- Achintya Ray, Ph.D is Professor of Economics in the College of Business at Tennessee State University.
Success in life basically depends on one’s ability to participate in the modern financial system. Our accounts in banks and credit unions are the main foundations of our financial lives.
Most of us get our paychecks deposited into bank or credit union accounts. We also pay our bills by writing checks or using bill payments from these accounts. We regularly check our savings using smartphone apps connected to these accounts.
The credit and debit cards we use are also linked to various banks and allow us to participate effortlessly in a digital economy while keeping transaction costs low.
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Households without a checking or savings account at a bank or credit union incur significant costs by being forced to use expensive services like payday loans, check cashing services, fee prepaid cards high, etc. Sadly, hundreds of thousands of Tennessee households find themselves in this situation every day. The FDIC Survey of Household Use of Banking and Financial Services found that about 8.1% of Tennessee households are “unbanked,” meaning no one in those households had a checking or savings account at a bank or credit union.
Assuming an average household size of 2.5, approximately 220,000 households containing well over half a million individuals are unbanked in Tennessee. Nationally, about 5.4% of households are unbanked. Unfortunately, Tennessee’s rate of financial exclusion (measured by the percentage of “unbanked” households) is 50% higher than the national average. This is an epidemic proportion.
Moreover, Tennessee’s financial exclusion is much deeper and wider than any of our neighboring states: Alabama (7.6%), Arkansas (7.1%), Georgia (7.4%), Kentucky (6 .5%), North Carolina (3.4%), South Carolina (5.2%) and Virginia (4.4%). Such pervasive financial exclusion inflicts tremendous costs on the people of Tennessee. If Tennessee had the same level of financial exclusion as North Carolina, we would have had about 126,000 fewer unbanked households.
Nerdwallet Detailed Analysis suggests that each unbanked person faces approximately $198.83 in additional expenses for using check and money order cashing services. In other words, an unbanked household with 2 incomes should lose enough money in check and money order cashing services that could have helped them cover about 2 months of utility bills.
Indirect costs do not help the situation either. Implicit interest rates on predatory payday loans for very small amounts can often be as high as 300%, as the Nerdwallet’s analysis suggests so. Simple calculations on the back of the envelope suggest that 220,000 unbanked households each losing $350 a year in costly fees and interest will collectively incur about $77 million in avoidable costs.
The true financial impact of the financial exclusion epidemic may be considerably greater than even this astronomical figure. To put this in another perspective, an avoidable loss of $100 million is a large enough sum of money to cover $2,500 in tuition and fees for 40,000 students.
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Unbanked households also face considerable challenges in establishing their credit history, obtaining a mortgage or a car loan. The inability to build a good credit history also affects their ability to build wealth throughout their lives, perpetuating the vicious cycle of poverty and increasing dependence on multiple welfare programs. Integration with the financial mainstream can be one of the main drivers of creating wealth and reducing chronic dependency on welfare programs.
Tennessee urgently needs a strong public-private partnership to combat the epidemic of financial exclusion. Various governments and leaders in the banking community are in an excellent position to leverage current technology to entice hundreds of thousands of households to open inexpensive FDIC-insured checking accounts at banks and credit unions.
These accounts can be connected to secure debit cards and credit cards facilitating inexpensive digital transactions, allowing these households to not only save money, but also participate in a booming digital market. boom without having to worry about high transaction fees.
Achintya Ray, Ph.D is Professor of Economics in the College of Business at Tennessee State University.