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Young Americans Likely to Be Unbanked Regardless of Income Level

This article was written by in Banking. 16 comments.


In discussing unbanked and underbanked American consumers, we tend to focus on low socioeconomic status communities. The mainstream opinion is that building wealth and long-term financial stability relies on the use of traditional banking and investing products and the knowledge to use these products effectively. The financial industry tends to avoid low socioeconomic status communities for a variety of reasons, but the bottom line is that these customers have not been proven to be profitable. Taking the place of these mainstream institutions are check-cashing facilities and payday loan outfits, designed to be very profitable while providing the immediate services required in these communities.

These “low-class” financial product purveyors are part of a growing industry. As with any burgeoning industry, there is beginning to be more research into its consumers. The unbanked and underbanked consumer is becoming better defined, and traditional banks see this as an opportunity to create products that directly compete with the successful check-cashing and payday loan market.

Check CashingWith this new research comes some interesting findings. Prepaid debit cards are products designed for consumers with low or no credit scores, a condition that is more common among low-income households, though there are many reasons anyone in any income bracket could have damaged or undefined credit. Think Finance has determined that the use of prepaid debit cards is the same regardless of income level. Among the consumers surveyed, a representative sample of the Millennial generation, someone earning up to $74,999 a year is just as likely to use a prepaid debit card as someone earning less than $25,000 a year.

The statistics pertaining the check-cashing services show a similar trend. For a fee of usually 1 to 4 percent, a check-cashing storefront can immediately give you cash. So can any bank branch, but you often need to open an account first, and that requires patience, the willingness to share your personal information and submit to a ChexSystems verification, and the openness to endless marketing. In many cases, it’s just easier to just pay the fee. 34 percent of Millennials with the lowest income make use of check-cashing services outside of traditional banks, only 5 percentage points higher than those with the highest income.

An article in USA Today addresses what might representative of the fact that the status of unbanked or underbanked is pervasive in this age group regardless of income:

Ammy Orozco, 30, who works as an executive assistant at a Check Cashing USA branch in Miami, has a checking and savings account with Bank of America but often chooses to cash checks at work instead. She says she’d rather pay to cash a check immediately than pay for gas to drive to the bank. She has also taken out payday loans in emergencies. She’s tried to get a loan from the bank, but it was “stressful.”

“They wouldn’t confirm right away… You’re there sitting and you need the money, and you’re like, is this going to happen or not?”

Millennials expect instant gratification and are willing to look past fees and unnecessary expenses in order to feed this desire, regardless of income. For a generation whose defining economic moment has been the Great Recession, the credit crunch, and high unemployment, as well as the media environment dominated by stories about bank executives behaving badly, poor use of taxpayers’ money, and class-action lawsuits pertaining to anti-consumer practices, it’s understandable that a mistrust of the mainstream financial industry keeps people away from banks regardless of income. Half of Americans are not saving for retirement, and while unemployment certainly plays a role, lack of trust in the industry and in markets in general is an important factor.

With the proliferation of services targeted to the unbanked and underbanked reaching a wider set of customers — that is, popularity and use has moved beyond low socioeconomic status communities — regulators have begun to take notice. (In other words, these products and their negative effects were acceptable when they took advantage of only the poor and whoever you might assume is more likely to live in poor neighborhoods, but now that the middle class is targeted, it’s an issue worthy of consideration.) The Consumer Financial Protection Bureau is looking into designing regulations for these products. Meanwhile, traditional financial institutions are taking advantage of this regulatory grey area to create products that compete with check-cashing storefronts and payday loan issuers, and to use these products as profit centers with the intent of eventually mainstreaming these customers into other profitable services.

Are you a Millennial who prefers immediate services like check cashing, payday loans, and prepaid debit cards instead of checking accounts, bank loans, and credit cards? This is not the primary audience of this website, but I’d love to hear some feedback from the millions of Americans who fit this description.

Photo: Daquella manera
USA Today

Published or updated May 17, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 16 comments… read them below or add one }

avatar Aaron Seibert

Heck no. I’ve used payday loans before in tight spots, and had nothing but bad experiences.

I’d much rather be at at a “real” bank and use real bank services. Nothing beats having someone down the street you can talk to if needed. With proper planning of your expenses, you shouldn’t need the instant gratification of payday loans and check cashing services.

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avatar Mike Collins

Traditional banks can be a hassle and they certainly look for any opportunity they can find to slap you with a fee. But paying a 1 to 4 percent premium just to avoid driving to the bank is pretty short-sighted. Perhaps they need a lesson in the power of compounding so they can see what that 4% could grow to if they invested it.

