Nation’s unbanked rate creeps down

Robin Robeson: Financial literacy is key to improving underbanked rates.

Seven in every 100 households nationwide don’t have a bank account, but through a combination of technology, an improving economy and out of necessity, the nation’s unbanked population is on the decline.

According to a study conducted by the Federal Deposit Insurance Corp. every two years, the number of unbanked households – meaning no one in the home has a bank account – inched down to 7 percent in 2015 from 7.7 percent in 2013 and 8.2 percent in 2011.

“More households opening bank accounts generally signals an improving economy, as more people have excess cash left over from their paychecks and need to put it somewhere,” said Kenny Gott, a certified financial planner with Piatchek & Associates Inc. “Generally, the more cash banks have sitting in customer accounts, the more loans they can make to consumers and businesses, and earn interest charged on those loans. It can have a kind of upward spiral effect on the broader economy.”

FDIC analysts said while improving economic conditions account for part of the drop in the number of unbanked, the rate fell further than expected based on economic factors alone.

Local bankers believe the rise in banking technology plays a big role.

“The last two or three accounts we opened were young people with new employers who only use direct-deposit for checks,” said Mick Nitsch, community bank president at The Bank of Missouri. “They are opening accounts out of necessity.”

Cultural shift
The millennial generation is largely characterized by its use of technology. Digital services are increasing in demand and banking is no different.

Quickly becoming industry standards, Bank of Missouri already offers mobile deposit and online bill pay. Nitsch said the move toward more electronic transactions has prepared the bank for a rise in accounts.

“More accounts don’t mean we hire more tellers,” he said. “These transactions tend to be electronic, and we now are positioned to handle that.”

New accounts at Bank of Missouri have grown on average 20 percent each year during the last few years. Nitsch said some of that growth is organic and some comes from the addition of branches in Nixa and Branson during the past 18 months.

At Springfield-based Guaranty Bank, new account numbers are even higher. Chief Operating Officer Robin Robeson said from 2013 to 2015, new consumer accounts are up 39 percent. She attributes much of that rise to the bank’s “best kept secret.”

“We have free checking, but weren’t actively promoting it,” she said. “That growth is also during a period of market disruption. Many local banks were acquired and that can shake things up.”

Robeson said during that same time period, in-person transactions also trended downward. Like Nitsch, she cites a spike in electronic banking platforms.

“While we would love to see them – why come in when you can take a picture of the check with your phone?” she said.

According to the FDIC study, some 37 percent reported online banking as their primary method for accessing a bank account, compared with 28 percent relying on bank tellers. Although teller use decreased between 2013 and 2015, it remains a popular mode of access, particularly among segments of the population that had higher unbanked rates. Use of bank tellers was especially prevalent for lower-income households, less-educated households, older households and households located in rural areas.

Use of smartphones to engage in banking activities continues to grow at a rapid pace, with 9.5 percent of households relying on mobile banking as their primary method for accessing a bank account. That’s up sharply from 5.7 percent in 2013.

Nitsch believes the nation is moving toward a cashless society and as a result, the U.S. unbanked rate will continue to creep down.

“The need for bank services will only grow,” he said.

Underbanked
The decline in the share of unbanked households was broad based. Unbanked rates among black and Hispanic households, for example, fell about 10 percent. But the unbanked rate for Missouri was relatively flat on the whole. The Show-Me State moved to 8.5 percent from 8.8 percent in 2013.

However, the number of underbanked households – meaning they have a bank account but look outside the banking system to meet transaction or credit needs – increased nearly 2 percent to 22.3 percent statewide, just above the national average of 20 percent.

Reasons behind not having an account vary from belief they don’t have enough money to maintain an account to valuing their privacy, but when it comes to being underbanked it comes down to access.

“People have a tendency to take the path of least resistance,” Nitsch said. “For whatever reason, they believe they can’t access money through a bank so it’s easier to go through another resource.”

This logic has lent itself to a rise in the payday loan and check cashing industry. The nonprofit Pew Charitable Trusts reports more than 2 million Americans annually use auto title loans, in which they borrow against the value of their cars, with the title used as collateral. Another 12 million Americans take out the more popular payday loans each year, in upwards of $7.4 billion in loans annually. According to the Missouri Division of Finance, roughly 2 million payday loans were taken out in Missouri from October 2013 to September 2014, the most recent period recorded.

“If they aren’t using a bank, they are open to predatory practices,” said Robeson, noting bank accounts are governed by an extensive set of consumer friendly regulations. According to the Consumer Financial Protection Bureau, payday loan finance charges may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate of almost 400 percent. The average amount borrowed was nearly $310 with an average annual percentage rate of 452 percent. By comparison, APRs on credit cards can range from about 12 percent to 30 percent.

“We need more financial literacy,” Robeson said, referencing Guaranty Bank’s elementary education program Money Island. “The economy impacts rates, but in this case knowledge is power.”