Viewpoint: Most Americans Are Banked. So Why Aren’t More of Us Financially Healthy?

By Eva Wolkowitz and Rob Levy, Center for Financial Services Innovation (CFSI)

The recent release of the FDIC’s biannual National Survey of Unbanked and Underbanked Households is chock full of good news: The era of unbanked households and so-called “bank deserts” may soon be behind us. The study found that nearly every American who wishes to have a basic account to conduct daily financial activities, such as depositing wages, paying bills and amassing small savings, can have it. Consumers also have multiple ways to access these accounts to fit their lifestyles. Some highlights:

• Banked households – those who have at least a checking or savings account at a bank or credit union – have risen to 93 percent. Only 7 percent of Americans are unbanked, the lowest rate since the survey started in 2009.
• 27 percent of unbanked households now use prepaid cards—which hold funds in an FDIC-insured account, can function as a bank account substitute, and have dramatically increased in quality over the past several years.
• Together, these findings bring the effective rate of financially included households up to a whopping 95 percent and the financially excluded down to 5 percent.
• Only 2 percent of the unbanked cite a lack of convenient bank branch locations as the primary reason for being unbanked, a reason that changes little when demographics such as race and income levels are accounted for. (By far the most popular reason for lack of an account — chosen by 38 percent — was lack of enough funds to keep in an account).
• 70 percent of banked households report using kiosks to conduct banking, 60 percent bank online, and 32 percent conduct banking through their mobile phones.

Wow, right? Problem solved. After all, a 95 percent US financial inclusion rate is nothing to sneeze at. And there’s an ever-increasing number of financial solutions available to nearly all consumers through online and mobile access. So … hurrah?

Not so fast. This is where the difference between financial health and financial inclusion becomes paramount. Financial health—the ability to manage one’s day-to-day financial life, handle unexpected expenses, and take advantage of opportunities to get ahead—remains out of reach for millions of Americans. CFSI’s Consumer Financial Health Survey found that a whopping 57 percent of U.S. households are financially unhealthy, and that financial health impacts even those earning middle-class incomes and beyond.

There are clear signs of financial health vulnerability among the FDIC’s findings.

• 44 percent of Americans lack even small savings for emergencies, including 27 percent of those earning more than $75,000 annually.
• 21 percent of households reported volatile monthly incomes that varied “somewhat” or “a lot.” Research increasingly shows that income volatility leaves many households unable to predict next month’s outlook or plan effectively, threatening their financial health.
• 7 percent of banked households turned to alternative, non-bank (and often low-quality) credit such as pawn or payday loans, including 4 percent of those who earn more than $75,000 annually. These products are typically used by consumers with low or absent credit scores, a key indicator of poor financial health.
• The problem only compounds for households with high income volatility: 40 percent of households with high income volatility made use of alternative payments and credit products, compared with only 22 percent of those with steady incomes.

Of course, the picture isn’t all gloomy. There are some bright spots for those struggling with financial health that show the way forward.

While not enough consumers save, building savings is possible—even for those who have lower incomes or are underbanked. 31 percent of those with incomes under $15,000 and 42 percent of those with incomes from $15,000 to $30,000 do save for emergencies.

Consumers also are leveraging new payments tools and reducing their reliance on high-friction (and often low-quality) products. Use of money orders is down 15 percent among all users, and check cashing is down 18 percent among the unbanked, who used them most. Instead, prepaid card use continues to rise, increasing by 24 percent for all households in the past two years.

The FDIC biannual study confirms that it’s time to move past the focus on simply getting people plugged into an account, and instead turn our attention to getting people to use financial products with the goal of improving their financial health. The first step is asking ourselves how financial services can better serve lower-income consumers, smooth income volatility, encourage savings activity and provide robust, high-quality credit options.

CFSI recently launched the Financial Health Beta Project to help providers measure and take a more proactive role in improving their customers’ financial health. We’re seeing a large number of providers adopting measurement of financial health as a cornerstone of their business strategy. As for us, we’d like to see more Americans go from being “financially included” to “financially healthy”—and having the next FDIC report reflect progress there is something we can all cheer about. Hurrah, indeed.

Eva Wolkowitz analyzes emerging industry trends and innovations for CFSI, with a focus on market dynamics, financial technology and consumer usage patterns that impact consumer financial health.

Rob Levy leads CFSI’s financial health initiative, coordinating a multipronged effort to bring consumer financial health into the center of how companies do business. For more information, contact [email protected].

In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.