Millions of Americans - 60 million, in fact - conduct their day-to-day financial business outside the banking system, leaving many to be preyed upon by payday-loan companies, rent-to-own establishments and other non-bank institutions.
Banks have largely ignored the unbanked and underbanked, arguing that it's difficult to figure out how to make money off them. But the Federal Deposit Insurance Corp. says it may look at using the Community Reinvestment Act - and the weight that the act carries in bank examinations - to encourage financial institutions to provide low-cost banking services and products.
A new FDIC report found that 17 million U.S. adults are unbanked. An additional 43 million are classified as underbanked.
You're considered unbanked if you don't have a checking or savings account. The FDIC defined underbanked households as those that have a checking or savings account but use non-bank money orders, check-cashing services, payday loans, rent-to-own agreements or pawnshops at least once a year.
The FDIC survey, conducted by the Census Bureau, is the most comprehensive look to date at the unbanked and underbanked. The survey finally provides proof of the problem that consumer advocates have been trying to address for years, lobbying for products and services for the millions of people shut out from the traditional banking system. Under a 2005 law, the FDIC is required to monitor the financial industry's efforts to bring people into the mainstream banking system.
"We are really trying to use that information to develop accounts that would really be appropriate for this population," FDIC Vice Chairman Martin J. Gruenberg said in a teleconference.
Gruenberg said the survey provided the agency with the information it needed to push the banking industry to aggressively address the needs of the unbanked and underbanked.
The Community Reinvestment Act (CRA) was passed in 1977 to address the shortage of credit available to low- and moderate-income neighborhoods. But there was little focus on the need for banks to offer reasonably priced basic financial services - such as check cashing, money orders, affordable small loans and, most important, savings accounts. The CRA regulation favorably recognizes such financial services activities, but in varying degrees, depending on the size of the bank, according to the FDIC. The regulation does not give as much weight to affordable banking services as it does to loans or investments.
The FDIC is exploring a CRA regulatory proposal that would more clearly recognize basic financial services and assign a higher CRA rating if warranted, thereby creating a more powerful CRA incentive.
If the FDIC were to explicitly state that creating certain products to serve the unbanked and underbanked met the CRA requirement, financial institutions would welcome the inducement, said Richard Riese, senior vice president of regulatory compliance for the American Bankers Association.
"I think getting affirmative credit for CRA purposes for initiating financial services for people of low and moderate income would be a positive change," Riese added.
Lower-income and minority populations are disproportionately represented among unbanked and underbanked households. Households with incomes of less than $30,000 account for at least 71 percent of the unbanked. An estimated 21.7 percent of black households and 19.3 percent of Hispanic households are unbanked.
In another survey released earlier this year, the FDIC found that while most banks offered basic checking accounts to all customers, and 73 percent were aware that their market areas included significant unbanked and/or underbanked populations, less than 18 percent identified expanding services to unbanked and/or underbanked individuals as a priority in their business strategies.
"Banks are challenged to create innovative yet profitable financial products to serve the unbanked," said Carol Kaplan, senior director of public relations for the ABA.
It is important to bring the unbanked and underbanked into the mainstream banking system. But whatever incentive is used, the government should take care to ensure that the products are truly helpful and affordable.
If the housing crisis has shown us anything, it's that major lending institutions aren't above taking advantage of low-income or credit-challenged people. The traditional banking system can be as abusive as the non-bank financial institutions when it comes to the underprivileged.
We should care, however, that millions of people aren't banking and that the alternatives are expensive and can trap people into years of debt. At least with the banks, we have the federal power to force them to do the right thing. And now is the time to make them serve communities that have been longing for better and more affordable banking services.
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