One in four New Jerseyans either is without a bank account or conducts some or all of his or her finances outside the mainstream banking system, according to a recent report from the Federal Deposit Insurance Corp.
Advocates say that operating outside the mainstream banking system costs the poor and low-income seniors money in extra fees and interest and makes it tougher for them to get credit for housing, automobiles, and other purchases. That makes social mobility difficult, contributing to economic inequality.
The same proponents also say that policy changes are needed — including a return to the rules that required all banks to provide basic, low-fee and low-balance checking accounts — to help bring the “unbanked” and “underbanked” into the mainstream banking system.
“Unfortunately, some of the policies that the banks have adopted recently are the kinds of things that are driving people out of the banks and forcing them to be underbanked,” said Phyllis Salowe-Kaye, executive director of NJ Citizen Action.
Those policies include a federal ruling that allows larger, federally chartered banks not to abide by state rules requiring them to offer low-balance accounts, as well as new identification rules for new clients that make it hard for low-income people to enter the system.
State officials say that bringing the unbanked and underbanked more fully into the mainstream system is a priority and that financial literacy programs currently in place and a new bank development district law, should help.
The new districts are designed to encourage the location of bank branches in underserved areas.
How New Jersey Adds Up
The FDIC report, issued in September, found that 212,000 New Jersey households did not have a banking account in 2011 and another 621,000 had accounts but used nonbank money orders, nonbank check-cashing services, nonbank remittances, payday loans, rent-to-own services, pawn shops, or refund anticipation loans. The unbanked represents 6.6 percent of the 3.2 million households in the state, while the underbanked represents 19.4 percent.
The report defines unbanked households as those without a checking or savings account; underbanked households have accounts but used nonbank services. for a significant portion of their banking in 2011.
New Jersey has a lower percentage of unbanked and underbanked households than the national average and ranks 23rd for the former and 26th for the latter.
Nationally, 28.3 percent of households are either unbanked or underbanked, an increase of 0.6 percent since 2009. Overall, 8.2 percent are unbanked, or one in 12 households nationally.
The report found that 29.3 percent of households nationally do not have a savings account, 10 percent are without checking accounts; and just two-thirds have both. A quarter of households nationally have relied on alternative financial services.
Salowe-Kaye said the report is an indication that more needs to be done to educate people about financial resources and to ensure that banking services are available for those with limited incomes. When people stay outside the mainstream banking system, she said, they end up paying more for services and hindering their ability to get credit.
“The problem is that it costs people to use cash-checking services,” she said. “People need to be banked. People need to be used to dealing with banks.”
State officials agree that more need to be done to give people in underserved areas access to inexpensive banking.
District by District
Marshall McKnight, spokesman for the state Department of Banking and Insurance, said the department recently released new rules that will govern the banking development districts that were created last year. The state also has an extensive financial literacy program in place.
The new development districts are part of legislation passed in 2011, intended to encourage banks to open branches in underserved areas by giving municipalities the ability to deposit their funds in the new bank. The state also could use the designated banks for deposits.
“This is a priority for the Christie administration and the department to reach out to the unbanked and underbanked through this,” which could mean an increase in the number of banks opening in low-income and urban neighborhoods, he said.
According to the FDIC, in minority and low-income neighborhoods, the unemployed and younger households tend to have the highest unbanked and underbanked rates nationally.
“Close to half of all households in these groups are unbanked or underbanked, compared to slightly more than one-quarter of all households,” the report says.
Among the Hardest Hit
Particularly hard hit are minorities and the immigrant communities, according to the report.
Almost two-thirds (62.7 percent) of unbanked households and more than a third of underbanked households (38.7 percent) are black or Hispanic, while just 16.2 percent of fully banked households are black or Hispanic. Among the unbanked, 17.7 percent are immigrant households, while 9.4 percent are underbanked. Households that speak only Spanish account for 9.2 percent of the unbanked, though they account for just 2 percent of the total population.
Specific demographic breakdowns were not available for each state, but banking advocates say that the national numbers are consistent with their experiences in the Garden State.
“There are not enough banks in our urban areas and rural areas,” Salowe-Kaye said. “Only a few banks have been willing to expand in urban centers.”
That puts urban residents at a disadvantage. They get charged fees to use money orders, to do business with check-cashing stores and other alternative services. It also forces them to rely on store credit, which comes with higher interest rates than the standard bank loan.
“You want to have a record of the checks you write, see your money, make sure you know not only what you have in an account so you don’t do overdrafts but so you can track your money,” she said.
No Free Checking
Even when there are banks in urban areas, they often do not offer basic checking. While the state requires banks to provide basic accounts — accounts with limited fees that require only a small minimum balance — the federal Comptroller of the Currency ruled a decade ago that they do not apply to federally chartered institutions. There were 77 state-chartered banks with $44.7 billion in deposits as of June 30, 2011, according to the Department of Banking and Insurance, and another 40 federally chartered New Jersey banks with $65 billion in deposits. An additional 51 federally chartered banks based outside of New Jersey had $3.5 trillion in deposits.
“A working mother making $23,000 a year cannot keep $1,500 in an account,” Salowe-Kaye said. “A low- or moderate-income person who is living nickel to dime cannot have $1,500 sitting in that account.
“What’s gone away is this basic, free checking from large banks for low- and moderate-income people and seniors,” she added.
McKnight said the state does not keep track of which banks offer the basic accounts, but that all banks are encouraged to do so.
The state is hoping to address the banking question through financial literacy programs, through outreach to students and senior citizens. There are numerous programs already in place, but the department is encouraging the public to make more frequent use of them. Seniors, in particular, need to be “aware of some of the particular challenges they might face as seniors, “ he said.
Salowe Kaye said more needs to be done to reverse the policies that have been driving low-income people from the banks. But in the meantime, consumers need to be conscious of the fees charged and the potential options that do exist.
“People should comparison shop,” she said, “because there still are smaller state- chartered banks that offer free checking.”