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05.26.22

Unbanked in America: Seeking Clues to Reducing Financial Exclusion

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This Economic Commentary reviews recent literature on financial exclusion – the lack of bank account ownership -- with the aim of better understanding its causes and consequences, and to search for leads to reduce it.

The unbanked rate in the US, though decreasing, remains high compared to unbanked rates in other developed countries and is higher among lower-income and racial and ethnic minority households than among white households with higher incomes.

Cleveland Fed researchers Paola Boel and Peter Zimmerman analyzed research from a range of fields including economics, finance, public policy and sociology and found a complex web of factors affecting decisions to be unbanked and no clear-cut path to reducing it.

They found, for example, that fees and minimum balance requirements are important factors in deciding not to have a bank account. Yet several studies show that when fees are constrained, banks find low balance accounts unprofitable, so access to bank accounts can actually decline.

Boel and Zimmerman noted that many of the studies cited, even the most recent, might not fully reflect the fast speed at which the payments landscape is evolving and the consequences of such changes for the unbanked. The move away from cash and the increasing tendency to shop remotely might increase the costs of exclusion for the unbanked. At the same time, the proliferation of fintech products could make access to a traditional bank account less essential for US households provided they have access to the internet.

To learn more about best approaches to reducing financial exclusion, they recommended studying several existing initiatives, including Cities for Financial Empowerment’s Bank On project, as well as innovations with pre-paid cards aimed at producing possible substitutes for bank accounts.

Read more: Unbanked in America: A Review of the Literature

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. For more information, go to www.clevelandfed.org or follow us on Facebook, Twitter, Instagram or LinkedIn.

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