How a Lack of Trust in Banks is Costing Some Americans

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Credit Sesame discusses a lack of trust in banks and the impact of this on Americans.

According to a recently-released FDIC report, nearly 6 million American households are considered “unbanked.” This means that no one in those households has a bank account.

The report, the FDIC Survey of Unbanked and Underbanked Households examines access to banking and the alternatives to bank accounts that some people use. It also looks at attitudes towards banks and other factors that affect whether people remain without a bank account.

A disturbing impression that emerges from the report is that people often don’t have good reasons for avoiding banks. In many cases, not having a bank account stems from misinformation or outdated social barriers.

This is a problem because the expensive alternatives unbanked households use to make and receive payments can make a difficult financial situation worse.

What’s keeping some households from using a bank account? Is it in their interests to overcome the barrier to open bank accounts?

The survey found several reasons people gave for why they didn’t use a bank. Lack of trust in banks was one reason, but there are other reasons, too.

Minimum balance requirements

The minimum balance requirement was the most frequently-cited reason people gave for not having a bank account. 40.1% of survey respondents said it was one of the reasons they didn’t use a bank, and 21.7% said it was their main reason.

A minimum balance requirement means you have to deposit a certain amount in order to open an account. They often require that you keep at least a given dollar amount in the account at all times.

Certainly, the minimum balance requirements of some balance requirements are out of reach of many Americans. After all, there are cases where those requirements can run into the thousands of dollars. It’s hard for some households to scrape together that amount of money at any one time, let alone keep that amount in the account throughout their normal pattern of paying bills and meeting other expenses.

Why it’s time to rethink this reason

Bank accounts with high minimum balance requirements are the exception, not the rule. Generally speaking, minimum balance requirements are more reasonable – or non-existent. Online banking has lowered the cost structure of many banks. It costs a lot less to manage accounts through the internet than it does to maintain an extensive network of physical branches. In many cases, banks have passed this lower cost on to customers. Accounts with little or no balance requirement are plentiful these days, so minimum requirements should not prevent someone from having a bank account.

Lack of trust in banks

The FDIC survey found this concern expressed in a couple different ways. 34.1% of respondents cited privacy as one of the reasons they don’t want to have a bank account. 33.0% said they didn’t trust banks.

Over the years, there have been some high-profile cases of banks taking advantage of their customers. That may contribute to some people’s perception of banks as untrustworthy. Also, being unfamiliar with banking can make people suspicious of banks. It can be a hard habit to break.

Why it’s time to rethink this reason

While there have been cases of wrongdoing by banks, those are relatively rare when compared to the thousands of banks and millions of customers involved. Also, banking is a very highly regulated industry. Part of that regulatory structure is FDIC insurance that covers depositors for up to $250,000 at any bank should the bank fail.

It’s also worth noting that as an alternative to banks, people often use things like payday lenders and check-cashing services. It’s worth remembering that banks are heavily regulated so a lack of trust in banks is no longer a good reason to remain unbanked.

Bank fees

Bank fees can come in many different forms. Maintenance fees may be charged every month, regardless of how you use the account. There may be a fee every time you use an ATM outside your bank’s network. Overdraft fees have gotten a lot of attention lately, because they can be especially expensive.

Those fees can be a particularly big burden on poorer customers with relatively low bank balances. Nobody wants to deposit money in a bank just to see the bank steadily take it away in the form of fees.

Why it’s time to rethink this reason

Many online banks don’t charge maintenance fees. This is especially important, because other fees can typically be avoided by developing good banking habits. This includes things like making sure to use ATMs that are within your bank’s network and taking care not to overdraft your account.

So, to a large extent bank fees can often be avoided if you choose the right bank and use your account carefully. Even when bank fees can’t be avoided, they are often cheaper than alternatives like check-cashing services and payday loans.

Bank branch location

15.4% of survey respondents said one reason they don’t have a bank account is that branch locations are not convenient. That’s understandable. Rural and inner city areas have long been underserved by bank branches. That problem isn’t getting any better as the total number of bank branches has steadily declined over the past decade.

Why it’s time to rethink this reason

With online banking, access to your account can be as near as your desktop or mobile device. This can be a great equalizer in taking away the barrier of location to give more Americans access to banking.

Ethnicity is a bigger barrier than income

Income is a big factor in whether people are unbanked. People with incomes under $15,000 are the least likely to have a bank account, and the percentage of the unbanked population declines as income levels rise.

Ethnicity plays an even greater role than income in determining who is unbanked. At every income level, unbanked rates are much higher for Black and Hispanic people than for White ones. Overall, 11.3% of Blacks are unbanked, compared with 9.3% of Hispanics and just 2.1% of Whites.

This suggests that there are traditional social barriers to banking that need to be overcome. Greater outreach and education about the benefits of banking, perhaps starting in the schools, might help.

The alternatives to banks are often costly

The FDIC report listed several of the alternatives people use instead of dealing with banks. These include:

  • Check cashing services
  • Pre-paid cards
  • Tax refund anticipation loans
  • Payday loans
  • Money orders
  • Auto title loans

These alternatives are often much more expensive than banks, especially if used habitually. These businesses cannot claim to be as highly regulated as banks. Alternatives not included in the 2021 survey include cash and credit cards.

The first line of the FDIC report is perhaps a fitting last line for this article, “The FDIC is committed to expanding Americans’ access to safe, secure, and affordable banking services, which is integral to the FDIC’s mission of maintaining the stability of and public confidence in the U.S. financial system.”

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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