Want to buy a house or build a credit history? Why banking disparities matter
This article first appeared in the St. Louis Beacon, May 3, 2010 - Among the many measures of racial disparity, this statistic might not get as much attention as unemployment, housing or education numbers, but it, too, has far-reaching impact: In the St. Louis area, 31 percent of African-American households are "unbanked" compared to 1 percent of white households -- the largest racial disparity of any metropolitan region in the country.
The Federal Deposit Insurance Commission, which defines the "unbanked" as Americans who do not have a savings or checking account, warns that people who don't bank at a federally insured institution not only lack the ability to conduct basic financial transactions, they also can't save for emergencies and long-term security needs or get loans on affordable terms. Instead, they depend on nonbank sources for money orders and check cashing -- and borrow money at costly rates from pawnshops and payday loan operations.
These statistics are from the 2009 FDIC National Survey of Unbanked and Underbanked Households. To read more, go to the FDIC's Economic Inclusion website .
* The FDIC estimates that 7.7 percent of U.S. households -- about 9 million -- are unbanked. At least 17 million adults live in unbanked households.
* The demographic breakdown of the unbanked: 21.7 percent of black households; 9.3 percent of Hispanic households; 15.6 percent of American Indian/Alaskan households; 3.3 percent of white households; 3.5 percent of Asian households.
* In addition, an estimated 17.9 percent of households -- about 21 million -- are underbanked, representing about 43 million adults.
* Minorities are more likely to be underbanked: 31.6 percent of black households; 28.9 percent American Indian/Alaskan; 24 percent Hispanic.
* Less likely to be underbanked: white households, 14.9 percent, and Asian households, 7.2 percent.
* Overall, an estimated 25.6 percent of U.S. households -- about 30 million -- are either unbanked or underbanked. That number represents 60 million adults.
* Overall, nearly 54 percent of black households and 43.3 percent of Hispanic households are either unbanked or underbanked.
The bottom line: The unbanked are more vulnerable to loss and theft. They can't build credit histories. They can't save for emergencies or for the future. They pay exorbitant interest rates for loans. And the cycle of poverty rolls on.
That was the upshot of a conference last week where local housing and community advocates, as well as members of the financial industry, got together to discuss economic inclusion in the St. Louis area. "Closing the GAP: Improving minority and low-income communities access to wealth" was sponsored by the Metropolitan St. Louis Equal Housing Opportunity Council and the St. Louis Equal Housing and Community Reinvestment Alliance.
Keynote speaker Barbara Ryan, deputy to the vice-chairman of the FDIC, spelled out the problems.
"You may wonder, 'Why should I care about this basic issue of the unbanked?' " Ryan told the gathering. "Well, it all has to start somewhere. It starts with having a bank account. You can't become a homeowner if you haven't taken that path."
Improving access to wealth for minorities and low-income Americans is important to the FDIC because the unbanked pay dearly for relying on alternative financial service providers, said Ryan.
"This can drain their cash flow, entrap them in a cycle of debt and make it more difficult for them to save, build wealth, plan for the future and become homeowners. So it matters," Ryan said.
The FDIC's efforts to improve access include financial education programs, a pilot program for small loans and the Alliance for Economic Inclusion, which works with financial institutions to develop new ways to reach the unbanked.
But Ryan also talked numbers, pulled from a survey released late last year by the FDIC:
- An estimated 7.7 percent -- about 9 million -- U.S. households are unbanked.
- An estimated 17.9 percent -- about 21 million -- are underbanked, meaning they have a checking or savings account but also use alternative financial services at least once or twice over a year.
- One-quarter of of U.S. households are unbanked or underbanked.
- The unbanked are disproportionately minority, unmarried and low income. Nearly 20 percent of households earning below $30,000 a year -- almost 7 million -- have no bank accounts.
How Missouri compares
Banking disparities also vary by geography, with the largest concentration of unbanked Americans living in the South, Ryan said.
In Missouri, the proportion of unbanked households is 8.2 percent, which is slightly higher than the national proportion of 7.7 percent. Overall, the proportion of unbanked households in the St. Louis metro area is 7.5 percent, which is actually below the national proportion. But the proportion of underbanked -- 22.4 percent -- is higher than the national proportion.
