Monday, December 07, 2009

The Imaginary Hobgoblin of "The Unbanked"

In Sunday's Washington Post, personal finance columnist Michelle Singletary provides some unbelievable commentary about the 60 million Americans who decide voluntarily to forego bank accounts, and she then goes on to support government intervention through the Community Reinvestment Act (didn't that contribute to the housing crash?) to "open banks' doors to all." 

Here is the opening:

Millions of Americans -- 60 million, in fact -- conduct their day-to-day financial business outside the banking system, leaving many to be preyed upon by payday-loan companies, rent-to-own establishments and other non-bank institutions.

Banks have largely ignored the unbanked and underbanked, arguing that it's difficult to figure out how to make money off them. But the Federal Deposit Insurance Corp. says it may look at using the Community Reinvestment Act -- and the weight that the act carries in bank examinations -- to encourage financial institutions to provide low-cost banking services and products.

A new FDIC report found that 17 million U.S. adults are unbanked. An additional 43 million are classified as underbanked. You're considered unbanked if you don't have a checking or savings account. The FDIC defined underbanked households as those that have a checking or savings account but use non-bank money orders, check-cashing services, payday loans, rent-to-own agreements or pawnshops at least once a year.

The FDIC survey, conducted by the Census Bureau, is the most comprehensive look to date at the unbanked and underbanked. The survey finally provides proof of the problem that consumer advocates have been trying to address for years, lobbying for products and services for the millions of people shut out from the traditional banking system. Under a 2005 law, the FDIC is required to monitor the financial industry's efforts to bring people into the mainstream banking system.

MP: Where to start? Here's an alternative version of the opening sentence:

Millions of Americans -- 60 million, in fact -- VOLUNTARILY conduct their day-to-day financial business outside the banking system, leaving many to be preyed upon SERVED VERY WELL by payday-loan companies, rent-to-own establishments and other non-bank institutions.

Second sentence:

Banks have largely ignored the unbanked and underbanked, arguing that it's difficult to figure out how to make money off them.

That statement seems ludicrous from beginning to end, and makes it appear that banks routinely turn certain people down when they show up with funds and attempt to open a checking or savings account.  Banks make money by converting savings and checking deposits into loans, and would therefore have no incentive to ignore or turn down new customers bringing new deposits to the bank (their main input), and banks would have no trouble at all figuring out how to make money from any customer's deposits - they loan them out!   

Given the proliferation of U.S. banks (more than 8,000) and the proliferation of banks advertising for new accounts and for free checking (examples here, here, here and here for the DC area), it seems absurd to suggest that new government regulations are necessary to address the imaginary problem of "unbanked and the underbanked."

H.L. Mencken accurately sums up the situation this way:

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.


At 12/07/2009 10:41 AM, Anonymous Anonymous said...

An observation/opinion. Many avoid checks and do business with cash to cheat on taxes.

At 12/07/2009 10:52 AM, Blogger Mark J. Perry said...

Or they could be here illegally.

At 12/07/2009 11:03 AM, Anonymous Anonymous said...

They're not doing it to cheat on taxes, they don't pay taxes:

1/3 of Tax Returns Filed Pay Zero Tax (and 1/2 of Those Get "Refunds")

The Tax Foundation reported yesterday that 46.6 million people who filed tax returns in 2007 had a zero or negative tax liability -- 32.6% of the 143.0 million tax returns filed. In about half of these cases, substantial additional money was "refunded" to the tax filer. 15 million people do not earn enough to file a tax return, so 61.6 million people do not pay federal income taxes.


TaxProf Blog

At 12/07/2009 11:12 AM, Blogger bob wright said...

There is a large cash economy that generally seems to be ignored by critics of the current method used to calculate unemployment.

These are people "off the grid" - they are not just people filing tax returns and paying zero taxes or receiving refundable credits.

At 12/07/2009 11:37 AM, Anonymous Anonymous said...

Banks won't accept accounts from some folks, unless a substantial opening deposit is made.

At 12/07/2009 12:01 PM, Anonymous Anonymous said...

I don't believe the 43 million under-banked is at all relevent. I am a small business owner who ships via Fed Ex and UPS. If I am dealing with customer without a relationship with my company I accept credit cards or COD Money order only. A lot of those money orders come in non-bank like 7Eleven. Are companies like mine contributing to the rise of the under-banked?

At 12/07/2009 12:08 PM, Anonymous Benny The Man said...

"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."

Somehow, I think of our foreign policy when reading this statement.

I agree, many people avoid banks as they are in our cash economy.
This is not a problem, except the rest of us have to pay relatively more taxes.

