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Why do millions go ‘unbanked’?

By Claes Bell, CFA · Bankrate.com
Wednesday, June 27, 2012
Posted: 10 am ET

Most of us who have checking accounts probably take them for granted, and may assume that everyone has one. But according to a 2009 study by the FDIC, 7.7 percent of U.S. households -- around 9 million total -- are unbanked. In the three years since then, it's likely that number has grown as many Americans continue to deal with severe economic hardship and joblessness, and many banks have substantially increased the price of their checking services.

To understand why so many Americans are going without a basic checking account, and what can be done to get them access to high-quality banking services, I spoke to Poppie Parish, senior vice president of economic inclusion and client education at Key Bank.

We have seen the number of banks offering free checking fall in recent years. Are more people underbanked now because we are seeing more monthly fees added to accounts?

I don't think it is the fees or the changes of the product mix so much, Claes. I think it is the challenges we have seen take place within the economy, first and foremost. I think we are seeing people, who at some point in time may have had really good credit scores, fall because they are faced with loss of jobs or changes of jobs where their income levels have gone down. Foreclosures and things of that nature have created a shift in their economic levels. And I think that is why we are seeing that population grow as it relates to being underserved.

Also, surveys have stated that as young people come into the markets, they are tending more toward alternative financial services because of convenience and transparency of fees and things of that nature, as opposed to building relationships (with banks). I think a lot of it has to do with us just rebuilding trust in the financial institutions and what they bring to the table in terms of helping to build financial stability for the consumer.

So what are the consequences of people going to more of an 'a la carte' approach to financial services rather than building a relationship, in your opinion?

From what I have seen and what I have heard from those that have come into our financial education center, they go to the alternative financial services to meet a specific need. They may need to cash a check, they may need to get a loan, which in some cases may be a payday loan. They may need to do remittance.

But when it comes to buying homes, when it comes to saving and investing and being prepared for retirement, that is something that, as of right now, alternative financial providers have not been able to do. Therein lies the issue for the consumer.

What's your take on prepaid debit cards? What you think about the CFPB's push to regulate them?

Actually, there was a big article in our local paper in regards to the survey that Bankrate.com did. I applaud you for that. Prepaid debit cards are obviously needed, wanted by the consumer. They provide convenience. It is easy liquidity. In many cases they can't overdraw, which is a good thing.

On the flip side of that we know many of them may not be FDIC insured and there are little if any regulations around them. One of the things that I have heard too, through the Center for Financial Services and Innovation, is that there is a need for transparency around the disclosures as it relates to fees and how you can avoid those fees as well, if there is a possibility for that. Hence, there is a need for CFPB to take a long, hard look at them.

Again, looking at the population, the marketing of prepaid cards is one of the reasons that we are seeing such an influx of individuals utilizing that product.

What about the CFPB's push to get penalty boxes or the idea of getting a penalty box with all the kind of significant fees on a checking account that is standardized? Kind of like a nutritional label. What do you think about that?

I had an opportunity to look at their mockup of the "fee penalty box," and anything that is going to provide the consumer with a simple view I think is a good thing of what they may be dealing with. The bottom line in all of this, at least for fees, is to educate individuals on how to avoid those fees.

I have no issue with what the CFPB is trying to do. That is basically just trying to provide the consumer with a simple format so that they can look at and understand the definition of what they may be incurring and why and how to avoid it.

You talked a little bit about Key Bank offering some of these a la carte financial services like check cashing independent of whether people have an account. Is that something that we are seeing more in the industry that more mainstream banks are offering these sorts of services?

I think ultimately we will. Key has been a leader in this, and we really started way before CFPB was even thought of.

Back in 2004, we really went out into the community and asked community leadership. We talked to people on the street. We wanted to find out truly what were their problems, what were their challenges, how could we be a resource to them. We tout ourselves as a relationship bank, and truly that is what we set out to do for the underserved market segment: bringing them into the fold of Key Bank.

I do believe with the CFPB now really focused on the consumer and the underserved, I think we are going to see more financial institutions looking at how they can bundle products to meet those needs. But you really have to start, as we did, looking at and understanding that particular consumer and what their needs are short-term and long-term.

The financial press has been quite critical of some check cashing places and things. Looking especially at payday advance loans and these types of products, do you think that when these sort of standalone services are offered by banks, it is better than at a local gas station or someplace like that?

I do, because if we do this right as financial institutions -- don't fee people to death, help them to understand, work with the consumer as a whole be it the underserved or mass market And provide responsible products and services to meet their needs -- I do believe we are better than a gas station. A gas station is there to help you pump, to provide a service, provide you gas. It really shouldn't be there to be your financial advisor, to be your financial coach. That is what we are here to do.

I have spoken to some people who provide standalone services and prepaid debit cards. They say one of the reasons they exist is that banks don't do a great job of serving consumers in low-income areas and they are there to pick up the slack. Do you think that is the case, and is that changing?

I think we better start. The economy has changed the outlook. We have seen a shift in credit scores, and what you do about that because of the challenges individuals have faced with the economy? For us, that means looking at things differently. Looking at how we go about scoring credit now. There are so many individuals now with (poor) credit files or with no credit files. Should they not have the same opportunities to build their financial capability as those that are more wealthy? I say they have every right.

These are the things that Key Bank is looking at. We are making sure that we step back, understand thoroughly the needs of all of our market segment and try to build innovative products and services to meet those needs and to help build towards the future. If we don't I don't know what the outlook is going to be for our economy as a whole. Financial institutions play a big part and a big role and have a huge responsibility around this aspect.

What is your feeling about the influence of ChexSystems, the blacklist bank customers get on if they make an overdraft mistake or don't pay an overdraft? Is it locking people out of the system? There are millions of people on that list.

You are absolutely right about that. There are millions of people on that list.

We have to help people before they get on the list. We have to help educate. We have to have that transparency within disclosures to help them to understand how not to overdraft, how to manage their finances. That is why for Key, we start at the high school level. We are going out into high schools teaching young people about credit. You would be amazed how many youth or teens already have credit cards. How many are already having problems with, for example, their cellphone bills. They are not paying their cellphone bills. That is going to be on their credit score. That is going to hurt them.

Looking at our check cashing piece, we welcome individuals that are on ChexSystems to cash their checks with us. We also as a part of that umbrella of our products and services we have an account called The Key Access Account. It is almost like a second-chance checking account that will allow individuals that are on ChexSystems to open up an access account so they can have direct deposit into an account that doesn't require the writing of checks. It is somewhat like a reloadable card, but it has some different nuances to it. It helps that individual.

We also have a product that is called Loan Assist to help people rebuild their credit. As we look at this market segment, as we look at people on ChexSystems, we have to look at ways where we can provide products and services to meet the needs of those individuals. The crux of all of this is to help by educating, coaching, being that financial adviser, to help them once they get out of ChexSystems to not get back into it.

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