By Patti Murphy
ProScribes Inc.
After years of brow-beating banks to do more for the poor, the federal government reported that the share of Americans without bank accounts fell to 7 percent last year. That's the smallest that group has been since 2009, according to the Federal Deposit Insurance Corp.
Putting this into raw numbers: approximately 9.0 million households, made up of 15.6 million adults and 7.6 million children were unbanked in 2015. Growing numbers of these households reported using prepaid cards in lieu of bank checking accounts; many prefer mobile rather than face-to-face access to financial services. Banks and credit unions can do more to reach these consumers. Mobile and prepaid products can help.
"Developing a relationship with a bank helps consumers build assets and create wealth, makes them less susceptible to discriminatory or predatory lending practices, and can provide a financial safety net against unforeseen circumstances," said FDIC Chairman Martin Gruenberg. "The decline in the share of households who do not have a banking relationship is a positive development, and the FDIC will continue working to help ensure households have access to safe, secure and affordable banking services."
The decline in the share of unbanked households was broad based, although some demographic groups saw larger drops than others. The share of U.S. households deemed to be underbanked remained relatively unchanged, according to the FDIC's latest National Survey of Unbanked and Underbanked Households. Data was collected in 2015 (with assistance from the U.S. Census Bureau) and findings were published by the FDIC this October.
The FDIC has been conducting surveys to gauge the number of unbanked and underbanked Americans every two years since 2009; that year 7.6 percent of U.S. households were unbanked. The FDIC defines an unbanked household as one where no one has accounts at federally regulated financial institutions; underbanked households have bank accounts, but also use nonbank alternatives, such as check cashers, payday lenders and prepaid debit cards.
The FDIC's data shows 19.9 percent of U.S. households were underbanked in 2015; those households included 51.1 million adults and 16.3 million children. The unbanked and underbanked are often referred to collectively as the financially underserved. The international consultancy KPMG LLP estimated in a 2013 report that the underserved, collectively, generate $1.3 trillion in U.S. wages.
The reasons U.S. consumers give for being unbanked vary, but generally fall into three categories. Many people cite financial reasons: they don't feel they have enough money to keep bank accounts going, for example, or they may object to fees and check holds. Many others (particularly millennials) don't like or don't trust banks. The third category consists of folks who have had bank accounts closed, or landed on an industry hot list for some other reason.
The unbanked and underbanked pay plenty of money in fees and interest for financial services: $138 billion in 2014 alone, according to the Center for Financial Services Innovation. That's a 7.6 percent increase from the year before.
Since 2010, consumer spending on nonbank financial services has been growing at an average annual rate of 6 percent, based on CFSI's analysis. Lending is the fastest growing segment, with a 310 percent increase in revenues from 2013 to 2014. Payments accounted for $10.1 billion of the total, and include check cashing, general purpose reloadable prepaid cards, and remittances.
The CFSI reported that revenue growth for general-purpose reloadable (GPR) cards was up 6.8 percent in 2014. Although that exceeds other economic growth indicators for the period, it was lower than other products. The FDIC said growth was stymied, in part, by increased competition which drove down card fees. New regulations that extend federal consumer protections for consumer credit and electronic funds transfer transactions to prepaid cards could further dampen interest. The Consumer Financial Protection Bureau, the agency behind the new regulations, however, delayed implementation until October 2017.
As the FDIC's and CFSI's data suggest, the financially underserved represent no small segment of the financial services market. Nor is it a recent phenomenon. Nearly 30 years ago the U.S. Department of the Treasury tried to address the problem by developing a prototype basic (low-cost) checking account that financial institutions were encouraged to offer customers of limited means. The initiative was not a great success.
Payroll cards were being offered long before GPR became an acronym for a type of prepaid debit card. In the 1990s, many large companies turned to payroll cards as an alternative to direct deposit. That effort seems to be working. Aite Group LLC reported payroll cards reached a tipping point in 2015: at 8.1 million, the number of employees paid using payroll cards exceeded the number receiving paper paychecks (7.0 million).
And as recently as June 2011, Time magazine published an article asking "Will Banks Target the Unbanked Next?" Some banks have, Alabama-based Regions Bank and First Tennessee Bank among them. But most bankers believe they can't generate sufficient revenues to support low-cost accounts. Some banks that tried by migrating these accountholders to lower-cost electronic channels (primarily ATMs) received bad press. I believe that's unlikely now that a majority of Americans are glued to their mobiles ‒ especially millennials, who are sometimes referred to as the mobile-first generation.
The FDIC found 69 percent of the unbanked adults have mobiles; 43 percent have smartphones. The percentages are much higher among the underbanked: 91.4 percent have mobiles; 75.5 percent have smartphones.
The FDIC's survey also offers insights on how consumers with bank accounts interact with their financial institutions. That data also points to a growing preference for mobile access to banks. "The estimates by banking status show that use of mobile banking grew substantially among both underbanked and fully banked households," the report stated. Among underbanked households 12.6 percent told the FDIC that mobile was their primary means of accessing accounts.
Companies like Ingo Money Inc. are tapping into this market demand. Ingo has built a consumer-direct digital check-cashing network that is being used by banks and nonbanks to support fee-based expedited funds availability options. Ingo has agreements with all the major card brands to support these fee-based services, and with several prepaid companies. In 2015, it struck an agreement with NetSpend Corp. (the TSYS-owned prepaid card company) to provide check-to-prepaid card loads through its issuing partners. 
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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