March 11, 2021, marked the one-year anniversary of the World Health Organization’s declaration of a worldwide pandemic. COVID-19 altered our economic landscape, changing the way we work, shop and pay bills. Social distancing and lockdowns led to an increasing reliance on digital systems for everyday activities, from in-store touchless payments to online shopping and banking. And this evolution is beginning to look like a revolution, a permanent change in our economy.
But game-changing moments such as this always yield winners and losers. As online transactions become ubiquitous, life has become more challenging for those who rely on cash: the unbanked, those who don’t or can’t access banking and financial services, and the underbanked, those who don’t make full use of such services.
The lack of a regular bank or credit union account means exclusion from convenient financial services such as ATMs, direct deposit of wages and online services such as PayPal. In a pandemic, it’s also a health risk, forcing the unbanked to rely on in-person encounters for the basics of life.
The Unbanked in the U.S. and Texas
According to an October 2020 report by the Federal Deposit Insurance Corp. (FDIC), 5.4 percent of American households were unbanked in 2019, a slight decline from 6.5 percent in 2017 and significantly lower than the 2011 peak of 8.2 percent (Exhibit 1). The 2019 figure represents the lowest share recorded since this survey began in 2009; the FDIC attributes this improvement to better socioeconomic circumstances for U.S. households. Texas’ share of unbanked residents, while higher than the nation’s, has declined as well, from a 2011 high of 12.8 percent to 7.7 percent in 2019.
A decade of data from the FDIC biennial surveys makes it clear that fluctuations in the economic circumstances of U.S. households directly affect the share of unbanked households. The 2011 peak, for instance, at least partly reflects the aftermath of the Great Recession. FDIC’s 2020 report says a future rise in the rate of unbanked households is likely due to the pandemic.
EXHIBIT 1: UNBANKED HOUSEHOLDS, U.S. AND TEXAS, 2009-2019
TEXAS
U.S.
Year
Number of Households (in thousands)
Unbanked Share
U.S.
2009
119,003
7.6%
2011
120,408
8.2%
2013
123,750
7.7%
2015
127,538
7.0%
2017
129,276
6.5%
2019
131,248
5.4%
Texas
2009
8,912
11.7%
2011
9,136
12.8%
2013
9,678
10.4%
2015
10,291
9.4%
2017
10,438
9.5%
2019
10,395
7.7%
Source: Federal Deposit Insurance Corporation
The FDIC’s findings were based on its June 2019 Survey of Household Use of Banking and Financial Services, a biennial effort conducted in partnership with the U.S. Census Bureau. Almost 33,000 U.S. households responded to questions about bank account ownership, the primary methods they use to access bank accounts, bank branch visits, the use of prepaid cards and nonbank financial transaction services and the use of credit.
FDIC’s surveys indicate that unbanked rates are consistently higher among minority communities. Nationally, 13.8 percent of Black households, 12.2 percent of Hispanic households and 2.5 percent of white households were unbanked in 2019. In Texas, 11.4 percent of Black households, 14.5 percent of Hispanic households and 2.5 percent of white households were unbanked (Exhibit 2). Even so, rates for all three generally have trended downward in the last decade.
EXHIBIT 2: UNBANKED HOUSEHOLDS BY ETHNICITY/RACE, U.S. AND TEXAS, 2009-2019
Year
Black
Hispanic
White
U.S.
2009
21.4%
19.6%
3.3%
2011
21.3%
20.4%
4.0%
2013
20.5%
18.2%
3.6%
2015
18.5%
16.3%
3.1%
2017
16.8%
14.4%
3.0%
2019
13.8%
12.2%
2.5%
Texas
2009
20.6%
21.1%
4.1%
2011
23.3%
23.6%
4.0%
2013
20.0%
19.0%
3.1%
2015
15.6%
18.4%
2.5%
2017
18.6%
16.1%
2.8%
2019
11.4%
14.5%
2.5%
Source: Federal Deposit Insurance Corporation
Lower-income households and those with unemployed members, or with significant variations in pay from week to week, also are at higher risk of being unbanked. The poorest — households earning a yearly income of $15,000 or less — are particularly vulnerable: 23.3 percent of these households are unbanked in the U.S. and 26.2 percent in Texas.
The FDIC’s 2019 survey lists the two top reasons respondents cited for not using banks, both nationally and in Texas, as “Not enough money to meet minimum balance requirements” and “Do not trust banks” (Exhibit 3).
EXHIBIT 3: NATIONAL AND TEXAS HOUSEHOLDS, 2019: MAIN REASON UNBANKED
Share
U.S.
Not enough money to meet minimum balance requirements
29.0%
Do not trust banks
16.1%
Texas
Not enough money to meet minimum balance requirements
29.1%
Do not trust banks
16.1%
Source: Federal Deposit Insurance Corporation
Banking in the Community
This comes as no surprise to Chief Community Officer Irvin Ashford Jr. with Comerica Bank, who has developed various financial education programs and community development strategies and initiatives for Comerica for more than 20 years.