At 12/07/2009 12:18 PM, Anonymous Anonymous said...

Moral hazard...

At 12/07/2009 12:48 PM, Anonymous Anonymous said...

This gives a whole new meaning to the title "Progressives."

At 12/07/2009 1:12 PM, Blogger JimJinNJ said...

This "journalist" is renowned for her stupidity; this is just the latest installment. Most likely part of the NYT's affirmative action program run amok.

At 12/07/2009 1:44 PM, Blogger Walt G. said...

Almost everyone can find a free or very low cost credit union to join. You do, however, have to provide a valid social security number. That might cause some people a problem.

At 12/07/2009 1:46 PM, Blogger OA said...

Why do none of the things done in the name of "reinvesting" ever sound like investing?

"Community Reinvestment Act"
"The American Recovery and Reinvestment Act of 2009"

Could they just be needing a dictionary?

At 12/07/2009 2:01 PM, Anonymous Lyle said...

Menkins quote needs to include the Media as much as politicians. The media fear monger as much because they want the reader/watcher to come back and there by observe the adds they play. In other words we have chicken little and cry wolf media-- the sky truly is falling-- of course its raining. I have seen a piece citing apocalypse fatigue that covers this nicely.

At 12/07/2009 2:17 PM, Blogger Luis H Arroyo said...

I´m delighted with this blog...
Interesting post. I don´t know if the problem, now, is a huge demand for money -not only by people; I just have red that corporates have accumulated a high percentage of its balances sheets in liquidity; add to this the higher rate of liquidity in the cash of the banks...
All that suggest me that the FED has an ample margin of time to put in place an "anticlimax" monetary policy. I don´t see an inflation risk in the near future.
In any case, it is a free election of the agents to do like this.

At 12/07/2009 2:53 PM, Blogger Audacity17 said...

Translation....our banks are insolvent and could really use your liquidity, not to mention we can't track you as easily outside the banking system.

At 12/07/2009 3:56 PM, Blogger JMG said...

Portuguese banks have found smart ways of leaving no one free of their beneficial intervention: First, if you own a business, say a small factory, you are "requested" by your local banking branch manager to pay salaries by wiring to employee's banking accounts; employees with no banking account have, to be paid, to open an account; then employees are offered credit cards, to be used under stratospherically rates of interest; and last, if the owners of the accounts keep only small amounts on balance, they are charged for “costs of account maintenance”. Bank of Portugal is blind and deaf to this and much more. Here and there on boards of directors one stumbles upon graduates from foreign universities. Guess from which country these universities are.

At 12/07/2009 4:12 PM, Blogger Milton Recht said...

Free is a misnomer when it comes to banking. Costs are just shifted to other areas so total costs to an average customer must be considered. It is something the FDIC does not consider in unbanked. For example, the time it takes for a check to clear and the funds become available for use, while regulated, varies at different banks and at non-banks.

If one receives a check and wants to use it to pay a bill, it is difficult at a bank to accomplish the goal. If the check is deposited into a checking account without sufficient funds in the account to cover the check, it can be several days before the check clears. You cannot pay the bank to have the cash immediately. However, you can go to a checkcasher, pay a fee, have the cash immediately, and get a money order to pay the bill or pay your utility bill right there at the check casher with the funds from the check. Additionally, many hard working people cannot get to a bank during their working day and check cashers and other non-bank service providers are open at more convenient times, speak the foreign languages of their customers, and if necessary, easily remit the funds to another country.

The reason there are unbanked is that banks either do not provide the needed service within the necessary time frame of people who need to live from check to check, or the total cost, including things like getting your electric turned off, are higher at banks than at the alternatives that the unbank use.

The FDIC fails to understand it is a rational economic decision that the unbank are making. Unless there are unmet needs of the unbank, it should leave well enough alone. If banks could provide the needed services at a lower price and more conveniently, the banks will increase their market share of this clientele. Otherwise, the unbank population will remain. These unbank providers are filling a market need that banks are not meeting.

To me it is a subtle form of xenophobia and elite paternalism. The regulatory class of people (e.g. FDIC) determines that its way of doing things is the only way and the uneducated and minority ethnic groups are too ill informed and irrational to know what they are doing and what is best for them. The groups must be converted for their own good. The regulators justify their concern and actions by doing some partial and incorrect analysis that shows the group in question is overpaying and therefore it is necessary for the government to step in and protect people against their will and voluntary actions.

At 12/07/2009 4:20 PM, Blogger OA said...

Audacity17 said...

Translation....our banks are insolvent and could really use your liquidity, not to mention we can't track you as easily outside the banking system.

