Monday, April 30, 2012

The World’s Unbanked Poor

April 30, 2012, 9:00 AM

After the global financial crisis, banks may not be viewed as the most trustworthy organizations, but generally they are considered a safer place to keep money than stowing it under a mattress.
new World Bank report shows that the proportion of adults who have an account at a bank, credit union or other formal financial institution in high-income countries is more than double what it is in developing countries — and suggests that the very lack of such an account may perpetuate poverty.
“Giving people a safe, affordable place to save their money is important,” saidLeora Klapper, lead economist in the finance and private sector of the World Bank’s development research group and an author of the report.
The study, based on a survey of 150,000 adults in 148 economies conducted by Gallup, estimates that there are 2.5 billion adults around the world who do not have a formal account, and that about 65 percent of them said they did not have enough money to use one.
“Formal accounts and savings may help poor people smooth their consumption and weather unexpected events such as unemployment, accidents, illnesses and deaths without necessarily resorting to expensive debt,” Ms. Klapper wrote in an e-mail. “Financial inclusion enables poor people to save and to responsibly borrow — allowing them to build their assets, to invest in education and entrepreneurial ventures — and to improve their livelihoods.”

There are some countries — including Cambodia, the Democratic Republic of Congo, Guinea, the Kyrgyz Republic, Turkmenistan and Yemen — where fewer than 5 percent of adults have a formal financial account.
Banking habits differed by region. Among people who are living on less than $2 a day, 27 percent of those in South Asia and East Asia have some kind of formal account. In the Middle East and North Africa, only 6 percent of those surviving on less than $2 a day do.
There is also a gender gap. In developing economies, men are much more likely to hold a formal account than women: 46 percent of men in these countries report having an account, while only 37 percent of women do.
The United States stands out for the proportion of its poorest residents who do not have an account at a formal financial institution. More than a quarter of those in the poorest quintile in the United States do not have an account, compared with just 3 percent of that quintile in Australia and Britain, and 9 percent in Canada.
Ms. Klapper said that among those who do not have bank accounts in the United States, more than two-thirds are women while a quarter are immigrants. And 46 percent cited lack of trust as a reason.
Although having a formal account typically helps people save more safely, even those who don’t have formal accounts put aside money for future use.
According to the report, 36 percent of those polled had saved or set aside some money in the previous 12 months. Not all of that money was going to bank accounts, of course. In wealthier countries, people also use various investment products and in developing countries, residents used community-based savings clubs.

