Money Mondays: Living Without A Bank

Tom: You join us this morning with a very interesting topic today – the unbanked.

Mellody: It is an interesting subject, tom, even if it sounds strange. Currently, surveys show that more than 7 percent of households representing some 25 million adults – or roughly 1 in 10 American adults – do not have access to traditional bank accounts.

That may not seem like a big issue, but there are a number of positive benefits that come along with having a bank account. But there is good news! The reason that I bring it up this morning is because last week the Obama administration announced that it would launch an effort to address this problem. So, lets talk about the unbanked!

Tom: Sounds great! Can you tell us about the negative impacts, Mellody?

Mellody: There are a number of difficulties that individuals can encounter when they do not have access to a bank account. For example, without a bank account, it is very unlikely that you will have access to a credit card or a loan, which means you are not able to build your credit score.

In the U.S., some 26 million consumers do not have enough of a financial history in 2010 to get a credit score, meaning that paying rent and utility bills on time wouldn’t be sufficient to gain access to credit. We have talked about how important it is to have a credit score, as it allows you to demonstrate responsibility, and qualify for everything from a cell phone plan to a mortgage.

Secondly, without a bank account, many individuals incur significant fees in order to operate financially. Consider something as simple as cashing a check. We all know about the cost of payday loans, but if you do not have a bank account, you may have few other options for your paycheck. Similar fees and deposits pop up when you do not have a credit card or debit card for utilities or ongoing charges.

Finally, if you do not have a credit card or access to credit in the event of an emergency, you may have to resort to something such as an auto title loan or the like in order to find the resources to deal with that particular emergency. Without having access to what most of us consider everyday financial tools, managing one’s finances can actually be quite challenging.

Tom: Who are most likely to be unbanked?

Mellody: An FDIC survey last year found that the unbanked fell into a number of categories. One of the primary reasons people cited for being unbanked is a recent financial crisis, such as a job loss or bankruptcy. Younger people are also likely to be unbanked. Finally, a significant number of Americans who are unbanked are concentrated in non-Asian minority and lower-income households.

Of all of those who reported not having a bank account, almost 58 per cent cited not having enough money to keep in an account to meet a minimum balance requirement as the reason for not having an account, while almost a third said high or unpredictable fees were the main reason not having an account.

Mellody: Yes, but I would not advise it. As I just mentioned, some people simply want to avoid fees or charges that come along with accounts, or do not like having to deal with a minimum balance. However, if you have access and the ability to keep your own account, it is important that you do, for the reasons we have talked about today.

Tom: What efforts are being taken by the Obama administration?

Mellody: It has not been developed into a program yet, but the Obama administration launched a new initiative to boost bank access for the millions of Americans who currently do not have it. On Tuesday of last week, the Treasury Department hosted a conference to examine possible solutions, and announced plans to partner with nonprofits and companies such as J.P. Morgan, Paypal, and The Gates Foundation to reach low-income and other underserved populations in the U.S.

Possible solutions include was looking at better ways to employ technology to offer banking services, which has emerged as a key point of access in developing countries as a result of the growing use of mobile phones and mobile payments. So, while there is nothing solid at this point, the White House is exploring ways to move forward.

Tom: That’s great. Thanks for joining us this morning, Mellody!

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Mellody is president of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS news and CBS.com.