Study Reveals Potentially High Cost Of Going Bankless

By JEANNINE AVERSA The Associated Press

Published: Jun 24, 2007

WASHINGTON - Grandma stuffing money under the mattress isn't the only one living outside the banking system.

As many as 28 million people in the United States are forgoing traditional financial institutions because of mistrust, cultural and language barriers or a belief that by the time all the bills are paid, there will be nothing left for an account.

That can be expensive and risky. People can run up big fees to cash checks, pay bills and meet other financial needs. Walking around with large amounts of cash can make them a target for thieves.

The bankless are estimated to earn hundreds of billions of dollars a year in income. Seeing a business opportunity, banks are trying to draw in these potential customers. So, too, are check-cashing businesses and retailers, including Wal-Mart.

But many people resist, preferring to remain in the financial shadows.

They tend to be minorities, Hispanic or blacks especially. They also earn low incomes and are young.

According to the Federal Reserve, about 1 in 12 families - 8.7 percent - does not have a bank account.

The number is higher for the poorest - nearly a quarter of families earning less than $18,900, the Fed said, citing 2004 data.

Carlos Maren, 25, a cook, is afraid that if he opens a bank account in the United States, he will get hit with fees for not keeping in enough money or for taking out more money than he has.

"My uncle sometimes says that it's expensive ... because if you don't have money in the account, [the bank] is going to be charging you," Maren says.

Hospital worker Leonel Mendoza, 32, is uncomfortable with banks in this country.

He and Maren do their financial transactions at a check-cashing outlet in the Adams Morgan neighborhood of Washington. They say it is convenient, and they like knowing upfront what they will be charged to cash their paychecks, buy money orders and, in Maren's case, wire money to his native Mexico. He has a bank account there.

"It's not real expensive," Maren says.

Yet those charges can add up.

A Consumer Federation of America survey of check-cashing outlets found that on average it cost $24.45 to cash a $1,002 Social Security check last year. A blue-collar worker pays an average $19.66 every week to cash a $478.41 handwritten paper check.

Having a bank account can be expensive, too, if it is not managed wisely.

Failure to keep track of an account balance can incur a penalty of $20 to $35 each time a check is bounced or an account is overdrawn.

"It can be costly to be outside the banking system. The poor pay more," says John Caskey, economics professor at Swarthmore College.

"On the other hand, if all you did is take that low-income person living paycheck to paycheck and moved them into the banking system and they are bouncing checks and incurring fees, you haven't done much and you may not have done them a favor," Caskey says.

Banks are working through community groups to ease fears, build trust and educate people about financial options. It is a challenge that can take years, bank officials say.

Meanwhile, the FDIC has spearheaded a project to help bring the bankless into the financial mainstream. Financial institutions, community groups and others are teaming up in nine markets to provide services including small loans, check cashing, financial education and for wiring money outside the United States.