As a follow up to my post on the unbanked, I wanted to delve a little bit deeper into the financial inclusion topic by discussing the underbanked. Particularly, I want to address the issues that arise when we try to box people into certain categories based on their behavior. Subsequently attempting to come up with policies that relate to these categorizations can get really tricky.
The underbanked are defined as individuals who have bank accounts but who also have used at least one form of Alternative Financial Services (AFS), as defined by the FDIC, in the past year. AFS include money orders from a nonbank, payday loans, check cashing services, pawnshop loans, rent-to-own services, tax refund anticipation loans, and auto title loans. So, anyone who has a bank account but also uses at least one of these things is considered “underbanked.” As of 2013, that comprises about 20% of the U.S. population.
Already, you might be able to see that there are issues with this definition. Money orders are the most obvious example. Though they’re not super common, I think a lot of people have had the need to use one at some point or another. Often it’s just as convenient (or more convenient) to get it from the post office or the drug store as it is from a bank, but as soon as you do that, you all of the sudden fall into this group of “underbanked” people who are thought to need help from a policy stand point. I don’t think simply using a money order should automatically qualify someone as falling outside of the mainstream when it comes to banking services.
The other types of AFS seem to be more valid examples of what people might use as a substitute for traditional financial services (though there are definitely instances where this isn’t the case). Additionally, use of these things is typically correlated with being lower income and having less stable finances. To be clear, the demographics of the underbanked are different than those who don’t use AFS. However, they’re not as different as you might expect. Based on data from the Survey of Consumer Payment Choice, an annual survey put out by the Federal Reserve Bank of Boston, the underbanked are remarkably more similar to the fully banked (people who have bank accounts and never use AFS) than they are to the unbanked. This is true for both their demographic attributes and the way they pay for things. They generally have lower income, are younger, have lower credit scores, and use credit cards less intensively, but they are similarly educated and use their bank account-linked payment methods (debit, checks, online bank account payments) almost identically. All of this indicates that their use of AFS is really more indicative of a lack of access to credit specifically than a lack of access to banking services in general. It makes sense that these lower income, younger people have fewer credit cards and use them differently, since we know that having less income and being younger makes it harder to get a credit card. It’s interesting though that this group of people has been labeled as “underbanked” when that doesn’t really seem to be the case – they are definitely using their bank accounts!
The other issue with this definition is more nuanced and has to do with what I touched upon in my other post: being “underbanked” is a conscious and often rational choice. Despite having access to mainstream services at their bank, the underbanked are still choosing to use AFS either because its less costly, more convenient, or they trust it more. I think that if we’re going to label people and make it a mission to change their label, we need to better understand what is motivating that decision. To me, it seems that the answer to that lies somewhere in the realm of credit and borrowing, not strictly depository banking.
At any rate, it’s clear that acting within the mainstream banking world as it exists today is not an optimal choice in every case, otherwise people wouldn’t choose AFS. If we want to maximize access to the mainstream financial infrastructure, more effort needs to be put into figuring out what people actually need and making that available, rather than just assuming that they should want what’s already there.