Understanding and Aiding the Unbanked and Under-banked

"Nearly one third of the US Population-- 106 million people--are either under-banked or unbanked." Forbes Magazine. June 14, 2013

Many of us enjoy the safety, security, and convenience offered by an increasingly cash-less commerce system. We have ready access to traditional financial services necessary to rent a car, reserve a hotel, buy a home, build a business, or send a child to college.

No Bank symbol_1-10-14For the unbanked, the lack of traditional financial services, either by choice or by necessity, results in not just a lack of conveniences most of us take for granted, but can also result in significant financial peril. Both the unbanked and under-banked that frequent Alternative Financial Services (AFS) may be at higher risk for theft and fraud.

These individuals and households are more likely to be victims of predatory practices such as paying usurious interest rates and exorbitant transaction fees.

What about those students and their families who are under- or unbanked that are attending your institution? Today, students reflect the general population more than ever. According to the National Center for Education Statistics, only 15% of undergraduate students attend 4 year institutions and live on campus. Non-traditional students may come to your institution with well formed financial habits, both good and bad. According to Mintel International Group, Ltd. Teens and Finance – US – January 2009, less than 11%1 of teens between the ages of 12-17 are noted as having checking accounts. For many students, the financial habits developed while in school will have consequences both positive and negative well into their post-academic careers. From managing day-to-day expenses to check cashing to receiving Title IV refunds, what can schools do to ensure access to credible financial services at a reasonable cost and promote good financial habits?

How many among us are unbanked or under-banked?

Cash Hand Out

A 2011 FDIC National Survey2 revealed that more than one in four (or 28.3%) of households in the US is either under-banked, meaning they have only a checking or a saving account, or unbanked. Of that combined number, 8.2% of households, nearly 10 million (or 1 in 12) are unbanked. Unbanked individuals do not have a deposit account at an insured institution and rely wholly on AFS. The under-banked also rely heavily on AFS.

Checks Cashed Neon SignThe PEW Research Survey3 tells us that the unbanked are twice as likely to be paid wages in cash as those receiving an actual payroll check. In addition to a lack of cash flow, individuals may remain unbanked due to a poor credit history while others may have had a bad experience with a bank or credit union in the past.


Convenience and Low Barrier to Entry

Many AFS providers offer a full range of services. In addition to check cashing, they provide money orders, remittances, payday loans, as well as tax and other refund anticipation loans. In addition to convenience, these services offer a lower barrier to entry. Many of them sell stamps, enable the payment of utility bills and are able to transmit funds electronically for money transfers.

These services provide convenience and speed, but at what cost to the consumer? ” It is estimated that 2.5 to 3 percent of government benefit checks and between 4 and 5 percent of payroll checks are spent just to be cashed.”4

The PEW study illustrates:Fees

"When you consider the cost for cashing a bi-weekly payroll check and buying about six money orders each month, a household with a net income of $20,000 may pay as much as $1,200 annually for alternative service fees —substantially more than the expense of a monthly checking account fee."3

Ways to help

So what about those students who are unbanked? How can you help them be more financially responsible and avoid expensive AFS providers?

Financial education is critical

Offering young people an introduction to money management can go a long way in encouraging sound fiscal practices. Alert them to the hidden pitfalls of AFS and the advantage of a government insured account.

Schools can act as cashier, dispensing funds to students as they need themStudent ID Card

Many schools use a campus card or so called “closed loop” debit card that is only accepted on campus and among a handful of local merchants. This option allows for a certain amount of parental control without prohibiting access to the funds and the staples the student requires.


Consider partnering with a local bank or credit union in the community

See if they are willing to offer a free checking account to students as well as a “second chance” account for those with a poor credit history or who have had other issues with financial institutions in the past. Many of the major banks offer such accounts. Keep in mind that such accounts carry additional risk, making them subject to higher minimum balances and other fees.

Consider providing a re-loadable prepaid card

Some students may not be ready for a traditional bank account and the potential for NSF fees. Prepaid cards are secure, benefitting from both credit card network protections as well as FDIC insurance, while the convenience of the prepaid card allows the student to use the funds as they need them. In addition, the nature of a prepaid card protects the students from NSF and overdraft fees. Many cards also offer traditional banking services, such as bill pay, and reload without any of the traditional banking or checking account costs.

Important Note: When considering to offer a prepaid card, be sure that the card program is in alignment with industry best practice recommendations such as: The U.S. PIRG Education Fund, and cited in the “The Campus Debit Card Trap – Are Bank Partnerships Fair to Students?”, May 2012”. These practices state that, in short, students should have an unbiased choice of where to bank, low fees, safe checking fees, unrestricted access to funds, strong consumer protections, no push marketing, and no conflict of interest. This report can be found here.

The Future

The ubiquitous nature of cell phones and smart phones in particular may provide an additional option in the not-so-distant future. According to the FDIC survey, 57%2 of the unbanked and under-banked own smart phones. Such technologies as near field communication (NFC) may allow not only for the transfer of funds electronically, but also eventually provide the ability to use the phone as a sort of credit card. This kind of technology, plus the use of low balance and payment due alerts as texts and/or emails, could assist students by helping them avoid late payment and overdraft charges.

Whatever the future options may be, right now those without a stable relationship with a traditional financial services provider are likely to pay more and save less in the long run; therefore, it is important to provide them with financially responsible options.

By: Tim Coutis, The Write Stuff



1 Mintel International Group, LTD, Teens and Finance – US – January 2009

22011 FDIC National Survey of Unbanked and Under-banked Households http://www.fdic.gov/householdsurvey/2012_unbankedreport.pdf

3The PEW Health Group Unbanked by Choice: A Look at Low-income Los Angeles Households Manage the Money they Earn July 2010 http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Safe_Banking_Opportunities_Project/PEW%20Unbanked%20Report_FINAL.pdf?n=9888

4 Reaching the Unbanked an Article by Martha Perine Beard that appeared on the Federal Reserve Bank of St Louis site in the winter of 2010 http://www.stlouisfed.org/publications/cb/articles/?id=2039

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