Partners, Volume 13, Number 2, 2003

Curbing the Cost of the Dual Economy

At the same time banks are becoming more technologically sophisticated and the demand for paperless, electronic transactions is expanding, a parallel “cash economy” that relies on alternative financial services is also growing, especially in low- and moderate-income neighborhoods.

Increasingly fringe financial services providers such as check cashing outlets, pawn shops, car title and payday loan companies act as alternatives for traditional banking relationships. This trend is a cause for concern among community development advocates, who recognize that recourse to these services can limit an individual’s or family’s financial potential and even hamper the community as a whole.

The hidden costs of the cash economy

According to a 2001 Federal Reserve Survey of Consumer Finances, 12.7 percent of all families do not have a checking account. Among those without checking accounts, 59.3 percent have incomes in the lowest 20 percent of those surveyed, 55.8 percent are headed by persons younger than 45, and 57.4 percent are nonwhite or Hispanic.

The development of an alternative financial services industry has been exacerbated by reduction in the number of mainstream bank branches in low- and moderate-income neighborhoods. In turn, concentration of alternative service providers in low- and moderate-income communities often stymies community and economic development efforts. The absence of documented income, payment records and credit history can block individuals from affordable housing and hinder business development.

Furthermore economic data for communities whose residents operate primarily in a cash economy will not be truly accurate because of undocumented income. Just as census undercounts affect decisions related to geographic and demographic allocation of public funds, inaccurate economic data may lead to inefficient use of revitalization resources.

Because the cash economy is largely unregulated, allowing an undocumented flow of money, fringe financial service providers create a fertile environment for predatory practices that strip wealth and equity from residents. The resulting destabilization of low- and moderate-income neighborhoods thwarts redevelopment efforts.

Non-banking households are on the rise

Numerous studies have addressed the reasons for the increase in non-banking households. Among the obstacles to banking cited are:

  1. lack of access or proximity to mainstream financial services,
  2. bank identification requirements,
  3. bank fees and charges,
  4. perceived benefits of alternative services and
  5. lack of trust in the banking system.

Some analyses look more fundamentally to the impact of globalization on job migration and immigration patterns as an explanation for the proportional increase in the number of those who do not use traditional banking services.

In The State of Working America 2002/2003, authors Mishel, Bernstein and Boushey explain that global investment has led to an overall decrease in employment stability, and thus to a rise in job-related migration. They say globalization has increased reliance on part-time and temporary jobs, self-employment and other non-standard wage jobs. Such non-standard wages tend to be concentrated in low-paying industries and among minorities and individuals with a high school education or less. The analysts point out that as families attempt to manage their finances in a less structured, more volatile environment characterized by unstable jobs and wages, mainstream financial products and services may seem less functional.

Immigrant populations and dual economies

High concentrations of ethnic or immigrant populations may also contribute to the existence of dual economies. In their recent study, “The Cash Centric Behavior of the Hispanic Community,” economics professors Radha Bhattacharya and Denise Stanley surveyed 217 Hispanic individuals in Orange County, California to determine money management preferences and identify possible connections to demographic and cultural profiles.

The survey showed that 35 percent of the sample did not participate in mainstream banking. Bhattacharya and Stanley determined that the main reasons Hispanics chose not to bank were banks’ minimum account balance requirements and the need for documentation and identification.

The study also concluded that non-banking Hispanics were more likely to have lower levels of education, to speak little or no English, and to be non-residents. They found that many immigrants were not accustomed to having access to bank products and services in their home country. Consequently, operating in a cash economy was more familiar to them than traditional banking.

Negative impact of alternative financial services

A major complaint about alternative financial service providers in low-and moderate-income communities is the exorbitant fees they charge for their services. Although this is often the case, the proliferation of fringe businesses can sometimes make prices more competitive for certain products. For example, Western Union in Miami charges $9.99 plus tax for a next day wire to Mexico City, whereas a local bank would charge on average $40 for the same service in addition to requiring that the money be sent to a correspondent bank.

An equally serious and more immediate concern regarding fringe financial service providers is the incidence of other abusive practices, including misreporting or not reporting timely debt repayment. This practice essentially disfranchises individuals from access to conventional markets.

Community recourse to fringe financial service providers can create a self-perpetuating cycle: A bank branch’s ability to serve the financial needs of its local market depends in part on its capacity to generate new business. In low- and moderate-income areas with a history of disinvestment and dependence on alternative financial services, financial institutions may find it difficult to maintain profitable branches. Growth can be particularly problematic for banks that require an established bank account as a reference for loan approval. Likewise, if individuals are not banking with a regulated institution, it may affect their access to credit.

Creating access to mainstream banking

Many financial institutions are partnering with local community development programs to provide better access to banking and improve personal financial management habits. The ultimate goal is to increase an individual’s or family’s net worth over time — especially those with limited incomes. Earned Income Tax Credit (EITC) and Volunteer Income Tax Assistance (VITA) outreach programs recently helped thousands of families throughout the country file their income tax returns and obtain their EITC refund, at no charge (See Partners Vol. 13, No. 1). Those who maintained bank accounts were able to file electronically and receive their refunds within 10 days.

EITC filers without bank accounts are often targeted by tax preparers for tax-refund anticipation loans. Such loans can significantly reduce the eventual refund after fees and interest are deducted. On the contrary, when financial education is combined with access to bank savings accounts and Individual Development Account (IDA) programs, the EITC can become a powerful wealth accumulation tool for low-income families.

Several recent initiatives have focused on improving access to banking services and financial education by increasing the participation of mainstream banks. With varying degrees of success, Community Development Financial Institutions (CDFIs) and Community Development Credit Unions have dedicated resources specifically to promoting greater access to credit and banking services for low- and moderate-income individuals. In the public sector, the FDIC and the Federal Reserve Bank have partnered with other organizations in designing materials to support financial education and personal financial planning. Private sector companies, including Fannie Mae, Freddie Mac and individual banks, have also developed financial education and budgeting materials.

Strategic partnerships are a key component to reaching all segments of the population effectively. In one such partnership, the Department of Defense recently adopted the FDIC’s Money Smart curriculum for use at more than 3,000 military installations around the world, thus reaching 1.4 million military servicemen and women.

Improving the efficiency of the economy in low-and moderate-income markets will increase the success of sustainable community and economic development in those neighborhoods. Facilitating access to mainstream banking services and identifying financial products that meet the needs of low-and moderate-income families are important challenges. The response to these challenges begins with basic financial education and comprehensive solutions that include a wide network of interested partners. The alternative financial services system discourages the wealth and asset accumulation that form the vital building blocks for stable communities and neighborhoods. Bringing more individuals back into the financial mainstream is a first step toward promoting personal financial growth and community development.

By Ana Cruz-Taura and Janet Hamer, regional community development managers in the Atlanta Fed’s Miami and Jacksonville Branch, respectively.

Announcing — Partners Software Online!

In 1995, the Federal Reserve Bank of Atlanta’s Community Affairs Program designed the Partners Software program as a development tool for community groups, financial institutions, government agencies and community development practitioners providing affordable mortgage programs.

We are excited to announce a new online version of this software. While similar to the original, the online program is geared more toward consumers who want to know how much house they can afford and ways to improve their financial profile to qualify for a mortgage.

For more information, please check out the beta version of Partners Software Online on our website at The original Partners software remains available from


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