The recent statistics released by the Federal Deposit Insurance Corp shows a very disturbing trend to most of the financial institutions in America. It seems that more Americans are opting to use alternative banking methods rather than approach the traditional banks for their needs.
This could be a death knell for the banks should more of their customer close their accounts and look the other way for their banking needs. According to FDIC, close to 17 million Americans do not hold accounts with any of the traditional banks hence they are unbanked. A further 51 million Americans use other alternative financial services as a supplement to their normal banks, implying that they are basically underbanked. In both cases of either being unbanked or underbanked, consumers prefer to use services offered by nonbank financial institutions which a majority of consumer advocates think that are not the best given the fact that they are not subjected to strict regulatory statutes as the banks.
But with the current trends in the financial sectors where there exists a large disparity between lending and borrowing rates, it can only be predicted that a large part of the banked population will still adopt some of the products offered by the alternative financial institutions. The main reason for this is due to the notion that the institutions offer fast and convenient services as compared to the mainstream banks.
Some of the services they use to lure clients include payday loans, settlement-advance loans, tax refund advance etc. In order to understand why a substantial part of the population is shying away from the banks, it is important to consider the demographics of both the unbanked and underbanked. It will be realized that a majority of them are relatively poor or they are working class individuals who do not have adequate funds to open, operate and maintain a bank account. They might as well be lacking understanding of how the banking system works and how it can benefit them with their finances. There are indeed a number of explanations for the existence of the large number of people running away from the banks. They include the following-:
Bad experience with the banks
A good number of the unbanked individuals agreed that they once had bank accounts with the main stream banks but they got discouraged and closed them due to a bad customer service experience they had with the bank. Though this sound like a flimsy reason to shun banking completely, it is significant to some people who don’t appreciate the kind of services they receive when banking. They could have had a nasty experience with the tellers or the bank delayed to release their cash. But such experiences are bound to happen in any bank and randomly to any customer.
Experts hold the view that rather than closing a bank account and heading over to the other financial institutions, the affected individual can simply change banks but not to be completely getting out of the banking system. This is because there are several benefits that come with having accounts with the mega banks – benefits you won’t find in the alternative institutions. Some of these benefits are rebate on foreign ATM withdrawals for those who travel a lot, gentle minimum account balances etc.
On the surface, the requirements for opening an account with most of the American banks are some little money and personal information. But on the background, the banks have their own systems of running background checks to determine every prospective account holder’s financial diligence before agreeing to let them open an account. As a result, many applications have been denied due to past financial mistakes such as a default on credit card payments, minor overdrafts, issuance of bounced checks etc.
Such individuals also find themselves blacklisted with most of the banks due to their past financial records. The glaring problem in such a kind of a situation is the bureaucratic rules that the banks have to adhere to. If their policies that guide account opening dictate that the applicant be blacklisted and be denied an account, the prospective account holder has no option but to turn to alternative financial institutions. However, there are instances when someone can have a poor financial past and still be able to pass the background the checks. This happens when there was mistake in the background check which made the bank to reject the application. The applicant can simply resolve the issue and convince that bank that it was indeed a genuine mistake and they may then be allowed to have accounts. The other option if a bank rejects an applicant’s application for an account would be to go for a second hand checking account but a majority would prefer to head over to the credit unions for their banking needs in such instances.
A majority of persons who lose their jobs are also likely to stop banking with the main stream banks and look for the alternative institutions. It is also important to note that with the high unemployment rates in the country, most of the unemployed have a lot of exposure to the alternative banking institutions more than mainstream banks because most states prefer to use prepaid debit cards in the distribution of the unemployment funds. This may explain why there is a strong correlation between unemployment and the underbanked or unbanked. Many financial experts however believe that a job loss should not be a reason enough to stop banking activities with the major banks. Though it can be a big hit economically, people should understand that their ability to open and operate a bank account is a factor dependent on a consumer’s record and the rules governing the banking operations with the particular banks. The best option when one loses a job is to switch to a bank with low charges and low account balances that they can manage in the absence of a job.
According to FDIC data, over half of the people who are unbanked or underbanked fall between the ages of 18 and 24 years. This category of people is referred to as young consumers and they are suspected not to have bank accounts because they are relatively young and just starting out in life. The other factors that may make this group of people to run away from the banks are the currents macroeconomic conditions that are particularly weighing heavily on the youth. Factors like student debt and lack jobs in the market are reasons enough to make any young person look in the opposite direction of the banks.
The other reason why young consumers would prefer not to use the banks is their tendency to use debit cards linked with the checking accounts. Most parents use such accounts as a means of sending cash to and fro to their kids and you find that a good number of them go for overdrafts amongst other financial services that attract large fees. Other young people also end up using “pay bill loans” and “account advance services.” Though the fees and interests on such products might appear to be small in the beginning, they normally attract large annual percentages and the only way for the young people to avoid the high charges is to use alternative institutions rather than banks.
Exorbitant banking fees
Exorbitant, unexplained and unsuspected fees are some of the reasons why people prefer to either remain underbanked or unbanked. A majority hate it when they are charged fees that they did not expect or which they know nothing about. According to finding by FDIC, many households in the United States that are unbanked cite that the fees were their major reasons for not considering the banks. It is however funny to note that a majority of the unbanked respondents, including those that have never used a bank before think that the fees and the bank charges can’t be a major deterrent to have a bank account. Actually, the fee issue is just a matter of transparency in business dealings. Consumers feel awkward if they incur charges that they are not aware of and they feel that they have been betrayed by the very institution they had trusted with their money. For those who uphold high moral standards, they will want nothing to do with such banks hence opt for alternative means.
To avoid debt collectors
Some consumers may prefer to shut down their bank accounts so that they avoid debt collectors which may use their banks to access their money. But this idea of trying to go off grid may not always yield the desired results. Though it is a fact that if you have a nonexistent checking account then there is no way how it can be levied, it is still possible to trace the employer of the debtor and determine exactly where the wage is being directed to. In a similar manner, the debt collectors can use the same technique to find other assets that are owned by the debtor. The best way to have peace of mind in case of any outstanding debts is to try as much as possible to clear them rather than trying to go off grid. Remember, one can run but they can’t manage evade paying the debt forever.