That last part is becoming more of an issue. Look at what happened with those UBS accounts. Keeping and flowing assets through financial accounts guarantees the tax man can come looking for them.

I would bet the gold run started when the US started scrutinizing wire transfers more heavily. First for security concerns, and later for tax reasons.

At 12/07/2009 6:33 PM, Anonymous Dr. T said...

Wow! Sixty million Americans whose financial transactions cannot be reported to the federal government and whose savings (if any) are not easily uncovered by the IRS.

These Americans should be forced to use bank accounts. We should tack that onto the Health Care Financing bill: everyone will be forced to buy an approved health insurance plan with funds drawn from an approved bank account. We cannot allow independence and nonuniformity!

At 12/07/2009 9:17 PM, Blogger QT said...

Milton Recht,

Excellent post..very persuasive arguments.

At 12/07/2009 10:04 PM, Anonymous Lyle said...

Note however that forcing Social Security recipients to have bank accounts has resulted in a drop in Crime, no more check theft from people on the way to the bank.
Note that the issue is much more payroll taxes than income tax, does that get paid. If you live on the cash economy that also does not get paid. So look at the payroll tax and not the income tax. Of course those illegals who do get paid thru checks are great for Social Security, they pay in but because the use fake Social Security Numbers, will never get anything back.

At 12/08/2009 12:45 AM, Anonymous Anonymous said...

I count as one of the "underbanked" since at least once a year I buy a money order at the US Post Office where they are cheaper then at a bank. I've got a high 6 figure net worth. Another problem of definition?

At 12/08/2009 7:27 AM, Blogger W.E. Heasley said...

If X millions are “Unbanked”, and if this was truly a problem, then what is the least expensive and simplest solution.? Economics is about the allocation of scarce resources to competing ends as well as finding the least expensive and simplest solution to a problem.

The disconnect by Progressives, Statists, Socialists, etc. comes when there is a perceived problem, Economic solutions are circumnavigated and shunned, and the problem needs to be immediately be solved by government intervention.

Plus, as pointed out in the comments above, the Subterranean Economy is at work. As Local, State, and Federal Taxes increase, the size of the Subterranean Economy increases. Further, when taxes go beyond equilibrium as described in the Laffer Curve, the Taxed and Regulated Economy suffers from accelerated tax aviodence. One of those tax avoidence technique is to go “Unbanked”.

At 12/08/2009 11:57 AM, Blogger OBloodyHell said...

> Could they just be needing a dictionary?

No, they're using the Humpty Dumpty approach:

"I don't know what you mean by 'glory,'" Alice said.
Humpty Dumpty smiled contemptuously. "Of course you don't – till I tell you. I meant 'there's a nice knock-down argument for you!'"
"But 'glory' doesn't mean 'a nice knock-down argument,'" Alice objected.
"When I use a word," Humpty Dumpty said in a rather a scornful tone, "it means just what I choose it to mean – neither more nor less."
"The question is," said Alice, "whether you can make words mean so many different things."
"The question is," said Humpty Dumpty, "which is to be master – that's all."
Alice was too much puzzled to say anything, so after a minute Humpty Dumpty began again.
"They've a temper, some of them – particularly verbs, they're the proudest – adjectives you can do anything with, but not verbs – however, I can manage the whole lot! Impenetrability! That's what I say!"

Liberal thought processes (I use the term loosely) starting to make sense to you, now?

At 12/09/2009 12:17 PM, Blogger sethstorm said...

The only way they went wrong is in how they included various nonbank instruments. A pawn shop would be stretching it. It would be better to divide it into three groups based on frequency - none at all, once a year to once a month, and more than once a month.

No, it is a case where a captive market meets unscrupulous providers.

The typical payday loan rate of 300%, with a low repaying rate does not mean "end consumers served very well". That is, unless you are willing to consider a more vulgar definition of "served".

Thankfully Ohio has the captive nonbanks mostly covered, and with the willingness to finish the job.

Plus, as pointed out in the comments above, the Subterranean Economy is at work. As Local, State, and Federal Taxes increase, the size of the Subterranean Economy increases.

Circumvention can be dealt with.

At 12/11/2009 2:21 PM, Anonymous Anonymous said...

If you shop at Walmart or if you work with people who don't have bank accounts you learn that many people are afraid of banks. Additionally, there lives are full of chaos and paycheck to paycheck. They don't have time to sit down and establish a bank account because the kids are screaming. The pay a fee every week to cash a check while on lunch break. Later that day they knock on the landlord's door with the rent money and that night they buy the week's groceries. They are not bad people they are just in a hurry. None of this is the bank's fault. It is just the way it is for many people.


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