A Look at the Banking Choices Of Low-income Individuals

Banking the unbanked has been an important part of the asset building policy agenda. Low-income individuals, in particular, get strapped with high fees when executing routine financial transactions using risky financial products. Mainstream banking has been seen as the safest way to protect and build assets in low-income communities. But that’s not always the case. In fact, the high cost of banking has deterred low-income individuals from staying banked.

A recent policy paper from the New America Foundation offers insight into the financial choices of low-income individuals who have figured out how to avoid fees associated with risky financial products and banks alike. The findings suggest a more nuanced approach to asset building policy is needed: We must first understand how vulnerable populations manage their money and advocate for policies that create financial stability, not instability.

Findings from the paper came from interviews with 37 recipients of the Temporary Assistance for Needy Families (TANF) cash assistance benefit in California. Most of those recipients were turned off by bad experiences with checks or automatic payments from banks accounts. They opt for cash or money orders instead.

The paper states, “The central role of cash in financial management is a constant theme. A number of respondents were wary of using anything but cash or money orders to pay bills.”

Across the nation, 9 million households are unbanked. In Illinois, more than 1 million households are either unbanked or underbanked. The average unbanked worker in Illinois spends $574 a year to cash their payroll checks. And 16% of the underbanked have obtained at least one loan from a payday lender, which typically leads to a cycle of debt.

Almost all of the TANF recipients interviewed had an account at a bank or credit union that had been closed. The main reasons: overdrafting the account or failing to pay penalties. For those interviewed, the fees and penalties made it prohibitive to keep the account open.

One woman told of forgetting about her automatic withdrawal for her car insurance. The $30 overdraft ended up costing more than $200 because of penalties. The bank closed the account before the woman could offer to make small, monthly payments to clear the charges.

Prepaid cards were popular among those interviewed, especially if those cards had a Visa, MasterCard or similar logo that lent credibility. The main motivation for using these cards, despite their high fees, was that they weren’t banks.

Using information gleaned from the interviews, the New America Foundation paper offers policy recommendations under four themes.

1. Reduce the cost of routing financial transactions:

  • Brand Electronic Benefits Transfer (EBT) cards with Visa or Mastercard.
  • Make EBT cards reloadable.
  • Make withdrawals from EBT cards no-fee.

2. Enable families to save money and plan for the future:

  • Provide a savings “bucket” to EBT.
  • Eliminate asset limits and reduce reporting requirements.

3. Encourage attachment to safe and affordable banking products:

  • Encourage development of basic bank accounts.
  • Explore the potential of new products.

4. Explore ways to help families cover unexpected expenses:

  • Offer automatic savings options.
  • Offer small loans for those transitioning off assistance.

The policy paper should be considered “required reading” as our thinking and understanding of asset building policy evolves and as we continue to advocate for safe banking products that address the needs of low-income individuals.

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