Nov 28, 2018 Philip Burgess
"Numerous people in the U.S. either lack bank accounts or are otherwise disengaged from the American financial system."
It's hard to deny that banks are the primary financial conduit for the majority of the American population: Based on the numbers from the latest edition of the Federal Deposit Insurance Corporation's national survey on financial inclusion in the U.S., approximately 93 percent of the country's households include at least one individual who has a bank account in their name. But in a country with more than 300 million residents, the remaining 6 to 7 percent who don't have bank accounts still make up a group of considerable size.
Even within the parameters of the hundreds of millions of Americans who do have bank accounts, there still exist a considerable number of individuals who barely use banks, don't use credit cards at all or are otherwise disengaged from the financial system of the U.S. As such, any examinations of the general financial state of this country would be remiss if they did not include mention of these demographics of the population. Additionally, it's important for business owners to consider the percentage of unbanked in U.S. households, as well as the underbanked and, if they don't already have such measures in place, to adopt tools that allow them to bring these individuals into their customer base, such as credit decisioning solutions from Microbilt.
Investigating the origins of unbanked and underbanked populations
To understand why it is worthwhile for companies - particularly small and medium-sized businesses - to consider the unbanked and underbanked in their strategic planning and reach out to them as potential customers, owners must first examine how these demographics originated.
The choice that some individuals make to not have bank accounts, or to keep such an account open but barely use it or engage with any other banking services, is not in and of itself a new phenomenon: In some ways, distrust of the banking system has been part of the American character since the early 18th century, when President Andrew Jackson, echoing sentiments of the state legislatures that elected him in a landslide, was so vehemently opposed to the idea of a national bank that he, never one to eschew hyperbole, pledged to "kill" it. (Biography notes that Jackson succeeded in this gambit, though about 80 years later, the Federal Reserve System would be implemented in response to nationwide financial panic.) The Great Depression revitalized anti-bank sentiment and distrust of the financial establishment, and even in eras of American prosperity such feelings have never fully disappeared.
Not unlike individuals who were dispossessed by the Depression, many of those who belong to today's unbanked and underbanked demographics are products of the Great Recession, the period of high unemployment and economic sluggishness that followed the 2008 financial crisis. Hundreds of thousands of people had just lost their homes to foreclosure or were significantly delinquent on their mortgages and would eventually face eviction, bankruptcy or both.
Many people blamed the crisis on the sheer volume of mortgage offers to people who couldn't possibly make good on them but were convinced that they could by aggressive real estate professionals or bankers (or both). The subsequent volatility of securities held by some of Wall Street's biggest firms that were backed by these mortgages, in addition to a number of significant institutional failures and inconsistent regulation, ultimately engendered the 2008 collapse, as subsequent analysis of the events by multiple economic experts would reveal.
"More than 24 million American households are underbanked, while over 8 million are considered unbanked."
The FDIC began conducting its aforementioned survey of banking usage in American households in 2009, as newly sworn in President Barack Obama faced the challenge of overseeing an economic recovery. Doing so would require the majority of his two terms in office, but employment began to bounce back in earnest during 2014 and has continued to steadily rise thus far under the administration of President Donald Trump. Nevertheless, the presence of unbanked and underbanked households in the U.S. has continued, as borne out by the cumulative results of the FDIC's annual study.
Differentiating between the unbanked and underbanked
The essential element separating the underbanked from the unbanked is simple: Members of the former group have at least one bank account (regardless of whether they regularly use it, or how often), while those who belong to the latter do not. Under these umbrella categories, the FDIC - as well as nonprofit organizations notably focused on this issue, like the Center for Financial Services Innovation - will examine factors that play into the groups' ultimate financial status. Education, age, ethnicity, employment, disability status (or lack thereof) and economic volatility are all tabulated.
The last of those characteristics is worth examining in detail: Proportionally, households in which their primary earners had a considerable likelihood of variable income from month to month were more likely to be either underbanked or unbanked. Those that qualified as fully banked, by contrast, were proportionally more likely to have stable incomes. Ultimately, this speaks to the fact that even in light of the undeniable resurgence the American economy has seen on a macro scale, there still remains a considerable income and opportunity disparity: Those who are not at the middle- or upper-middle-class level of the country's majority struggle more than one would expect.
Circumventing traditional financial channels
If the underbanked and unbanked households in America are barely bringing their patronage to the U.S.'s banks or not bringing it at all, it poses the question of how exactly they are managing their money. While there is undoubtedly a very small percentage of individuals who keep as much of their earnings in cash as possible - most likely those involved in less-than-scrupulous activities - most underbanked or unbanked Americans use alternative credit methods, which the FDIC classifies as "alternative financial services" in its survey. This category can refer to anything from a pawn shop transaction to the initiation of a rent-to-own agreement, but typically refers to the following:
- Prepaid debit cards.
- Money orders.
- Check-cashing services.
- Auto title loans.
- Loans from nontraditional lending institutions or platforms, usually with shorter terms than auto or home loans (1-6 months, in rare cases 12 months).
Until recently, these transactions weren't recorded by any of the traditional credit-scoring platforms - alongside other common transactions the unbanked and underbanked might make, like rent or utility payments - and most of them, including the majority of FICO scoring models, don't include alternative financial services. Because so many lenders use FICO, the unbanked and underbanked could be rejected on credit applications despite possessing reasonable income.
SMBs that need to make the most of every opportunity in a crowded and competitive marketplace would do well to strongly consider the merits of offering credit to customers and using alternative credit data as part of their decision-making criteria. Doing so offers these merchants the chance to expand into a market that is larger than many would think and also, as yet, largely untapped. Microbilt's credit decisioning solutions for small businesses use precise analytics to cull data from a wide range of sources and offer a comprehensive portrait of customers - one suited to a financial world full of complexities.