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The Unbanked
The US Treasury department estimates more than 35 million people in America lack access to bank services.
- This number includes rural poor and minorities in inner cities who have been unbanked for reasons ranging form lack of education to bad credit, and the growing wave of hard working immigrants, primarily Hispanic that have entered the country in the last decade.
- These unbanked individuals conduct all of their common transactions through cash payments and regularly convert their paychecks into cash and other financial instruments such as money orders.
- People who remain outside the banking system often fall prey to predatory lenders and high charges levied by wire-transfers services, check cashing locations, auto-title loan companies and credit companies.
- Most check cashing locations charge between 2 and 3 percent of the face value of a check to cash a check. A family with a $20,000.00 year income could easily be paying $600.00 a year of their limited annual income just to receive the most basic of financial services.
In addition, a large portion of the immigrant population sends regular payments to family members in their country of origin, again paying high fees working through wire-service companies.
- In 2002, immigrants sent more to $30 billion to Latin America, with nearly $10 billion of that total into Mexico.
- Surveys indicate that 60% of Latinos have sent international transfers, with 40% doing so on a regular basis averaging $230.00 month. Cost of transfers range from 5% to 20%. If our family with a $20,000.00 annual income is transferring $2500.00 a year they are likely paying $250.00 + (10%) in service fees to do so.
- In just these two examples our family with a $20,00.00 income is paying .0425% of their gross income in service fees, add to that the cost of money orders and other guaranteed instruments needed to complete regular transactions and the total can easily represent 5% of their annual gross income for “financial services”.
Before approaching this market it will be helpful to understand why they are willing to accept these seeming outrageous fees.
- First there is a cultural distrust of banking institutions; many of these immigrants come from countries where currency devaluations and bank failures have been common. In addition, in many of these countries the banking system caters nearly exclusively to the rich. This brief story helps to illustrate the situation:
A consultant (Stern) was doing a retail strategy assessment for a bank in Ecuador that invested heavily in technology but still had its savings and checking accounts on different systems. To take out savings and put them into checking, customers had to wait in two lines.
Stern watched one man stand in the wrong line for over an hour. Illiterate, he also had the wrong slip to present to the teller, who scoffed at him for his mistake and offered no help. “His face was one of unbelievable pain,” Stern says. “He wound up back at a table trying to figure out which slip was the correct one, too intimidated to ask a banker for help.”
When Stern relayed this incident to the bank’s chairman, he laughed at her. “The man doesn’t know how to read,” the chairman said. “That man,” Stern countered, “is your country’s customer.”
Imagine being an immigrant coming from that background to pursue the American Dream.
- It can be quite difficult to open a checking account where minimum balances required are often $500.00, and as a low-income earner living paycheck to paycheck who runs their account down to zero at the end of each pay period, it is quite easy to “bounce” a check, with each bounced check incurring $40.00 or more in charges.
- Add to that communication difficulties and documentation challenges.
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