Choosing to Be Unbanked

Access to a bank account is a liberty enjoyed by many Americans. People can freely choose whether to allocate the money necessary to have an account. If they don't want to pay - or cannot pay - the going price for having a bank account, they don't. It's that simple. This price gives zero weight to any demographic dimension. So, why are 40 million Americans currently unbanked?

People can determine the costs of a bank account along with its benefits. They weigh those costs and benefits and make their decision - and for many, this means choosing to be unbanked. In fact, the most common reasons that unbanked people gave in surveys by the FDIC and the Federal Reserve Board is that they feel they do not have enough money for an account or simply did not need an account.

I recognize a wide distribution of economic fortunes exists in our economy. Life is harder for some than for others. I get it. But, I also firmly believe that people are capable and have the best vantage point to make decisions about their lives.

Consumers ask themselves questions like: "Should I buy this good or service?" Or, "If I buy this good or service, what other good or service will I be without?" People operate within a budget and make hard choices about allocating money.

There is considerable research on unbanked people, generally defined as those who don't have a bank account. The market, however, still provides non-bank financial services to them.

Google the term "unbanked population" to read more about this topic, and you'll see that most of these articles seem to imply that being unbanked is a situation imposed on citizens. I, on the other hand, interpret the number of unbanked people as a potentially market-determined outcome of people weighing costs and benefits.

One article by the Corporation for Enterprise Development hits close to my home - Mississippi - which, according to this article, is the "top unbanked state in America." About 16.4 percent of households in the Magnolia State are unbanked, more than double the national rate.

Why are there so many more unbanked people in Mississippi? The citizens of Mississippi make, as a group, less money than citizens of any other state. This fact means that the people living in Mississippi cannot spend as much money on goods and services as people in other states. These services include bank accounts.

How expensive can a bank account be? At one prominent Mississippi bank, for one type of checking account, $50 is the minimum opening deposit required.

Suppose a government employee in Mississippi opens this checking account and wants to keep it open for a year. The monthly service fee for this particular checking account is $8 per month, so this checking account must provide more than $8 worth of service to its holder, or else it will be closed.

At what amount does the size of check make a person indifferent, all else equal, to using a bank account to access cash or using a check-cashing service? In Mississippi, check-cashing businesses can charge a maximum of 3 percent for any government check. So, the answer is: $8 / 3 percent = $267. If the customer has a monthly check greater than $267, cashing all but $8 of the check through the bank account makes economic sense.

But, all else is not equal. If the customer decides to let the $50 dwindle, after six months of service or maintenance fees there will only be $2 left in the account. Now, suppose a check is written that exceeds the amount of money in the account. The return check fee in Mississippi is $40.

Avoiding one of these $40 fees in a month moves the breakeven point to $48 / 3 percent, or $1,600 - the pretax monthly amount from working 40 hours a week at $10 an hour. So, one can see how consumers might not want a bank account.

I'm not advocating for any competitive financial service over another. I am merely suggesting that many people who are unbanked, like Mississippians, have likely made a rational economic decision by weighing the costs and benefits of having a bank account.