With growth returning to the strategic agendas of many U.S. banks, new research about the unbanked and underbanked population of New York City offers insights about unrealized market opportunities — and also highlights some of the challenges banks face in tapping into those opportunities. According to a study commissioned by the city's Department of Consumer Affairs' (DCA) Office of Financial Empowerment (OFE) , more than 825,000 adults in New York City — 13 percent of all households — do not have bank or credit union accounts, but instead handle financial activities such as bill payment and cashing payroll checks by using check cashers and other "fringe" or alternative financial service providers. This is compared to 7.7 percent of unbanked households nationwide, according to the Citywide Financial Services Study, conducted for DCA by Acxiom and Social Compact, a non-profit research firm.
"The building blocks toward financial empowerment [include] having an account at a bank or credit union," stated DCA Commissioner Jonathan Mintz, who presented the research at a forum hosted by the Center for New York City Affairs at The New School in New York City. "One of the critical building blocks, clearly, is having a mainstream banking account relationship. It makes it easier to save. You get every dollar of your paycheck; you have opportunities to save money; it prevents from theft; you can be smarter about how to spend money; it helps pay bills in a more reliable way, [and to] qualify for loans."
That's why the study's findings are so disturbing, according to Mintz. "We have a big problem here. What we found is truly disheartening. New Yorkers are more likely than people in the rest of the country to go without a bank account." The 825,000-plus unbanked New Yorkers represent a population segment bigger than the population of Miami and Pittsburgh combined, he noted, adding that, "The sheer volume of people who depend on [alternative financial services providers] represents an enormous market, and a huge opportunity for banks and credit unions."
But the long-standing assumption that the main cause of unbanked status is a lack of bank branches in neighborhoods with a high number of unbanked or underbanked people was not entirely borne out by the research. In fact, The Citywide Financial Services Study, which represents the first time the number of unbanked adults in New York City has been quantified, found that the city's top 10 unbanked neighborhoods average one bank or credit union present for every two alternative financial services providers, compared to 1.5 banks and credit unions for every alternative financial services provider citywide. "Opening a financial institution in an underserved neighborhood is not a cure-all," Mintz observed. "Living close to a bank or credit union is not a solution as to whether or not you'll open an account."
According to the study, concern about bank fees such as overdraft or monthly fees, is the main reason unbanked residents do not use banks or credit unions. This is a somewhat ironic development, considering that, according to the study, residents in just two New York City neighborhoods " Jamaica, Queens, and the Melrose section of the Bronx -- spent more than $19 million a year on check-cashing fees. But speakers at the forum emphasized just how extensive distrust of traditional financial institutions continues to be.
"A low-wage worker could spend as much as $40,000 over their lifetime in check-cashing fees " imagine what it could be doing in a checking account," said Cathie Mahon, executive director of the OFE and assistant commissioner at the DCA, who participated in a panel discussion at the forum. "From our study, the highest indication why people weren't banking was fees, and their concern about the unpredictability of fees. Even though check cashing may cost you a considerable amount, you know what you're paying for" " as opposed to fees such as overdraft fees charged by banks, which Mahon and other panelists described as "hidden fees."
Concurring, panelist Leslie Parrish, a senior researcher at the Center for Responsible Lending (CRL), said that when people use check cashing services, "In a lot of ways, people who are unbanked are making a very rational choice. They can budget for that amount." And panelist Deyanira Del Rio, associate director of the Neighborhood Economic Development Advocacy Project (NEDAP) weighed in, "So many bank accounts with courtesy or automated overdraft can be financial landmines for people who can't maintain a balance in their accounts. There needs to be a lot of reform before we can steer low-income people to banks."
DCA Commissioner Mintz contended that a key to convincing people to open bank accounts is "about the products and services actually being offered by those institutions." Among the steps DCA is taking to help people transition from high-cost fringe financial services " and to help the industry "provide the right information and right products to the marketplace," in Mintz's words " is the creation of the NYC SafeStart Bank Account, the city's first banking product available to all New Yorkers. It is an ATM-based starter account that can never be overdrawn, and is offered in partnership with Amalgamated Bank, Bethex Federal Credit Union, Brooklyn Cooperative Credit Union, Capital One Bank, Carver Federal Savings Bank, Checkspring, Lower East Side Peoples Federal Credit Union, MT Bank, Neighborhood Trust Federal Credit Union, and Union Settlement Federal Credit Union. Any New Yorker is eligible to open a NYC SafeStart Account, which, for the first two years, includes no overdraft fees, no monthly fees (provided minimum balances are met), minimum balance requirements of $25 or less, and an ATM card.