from traditional bank accounts.

One way this is being addressed is by easing the identification requirements for new customers, including accepting alternate forms of ID and not requiring social security numbers.

This became an issue for Bank of America in February 2007, when the bank was marketing accounts to immigrants in California, only requiring an Individual Taxpayer Identification Number - issued by the Internal Revenue Service issues to people who don't have social security numbers or aren't eligible to obtain them -- along with any form of identification issued by any government.

It turned out that this set of customer identification requirements was acceptable to bank regulators, and it meets the requirements set out in the Federal Financial Institutions Examination Council's core examination procedures.

Seeing an opportunity, non-banks are also making major efforts to jump into the action, offering various services including pre-paid debit cards, credit cards, bill paying and, of course check-cashing services.


(WMT) - Get Report

for example, offers check-cashing with fees starting at $3.00 ($6.00 for checks over $1,000), money transfers starting at $4.75, bill paying starting at 88 cents, and money orders for 60 cents.

Of course, using these services without having a bank account can get pretty expensive. Cashing a year's worth of pay checks at Walmart would cost $72, or $144 for a customer who grosses over $24,000 a year. And for a customer paying a bill at the last minute, the fee is $3.95 for Walmart Money Center's Express Payments service.

If a customer opens a checking account at a bank instead, he or she can get all of these services for free, including on-line bill paying, which would also save them on postage.

Then again, things aren't so simple, according to Kimberly Gartner, Associate Director of the Center for Financial Services Innovation - a nonprofit industry group that works with banks and non-bank financial service companies to provide services to unbanked and underbanked consumers. Gartner added that the non-banks are "providing services that customers need at prices that are transparent." She also said that prepaid debit cards being marketed by non-bank services providers provide another choice of consumers in the marketplace, to meet their transactional needs and avoid overdrafts."

Federal Deposit Insurance Corp.

spokesman David Barr told TheStreet that "customers need to put pencil to paper and figure how much they are spending on a monthly or yearly basis, and see if banks can be more cost-effective for them." The FDIC has done major studies on unbanked and underbanked consumers, conducting various national and local surveys that highlight the geographic concentration of this phenomenon.

Overdraft fees are a major sticking point for consumers. Following the revisions to the Electronic Fund Transfers Act - or Regulation E - that required banks beginning on August 15 to provide expensive

overdraft protection

for ATM and debit card transactions only to customers who opt-in for the service, the FDIC in November issued guidance for banks to limit

multiple overdraft fees

and reach out to customers who incur many fees to offer them less-expensive alternatives.

So a new bank customer has one additional temptation and a potential for excessive overdraft fees. If the new customer can properly manage their checking account, they will escape most fees, and the bank will still benefit, since it will likely pay no interest on the checking account deposit.

Barr also pointed out that the benefit to the banks is "not just deposits - there could be opportunities down the road to cross-market products, including a car loan, home loan or small business loan and build the relationship." He added that for banks it can be "difficult to measure in terms of short-term profit."

Concentration of Unbanked

According to Gartner, data from her organization and the FDIC "put the underbanked population at 12 to 22 million households," topping out at about 20% of the U.S. population.

The FDIC is required by law to survey "banks' efforts to bring individuals and families who have rarely, if ever, held a checking account, a savings account or other type of transaction or check-cashing account at an insured depository institution into the conventional finance system." These individuals are termed "unbanked," by the agency.

According to the initial study completed late in 2008, out of 118.6 million U.S. households, 7.7% were unbanked." The state with the highest unbanked concentration was Mississippi, with 16.4% of households having rarely, if even, held an account at an insured depository institution.

The two states with over a million households were California, with 7.7% of unbanked households - matching the national rate - and Texas, with 11.7% of households considered unbanked.

The FDIC also said that 63% "of banks provide financial education materials to unbanked and/or underbanked individuals."

A closer look at the Texas information provides insight to the cultural aspects of consumers shying away from banks, as 20% or, 225 thousand black households, are unbanked, and 21% or 559 thousand Hispanic households, are unbanked. With such large pools of potential customers, Bank on Central Texas - an organization formed by United Way Capital Area and a non-profit group called United Way Capital Area and local nonprofit group PeopleFund -- is helping banks and credit unions reach new customers.

The group's spokesperson was unable to comment for this article, but according to a June report in the American-Statesman, Suzi Sosa -- the chairwoman of Bank on Central Texas's volunteer leadership council -- said that "when you operate in cash, none of the positive transactions behavior you had is valued; there's no record of it," adding that "when you have a an electronic account -- a checking account or a prepaid account -- now you have a transaction history that makes your money count."

According to the American-Statesman report, Bank on Central Texas said that the banks, credit unions and debit card providers belonging to the group planned to "offer free or low-cost accounts," and would accept "alternate forms of identification, including Mexico's Matrícula Consular ID card."

The organization's financial partners only include one large bank headquartered in the state -

Comerica Bank

, the main subsidiary of

Comerica Inc.

(CMA) - Get Report

, which relocated its headquarters to Dallas from Detroit in 2007. Comerica only had a 1% deposit market share in Texas as of June 30 according to the FDIC, although its 11th-place ranking was an improvement from 14th place two years earlier.

Large out-of-state financial partners of Bank on Central Texas include subsidiaries of

Bank of America

(BAC) - Get Report


Wells Fargo

(WFC) - Get Report


Capital One

(COF) - Get Report


Regions Financial

(RF) - Get Report


The bank with the largest deposit market share in Texas as of June 30 was

JPMorgan Chase Bank, NA

, the main banking subsidiary of

JPMorgan Chase

(JPM) - Get Report

, followed by

Bank of America NA

, which benefited from its acquisition of Countrywide Bank FSB, which had the #2 deposit market share in the state in June 2008, before being acquired by Bank of America in July 2008.

The bank with the third-place market share in Texas as of June 30 was

Wells Fargo Bank NA

, followed by

USAA Federal Savings Bank

and then

Compass Bank

, which was acquired by

Banco Bilbao Viscaya Argentaria

(BBVA) - Get Report

in September 2007.


Written by Philip van Doorn in Jupiter, Fla.

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Philip van Doorn


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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.