One of the unfortunate, though perhaps unavoidable, side effects of the way our consumer credit system is set up is that the cost of financial services is the highest for those who can least afford it. There is a strong positive correlation between a consumer’s credit score and his or her income and education level, which translates into credit being more readily and cheaply available to higher-income consumers and vice versa. And consumers on the lowest rungs of the credit score ladder are all but shut out of the system.
These so-called “unbanked” consumers are shut out of regular banking services, such as checking and savings accounts and credit and debit cards. Instead, they are left to rely primarily on prepaid cards, check-cashing and utility-payment stores for their financial needs. And these are very expensive services, even as prepaid cards are quickly becoming much better than they used to be, as issuers are trying hard to drive their customers away from debit cards.
So it is always great to see someone reaching out to the unbanked and trying to bring them back into the system. That’s exactly what PNC Bank is doing through its participation in the U.S. Department of the Treasury’s Community Financial Access Pilot (CFAP) and its efforts are producing some good results, as Baltimore Sun’s Eileen Ambrose tells us.
Educating the Unbanked
CFAP’s stated goal is to
[I]ncrease access to financial services and financial education among low- and moderate-income families and individuals, especially individuals who have no bank or credit union account.
Nearly 10 million U.S. households are unbanked, the Treasury Department tells us, so there is no shortage of potential beneficiaries of such a program. PNC is participating in the pilot with its Foundation Checking account, which the bank describes as a “starter account for those with no banking experience.” After a year using their Foundation account, successful “graduates” can move on to more traditional bank accounts. There were 25,000 active Foundation Checking accounts at the end of 2010, according to PNC, but the bank hasn’t provided data on how many of these account holders have been able to successfully “graduate.”
But Ambrose tells us the story of one such “graduate” and it’s a great one. The formerly homeless protagonist who used to be paid in cash or a check that he would take to a check-cashing store now “has checking and savings accounts at PNC and is in the process of getting a credit card.”
It Will Be a Steep Climb
I hope that PNC and the other banks participating in the CFAP will produce many more success stories, but they have their work cut out for them. There is a real need for basic financial education in the U.S. A recent paper by Fumiko Hayashi and Joanna Stavins from the Boston Fed found that:
…38 percent of the sample did not know their FICO score. The youngest respondents, those with the lowest level of education or the lowest household income were less likely to know their score than the rest of the sample. Consumers with high education or income were more likely to know their scores.6 A much higher fraction of the unbanked did not know their score, compared to respondents with a bank account.
That says it all right there. Four out of ten Americans have no idea what their creditworthiness is! Hayashi and Stavins also find, unsurprisingly, that credit card holding increases “dramatically with education and income” and the same is true, though to a lesser extent, for debit card adoption.
So we know what needs to change, in order to enable the unbanked to enter (or, in some cases, to re-enter) the financial system. But we also know that educating ten million households is just not feasible, even with the best of intentions and vastly greater resources.
Nevertheless, programs such as CFAP are needed and should be marketed much more vigorously, so that unbanked consumers who are looking for a way to get banking services and are willing to accept help, can actually learn how to do that. And even a modest progress should be applauded.
Image credit: Wikimedia Commons.