“Financial Inclusion” has been a long-standing goal in development policy circles, borne at least in part out of the microfinance revolution. Belatedly, wealthier countries like the United States have caught on to the need to pay attention to whether households are included in the formal financial system. But a shared and precise definition of what it means to be included, or excluded, remains difficult to come by.
One of the main reasons it’s hard to precisely define who is included is that it is possible to use formal services, even a lot of formal services, but still not have the services that are most needed. Conversely, people who don’t use formal financial services may be avoiding them on purpose for logical reasons. Are these people included or excluded?
For example, the consensus among policy-makers in the US seems to be that bank accounts are a prerequisite for “full participation in the economy”. While a clear majority of American families do indeed have an account, the FDIC reports that a fifth of the country is “underbanked,” a category defined as using “one of the following products or services from an alternative financial services (AFS) provider in the past 12 months: money orders, check cashing, international remittances, payday loans, refund anticipation loans, rent-to-own services, pawn shop loans, or auto title loans” in addition to having a bank account at an FDIC bank accounts in addition to alternative financial services like money orders, check cashing, and payday loans. In other words, bank accounts fall short of meeting the needs of this substantial group– and in fact they enable the use of products widely considered over-priced and bad for financial health.
We thought it would be interesting to look at the USFD households to see how they used the formal financial system and how they felt about it. Our cash flow data allow us to see how households used both formal and informal services and our more qualitative data give us a deeper look into how households felt about those services.
Almost all of the study participants had a checking or savings account, as shown in the graphic below.
And account holders did demonstrate getting at least a little value out of them. Some relied on their banks for high frequency transactions. For example, the sample’s average non-savings account saw over 4 deposits and almost 20 withdrawals per month. (See this issue brief for more on that data.) Other households in the study valued their banks as places to keep money out of reach: Janice Evans, a blackjack dealer in Mississippi, kept a chunk of her savings in an account that she could only access by driving an hour to the nearest branch.
Of course, Diaries families were not always happy with their formal financial institutions, and some had needs that banks didn’t meet. Consistent with FDIC data, there’s a large overlap between bank account holders and people who use less formal tools. The table below shows, for example, that 33 percent of households with a bank account also used money orders at some point during the study.
Note: 216 households had a bank account. The FDIC’s
of the un- and underbanked takes a more in-
depth, nationally representative look at these numbers.
Similarly, many households used both banks and alternative loans. Ninety-five percent of USFD’s payday loan borrowers had a checking or savings account. That’s not so surprising, since most payday and similar lenders require their borrowers to write a post-dated check against a bank account in order to take out a loan. But what explains the behavior of people with bank accounts who make transactions with money orders and prepaid cards?
A study participant in greater Cincinnati, Amy Cox, is one such person. She signed up for an account because she thought it’d help her save more money, but found that the debit card was just as easy to spend as cash. So she reverted to her old system of using mostly cash, keeping the account open just in case she changed her mind. Throughout the study period she continued to experiment with other financial management strategies, like making weekly utility payments on a prepaid card (though as you can read in her profile, she paid a lot of fees to do so). Another household, Mike Smith, used cash for practically every transaction. He’d once opened a savings account to access a large check without paying a proportional check-cashing fee, and only made three transactions in it throughout the study period. Instead he cashed paychecks for free at his bank, then paid 78 cents on average for money orders to cover all his bills.
Incidentally, Mike was one of three people at that field site, the one where I collected data, who confessed to me their suspicions of bank tellers stealing from their accounts. That level of mistrust, and the fact that it came from several of the study participants that I knew, surprised me. It speaks to a deep-seated discomfort with the formal banking system even among those who use it. It can help explain why many people choose to be “underbanked” or “excluded.”
The Diaries also conducted a one-time survey into households’ perceptions of their banks. Its results reinforce the sense that people don’t quite know how to feel about their financial service providers. Households expressed clear concerns about inconvenience, costs, and opaque rules. The table below shows how different complaints stack up against each other.
Note: 117 bank account holders responded to this prompt.
Respondents could choose up to two
complaints, so numbers do not add up to 100.
Listening to the USFD households illustrates how complicated a concept financial inclusion is. While they would all probably be described as “included” or “banked” under most rubrics, they had no clear sense that their banks or other financial service providers were making them better off. That raises a tough question for those aiming to increase financial inclusion: What if people are better off underbanked?
This post reflects the views of the author, and not necessarily of the USFD project or its funders.