“There’s been a generational lack of trust and inclusion, particularly for people of color and the economically disadvantaged,” Ashford says. “Often, bankers aren’t necessarily from the same ethnicity or ethnic background as the community where the bank is located. This distrust of financial institutions has led to other people, such as predatory lenders, coming in to fill the gap, because there will always be a need for people to access financial services.”
Meeting people where they are with their financial understanding and helping make the bank’s financial tools accessible and convenient is part of his financial education strategy, Ashford says, noting that the traditional “banker’s hours” of 9 a.m. to 5 p.m. often aren’t convenient for those in underserved communities.
“I think proximity and intentionality can break down some of the mistrust,” he says. “So our banking center network promotes phone and mobile banking and offers extended hours at our banking centers, which helps reduce the need to go to nontraditional financial sources.”
The pandemic has moved Comerica to increase its involvement with financial literacy programs.
“Since the onset of the pandemic, we’ve become more involved with financial boot camps with our community partners, such as the EMPOWER Series Inc.,” Ashford says. “We’ve registered close to $383 million in economic activity impact in diverse communities as of year-end 2020.”
Even the most basic bank account can be the first step toward broader financial inclusion, creating a path to credit and insurance and helping individuals start and expand businesses and invest in their education or health.
“We work to build trust through business resource groups and teams that pursue strategies that meet the banking needs of diverse communities,” Ashford says. “We’ve been able to tear down many of the phobias and barriers people have about trusting and using banks because we’ve been active in the communities we serve.”
Unintended Consequences
Mike Mauldin, director of the Excellence in Banking Program with the Jerry S. Rawls College of Business Administration at Texas Tech University, understands why the underbanked and unbanked are mistrustful of banking systems.
“It looks like a rigged game when it comes to the underbanked and unbanked,” Mauldin says. “And while I know it’s not a rigged system, I think I could see how someone who can’t get in could have that perception.
“I have met very few bankers who weren’t in love with their community,” he says. “Our financial institutions need to have the flexibility to work with somebody, look at their individual financial condition … and have the ability to restructure it.”
Mauldin says such flexibility is almost impossible for community bankers, however, due to current credit rating restrictions under the federal Dodd-Frank Act, enacted in 2010 in response to the 2008 financial crisis. Under Dodd-Frank, Mauldin says, banks can only use statistical analyses, such as fair lending regression analysis (FLRA), a statistical model, to determine which customers receive help. The FLRA, however, relies primarily on prior credit transactions, creating a Catch-22 scenario for those who haven’t used credit before.
“Does statistical analysis work?” Mauldin says. “Certainly, it works, [but] what was the unintended consequence? How are the underbanked and the unbanked ever going to get into the current credit scoring lending system using FLRA?”
The answers certainly won’t come quickly, he says.
“I think we need to get people around the table willing to speak up and help others recognize this is a problem,” Mauldin says. “Helping people achieve the American dream is something bankers want to do as a group. And we have to get back to where we can offer that lifeline to people that need a second chance, but the system right now is not really set up for [that].”
Banking on the Unbanked
“I think it’s really important that we act from a whole community standpoint,” agrees Chris Furlow, president and CEO of the Texas Bankers Association (TBA). “Government alone can’t address the changes we have in this regard, and the private sector cannot do it alone. We need a whole community.”
One such community approach is a national program called Bank On, supported and promoted by the American Bankers Association, which encourages underbanked and unbanked persons to create a bank account for fast access to stimulus and unemployment payments and other benefits through direct deposit. The program allows banks and credit unions to offer these customers an account with low monthly maintenance fees of $5 or less and no overdraft fees. And recently, financial technology services companies, or “fintechs,” have expanded their services beyond small businesses and now are offering their cutting-edge, often mobile financial services to the unbanked and underbanked.
Furlow believes expanding financial literacy programs, particularly at the high school level, is a good first step toward helping the underbanked and unbanked become more resilient in the face of any future economic crisis.
A new TBA initiative called CREATE (Community Reinvestment and Trust Enterprise), launched in February 2020, seeks to develop sustainable economic growth in Texas’ traditionally low- and moderate-income areas by partnering with banks and other organizations to provide small business owners with critical business education and planning skills. Unity National Bank in Houston and the Greater Houston Black Chamber of Commerce are leading partners in this effort.
TBA also supports the development of banker education programs in Texas colleges and universities.
“We’re working with institutions including Texas A&M - Kingsville, which has a majority Hispanic student population, and Texas Southern University, a historically Black university, to build their banking programs,” Furlow says. “We’re committed to developing bankers who will understand their communities’ needs better than anyone else.
“We need to take this opportunity so that in the future, regardless of the next crisis, we ensure people are not in this position again,” he says. “We have to expand financial literacy, not only in Texas but across the country, to help people plan ahead of any emergency.” FN
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