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avatar jim

I’m not a millennial myself. The article says that 50% of young households age 15-34 are ‘under banked’ but I don’t see any explanation of what under banked is really supposed to mean. IT doesn’t mean ‘unbanked’. The name under banked implies that they have some banking but not full banking. I really have no clue what that is supposed to mean. What qualifies as full banking versus limited banking? I don’t expect anyone to know the answer, but the article isn’t super clear.

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avatar erowe

Underbanked means that a consumer has a relationship with a bank or credit union but also uses “non-traditional” financial services providers. So a person could have a checking account but still use a check casher when she/he needs instant access to a paycheck.

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avatar jim

I’ll take your word for it. But it still doesn’t make sense to me. These people still have bank accounts but they just chose not to use them sometimes. This isn’t really a banking access problem in my opinion. Its more like ‘under-utilized-banking’. I guess. I don’t see that as a problem on the banking side. I guess the only real problem is they chose to use services with higher fees for no good reason. Its more of a ‘why-are-you-paying-for-check-cashing-or-payday-loans-??’ problem.

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avatar Luke Landes ♦127,535 (Platinum)

Well, underbanked really refers to those who use check cashing services, and other fringe products. To be unbanked, technically you’d have to have no access to even the worst money products… no payday loans, etc. Perhaps even homeless. Thus, I lump unbanked and underbanked together to refer to those who do not use the mainstream financial industry, and that might not be the “correct” usage. The title of the article would be better stated as “… likely to be underbanked …”

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avatar Evan

Considering the instant gratification of direct deposit (i.e. my payment is in my checking account before I wake up) I am shocked anyone would use anything else if their employer offers it. I would be surprised if Ms. Orzoco’s company didn’t offer it considering it is unlikely that they literally “cut her a check”

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avatar Luke Landes ♦127,535 (Platinum)

Well, considering she works for a check cashing company, I wouldn’t be surprised if they don’t offer direct deposit, encouraging employees to use their own services above traditional banks.

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avatar Lance

I am in my mid twenties, so I don’t now if I am a millennial or not but I never would go to those places. I always got direct deposit or took my check to the bank.

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avatar csdx

Well I guess I fall into that generation, but that lifestyle/logic seems so distantly removed from me. Aren’t we supposed to be the wired, always online generation?

I hate having to deal with physical money. I take a direct deposit into my account, which I manage electronically, pay with plastic, then payoff my cards online as well. I’ve even opened bank accounts entirely online. On the rare occasion I do have a check I can just feed it into a bank ATM to deposit it, any time day or night, or heck, even just take a picture of it and never even have to leave the house. Now that’s convenience, and I get paid for this (interest, cc rewards) rather than paying a fee for the supposed ‘convenience’ of check cashing.

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avatar Steve O.

I think many of these young people have been burned by the banking system, through excessive overdraft fees or something else. That, with a general distrust of banks following the Great Recession, drives people to these services.

I’m in that generation, but I cringe every time I see Montel Williams in that commercial for that company that will provide “up to $1,000 in your checking account the next day.” Also, as the audience of this website no doubt knows, the fees associated with these services are ridiculous. Those re-loadable debit cards aren’t cheap to have. The problem is that folks in this bracket either aren’t educated about how to get fees waived at traditional banks or don’t care to be educated.

It’s a shame.

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avatar Jessie

I guess I am part of this group (born in 1987) but I wouldn’t consider using these types of services. I learned growing up that if there were fewer banks and more check cashing/cash for gold establishments than I was likely to be in a less desirable neighborhood. I guess it varies by what you’ve seen your parents do and what they taught you growing up. I am also curious what ‘under banked’ means specifically.

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avatar Shawanda

Sounds like these people just make bad financial choices all around. It’s not that hard to find a bank that won’t rip you off. And I’m sure many of these people have access to credit unions. When you’re comfortable paying ridiculous fees to cash a check or okay with borrowing money from pay day lenders at obscene interest rates, then you should retain your right to do that. I don’t care if your income is low, moderate, or high.

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avatar Holly

There are low cost alternatives for people who prefer to do banking on a smartphone rather than going to a bank. I deposit checks by snapping a photo of my check and only pay $10 for an overdraft. Or text B and my balance comes to my phone. So easy, no hassle and no fee.

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avatar qixx ♦1,895 (Half-Dollar)

I prefer faster lower cost options. First is the loan shark. He charges lower interest than payday loan places. Gives better terms. Just an all around better situation. My local loan shark would even cash a check i’m sure. Never actually asked him.

Also with electronic deposit how is that affecting these payday loan places. I can take a check, take a photo of it and have it deposited into my account without having to leave my house. My phone is closer than and check cashing teller. Even if i am standing in the lobby of a check cashing place.

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avatar L Spencer

I do not keep a checking account. However, I do have a savings account. Prepaid cards are more my thing, although I rarely use it. I don’t trust banks or credit unions. Yes I’m a cash carrier but I realize that tossing plastic isn’t any safer.

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