Partners (Summer 1998)

Photograph by Tramaine Colbert Age 17
Photograph by Tramaine Colbert Age 17
Being Accountable:
A Descriptive Study of Unbanked
Households in the U.S.

Jeanne M. Hogarth, Senior Analyst, Consumer Policy, Federal Reserve Board and
Kevin H. O'Donnell, Research Assistant, Federal Reserve Board

Nearly 13 percent of households are "unbanked;" that is they do not have transaction accounts offered by the nation's mainstream banking system. This equates to nearly 12 million U.S. households. With the passage of the Debt Collection Improvement Act of 1996, significant numbers of the unbanked will be drawn into the mainstream banking system over the next few years. However, we know little about these households—who they are and why they have no bank accounts. And, as a consequence, we know little about how to structure new types of accounts for these households and what can be done to ease their transition into being account holders.


The Debt Collection Improvement Act requires that all recurring federal benefit payments be made via electronic funds transfer (e.g. Social Security, VA benefits, Government Pensions, Military Pay/Pensions). In response, the U.S. Department of the Treasury has created the Electronic Funds Transfer, 1999 program (EFT99), culminating in the establishment of an "all electronic" Treasury by January 1, 1999.

Most certainly some of the 12 million unbanked households have members who are recipients of federal benefit payments and who will be drawn into the mainstream banking system as a result of ETF99. Many of these individuals will be drawn from the ranks of the low-to-moderate income households that have relied heavily on the Alternative Financial Sector– check cashers, pawn brokers, etc.—for their banking and credit needs. These individuals will benefit from the increased access to and availability of banking and credit services and lower fee structures of the mainstream financial sector (MFS) and corresponding reduced reliance on the AFS.

The MFS will benefit from ETF99 over the next few years in terms of improved efficiency of payments delivery and reduced costs of electronic funds transfers compared to current check clearing processes. Reductions in paperwork will also reduce the administrative costs of the banks thus contributing to great cost efficiencies. Improvements in the secure delivery of funds will cut down on fraud which will result in cost savings for the industry, as a whole. Banks currently lose $70 million annually from forged Treasury checks (U.S. Treasury, 1996).

In return for these administrative cost savings, banks will need to provide accounts for recipients of federal benefit payments covered under ETF99. In 1989, the American Bankers Association estimated that more than 50 percent of commercial banks already offered some sort of basic banking or lifeline accounts (low fee, low balance requirements, limited service accounts), primarily for low-to-moderate income households. Given that substantial numbers of low-to-moderate income households are currently unbanked, it appears that there has been very little marketing of these accounts and many households remain uninformed about them.

In order to formulate a more comprehensive picture regarding the key attributes of the unbanked, the objective of this paper is to explore the demographic characteristics of unbanked households and some of the main reasons they cite as to why they do not have checking accounts. This will provide a framework for future research and studies related to the banking of unbanked households over time and the corresponding ease or difficulty with which this transition will be accomplished.

1997 Profile of Bank Account Ownership
1997 Profile of Bank Account Ownership
Households Who Have No Bank Accounts
Households Who Have No Bank Accounts
Most Common Reasons Cited by Households
Without Bank Accounts

Most Common Reasons Cited by Households Without Bank Accounts
Source: Survey of Consumer Finances, 1995

Results Of those households without bank accounts, about half (49%) also did not use banks on a regular basis. Higher proportions of minorities (Hispanics, African Americans, and others) were among those who did not use banks. Unbanked females were more likely to not use banks than unbanked males. Unbanked households who do not use banks were slightly younger, had slightly less education, and had lower incomes than their counterparts who use banks. Unmarried, unbanked households were more likely to not use banks than their married counterparts. Unbanked, non-employed households were more likely to not use banks than employed or retired households.

To better understand these "hard core" unbanked households (households with neither a checking nor savings accounts and who do not use banks on a regular basis), we explored the reasons they gave for not having a checking account. The three main reasons cited for not having a checking account were: 1) don't write enough checks (21%), 2) don't like dealing with banks (21%), and 3) don't have enough money (32%). It is interesting to note that a larger proportion of persons who do use banks (versus those who do not use banks) say that the reason they don't have an account is that they don't like dealing with banks.

Relative to the overall proportions of households citing a given reason, Hispanic households were more likely to cite economic reasons while African American households cited a combination of not having enough money and not writing enough checks. Whites and others were more likely to cite "don't have enough money" and "don't like dealing with banks." Women were more likely to give economic reasons (not enough money) for not having an account while men were more likely to say they don't like dealing with banks. Married households were more likely to say they don't like dealing with banks while unmarried households were more likely to say they don't have enough money. Older persons, persons with lower educations, and persons with lower incomes were more likely to say they don't have enough money or they don't write enough checks.


The profile of households without bank accounts that emerges from these data is that they are minority, female, young, low income, less educated, unmarried, non-employed with a slightly higher probability of living in the South or South-Central regions. Furthermore, households without accounts who also do not use banks are even more likely to be minority, female, young, low income, less educated, unmarried, non-employed, and living in the South.

The majority of respondents in the 1995 Survey of Consumer Finances who do not have accounts and do not use banks cited "don't have enough money" or "don't write enough checks" as the main reasons for not having a checking account as opposed to "don't like dealing with banks." Thus, it may not be difficult to draw these individuals into the mainstream banking system with the establishment of basic banking accounts. Given that these households currently are unbanked despite the fact that many banks already offer such accounts, educational efforts are needed to inform unbanked recipients of federal benefit payments about the need to open up bank accounts and the availability of these lower cost types of bank accounts.

Furthermore, these new account holders will need to be educated on how to manage their new accounts. Opportunities for public/private partnerships between community organizations and financial institutions (e.g. trained volunteers to help new account holders balance their accounts at the end of the month) are apparent. This educational effort will require cooperation and the joint sharing of information on the part of federal agencies, state governments, consumer advocacy groups, community based organizations, and main stream financial institutions.


The advent of ETF99 has implications for financial educators, counselors, and researchers. Financial planning educators will have their work cut out for them as federal benefits recipients begin to set up their EFT99 accounts. As with any new product, consumers may need some help and guidance in learning about account features and which account best suits their needs. Helping households sort through the features and fee structures of these accounts will be key educational objectives for financial educators in the next year.

Equally important will be information on using and managing these accounts. Some accounts may only be accessible through ATM and/or point of sale terminals. Consumers will need to learn not only how to use the technology, but also how to track their withdrawals and about their rights – and liabilities - under the Electronic Funds Transfer Act.

Counselors need to be prepared to help new account holders manage these accounts. Sessions on how to balance your account (whether with or without a checkbook), how to track your spending, or what to do when you're overdrawn are likely to be needed. Some agencies and organizations may want to work with financial institutions in their communities to train volunteers who can be available to ETF99 participants to help them during their first few months of learning how to use their accounts.

Given what we know about the audience (low-income, low education levels, young, female, with a large proportion for whom English is a second language), outreach efforts and education materials need to be specially targeted to these households. This may mean working in conjunction with community groups, parent organizations, churches, and established programs such as WIC and Cooperative Extension's Expanded Food and Nutrition Education Program to reach and teach these clients.

Researchers will need to monitor the progress of EFT99 and help policy makers and financial institutions fine-tune the process and the products associated with the transition. EFT99 will not affect all unbanked households, so there will be a continuing need to update the profiles we've presented in this paper.

This descriptive exploration of the unbanked has shed some light on these households. Those who will be drawn into the banking system due to EFT99 are only a portion of all unbanked households, however. Additional analysis is needed to identify other unbanked households and to understand and address the barriers to banking for these families.

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