"What is striking, however, is that the proportion of black unbanked households in the state of Missouri at 29.2 percent is notably higher than the national proportion," Ryan said. "And the gap is greater in the St. Louis metropolitan area where the proportion of black St. Louis households at 31 percent far exceeds the national proportion of 22 percent and, similarly, the proportion of low-income households -- these are households earning less than $30,000 a year -- is 23 percent, which is above the 20 percent national proportion."
The survey found that, nationally, about half of the unbanked used to have bank accounts.
"The most common reason cited for not having a bank account was not having enough money to feel that they need an account,'' she said. "This suggests that some consumers are making a rational choice in deciding to live outside the banking system. They don't think they can afford it."
Bank service charges, including steep overdraft fees, keep many of the unbanked away, Ryan said.
She added that although the FDIC can't provide reasons for each metropolitan area, so far, the national findings have mirrored the findings in the metropolitan areas the FDIC has studied.
Will Jordan, executive director of the Equal Housing Opportunity Council, agreed with Ryan's assessment.
"I know people who have incurred from a bounced check, $300 and $400 in fees, and either they pay it or they run from it, and are never able to get another checking account in any bank. So now they're out for good," he said.
But Jordan also cited the lack of a bank presence in certain St. Louis neighborhoods, which he said is rooted in the "traditions of fear" that spurred white flight -- first from the city and then from areas in St. Louis County.
"It was fear that made people leave the school districts and the communities and the neighborhoods. And the banks went with them," Jordan said. "It's going to have to be something that trumps fear that gets people to come back into the communities."
Jordan said that banks followed their customers out of the city.
"And now we're trying to reverse that," he said. "It's all connected."
Looking for answers
Some of the housing advocates in the audience shared the experiences of their low-income clients who felt unwelcomed at banks and others who were unable to open checking accounts because of poor credit histories.
Ryan noted that banks will have to rethink how they serve low-income people by tailoring services to their specific needs. That could include lowering service fees and minimum balances, for example. But she noted that banks also have to balance those efforts against profits and meeting financial regulations.
Jordan said that even if banks offer such products they will have to work at reaching out to minority and low-income customers, perhaps, even offering amnesties to people who left banking on bad terms.
"A bank will have to advertise," Jordan said. "People are not going to go and look for it on their own."
Jordan said that unbanked St. Louisans pay a heavy price for relying on nonbanks -- and so do their communities.
"The cycle is basically very predatory in Missouri -- the interest rates are very, very high. Payday loans are unbelievable," Jordan said. "You must have a banking product that takes into account what the needs are. That's why we're having this program today -- because banks have got to hear that if they don't take a progressive stand and allow people to do what they haven't been able to do so far, the whole community will go down."
Bill Dana, president and CEO of Central Bank of Kansas City, presented a session on locating bank branches in low-income and minority communities.
Central Bank is a community development financial institution that has focused on serving low- to moderate-income clientele. Three of the bank's six locations in Kansas City are in the urban core.
Central has expanded to St. Louis, recently opening a location at 3412 North Union Blvd., the site of the failed Gateway Bank of St. Louis. Central bought Gateway, a failed bank that was closed by the FDIC in November. Dana said the St. Louis branch serves predominantly African-American clients.
Central is one of 12 banks that served as case studies in an FDIC survey of banks, conducted in 2008. The study focused on Central's attempts at reaching out to the unbanked, primarily Hispanics. In addition to financial literacy programs, the bank offers unique products, such as reloadable payroll cards. Instead of paychecks, employers deposit pay into employee bank accounts. The workers access the funds through payroll cards, in a fashion similar to debit cards.
"I'm anxious to share some news about the products that we offer," Dana said.
The FDIC's findings on the unbanked came as no surprise to Dana, though he couldn't speak to the reasons for the banking disparity in St. Louis. He said his bank's expansion here is a natural extension of its focus in Kansas City.
"I don't know about the landscape of the players in the St. Louis community," Dana said. "I'm a tiny little bank -- $180 million -- very small in relationship to banks in general."
He acknowledged that banks -- and bankers -- are facing negative attitudes these days.
"It's kind of like we now know what lawyers feel like; we're kind of reviled or not held in high esteem,'' Dana said. "Our role is to just continue to do what we can. We always try to create a positive persona whether it's with a low-income client or a high-income client. And the chips will fall where they may."