Sunday, April 29, 2012

How Banks Are Getting Richer Off The Poor

It’s not easy being a big bank these days. Consumers hate them, shareholders have beef with them and regulators can’t figure out what to do with them.
"People treat banking like an electric utility where if you flip the switch it has to be there for you. But the truth is banking is a business that aims to makes profits for shareholders," Nancy Bush, bank analyst.
At the end of the day though, a bank’s gotta do what a bank’s gotta do: make money. But howbanks go about making that money is one way to differentiate them. The New York Times today writes about a few banks out there looking to boost business by offering low-income consumers products laced with loads of fees and plenty of interest.
Some banks, namely U.S. Bank, Regions Financial and Wells Fargo, are luring low-income consumers to sign up for things such as prepaid debit cards and payday loans–products that typically come with all sorts of fees and charges, the Times reports. Why are banks courting these customers with pricey products?  Well, besides the obvious (fees) the products themselves weren’t subject to all the regulatory overhaul brought by the Dodd-Frank reform act. That leaves more room for banks to make money in an environment where doing so has become more difficult.
The Times story features David Wegner. He makes about $1,200 a month and is looking for a checking account.  He ends up with  U.S. Bank where he is offered all sorts of financial products geared toward low-income consumers. The branch offered him prepaid cards, check cashing and short-term loan options. He tells the Times that he felt like he was being treated like a second-tier consumer.
The truth is that when it comes to profitability Wegner is indeed a second-tier customer compared with other customers with higher checking balances. And you know what? There are higher tier consumers than them too like the ones with bigger checking balances. Consumers with multiple mortgages, checking accounts, savings, brokerage accounts and loans are valued more.
Nancy Bush, a bank analyst, puts it this way, “It goes back to the way some people have viewed banking. They treat banking like an electric utility where if you flip the switch it has to be there for you. But the truth is banking is a business that aims to makes profits for shareholders.”
Consider that 25% to 40% of checking accounts at the big banks are money losers. That’s according to Dick Bove who says the way banks used to make money from those unprofitable checking accounts is through debit card swipe fees and/or overdraft fees. Regulations like the CARD Act and Durbin Amendment have dramatically shrunk the revenue from those activities. “In response, banks are are either kicking out those unprofitable consumers by driving up fees or providing them with other products that are higher in cost,” Bove says.
Note that other big banks like Bank of America,JPMorgan Chase and Citi aren’t mentioned in theTimes story. That’s because they don’t offer these so-called alternative lending products for low-income consumers Bove says. Those banks aren’t relying so heavily on the retail banking sector for revenue and profits while banks like Wells, Regions, U.S. Bancorp and Fifth Third Bank are much more retail banking consumer for business.
The bigger problem here is that low-income consumers don’t have much of an alternative when it comes to banking. There’s a growing population of people who don’t have a bank accounts because they feel they can’t afford it. They are called the un-banked and under-banked; people  who don’t have enough funds and/or mostly deal in cashtransactions and who say they can’t afford bank fees. They turn to things like pre-paid debit cards whichaccording to the Federal Reserve is the fastest growing non-cash method of payment.
Unfortunately they can also be laced with an alarming amount of fees and a lot less protection than your regular old debit card.
Products geared toward low-income consumers have typically been offered by payday loan companies and storefront lenders or even big retailers like Wal-Mart. Consumer Reports analyzed the pre-paid card industry recently and here’s what it found:
  • Fees can be high, multiple, and confusing
  • Not all prepaid cards provide adequate protection against theft of funds using the cards or card account numbers
  • Promised credit lines or features to build a credit record may be expensive and overstated
  • Federal deposit account insurance for prepaid cards applies differently than i does for bank accounts and may be capped at less than the value of all of the prepaid cards issued by a particular card program.
In its analysis the group sampled 16 prepaid cardsand found 13 of the 16 prepaid cards charge monthly fees, ranging from $2.95 for the nFinanSe card to $9.95 for the Vision Premier card and the Univision card. ATM withdrawal? Twelve of the 16 cards impose a fee for checking balances at ATMs, ranging from 45 cents to $1 per balance inquiry.

So now some banks are getting into the game in a bigger way. As the Timesnotes, these banks say they’re providing services for customers who might not be able to get banking access without them. That might be true but it’s a weak argument, and one that does nothing for the low-income consumer.
Indeed it seems the costs of banking outside of the traditional methods are higher, and the alternative for departing banking customers are not much better. In fact, it looks a lot worse according to some of those pre-paid card costs.
Here’s BB&T CEO Kelly King making the point in a letter to shareholders recently:
Particularly during these uncertain economic times, the deep and enduring relationships we form with our clients are crucial to both our success and our clients’ financial well-being. Unfortunately, the value of these banking relationships has been too easily discounted or even dismissed in recent years as banks have unfairly borne the brunt of blame for the financial credit crisis. We believe it’s important for banks like BB&T to reaffirm the value of having a relationship to help our clients meet their financial goals. For example, a national news reporter recently wrote about her experience living without a bank for only one month. In addition to the hassle of trying to pay bills and handle other routine transactions without a checking account, credit and debit cards or direct-deposited paychecks, the reporter was charged $93 in fees during the month for money orders, paycheck-cashing services and the like.
So, the bottom line for now is that the sad state of banking for the low-income consumer is more about picking your poison than than anything else.
Follow me on Twitter: @_halah