Regulators could do more to bring underbanked into mainstream: GAO

Regulators haven’t been able to resolve inequities in banking services that exist along racial, income and educational lines, says a new government report. In some cases, their actions might have made things worse.

A study by the Government Accountability Office found that Black and Hispanic households were significantly less likely to use banks for all their financial needs than their white counterparts. Fewer than 60% of the Black and Hispanic groups were fully banked, compared with 83% of white households.

Also, nearly half of households without high school degrees used high-fee alternative services — such as payday or pawn loans, prepaid cards and rent-to-own arrangements — for some or all of their financial needs. Less than a quarter of diploma holders used such services, according to the report, which considered consumer data from 2015 to 2019.

A similar pattern was evident across the income spectrum, with lower-income groups being less likely to use banks, according to the GAO report which was unveiled to the public Monday after being published last month.

Overall, just 5.4% of U.S. households were unbanked, according to the GAO, accounting for roughly 7 million people. That was the lowest unbanked rate in 30 years.

The greatest gains were made by historically underbanked populations. For example, the share of Black households with a checking or savings account increased from 56% in 1989 to 86% in 2019, while the share of white households with such accounts moved from 89% to 95% during the same period.

Still, the amount of households that depend on alternative services for at least some of their financial needs has been relatively stagnant during the past decade, declining slightly from 20.1% in 2011 to 17.9% in 2019. The leading reasons for consumers avoiding traditional financial institutions were a lack of funds, burdensome fees and a mistrust of banks, the GAO found.

Consumer protection initiatives, including those aimed at limiting overdraft charges and capping interchange fees, might have contributed to this lingering issue. While these initiatives have meaningfully reduced costs for bank customers, they have also saddled banks with higher compliance costs, leading them to raise checking account fees and offer fewer free accounts.

Other initiatives aimed at encouraging banks to increase their lending pools have been ineffective, the GAO found. This includes efforts by regulators to encourage banks to provide small-dollar loans. Market participants told the watchdog agency that there was too much regulatory uncertainty around that type of lending for them to participate.

Promising efforts, such as the Federal Deposit Insurance Corp.’s public awareness campaign on the benefits of banking or the Office of the Comptroller of the Currency’s push to expand credit access, lack performance measures to adequately track their efficacy, the report found. Likewise, the National Credit Union Administration’s initiative to measure the time it takes to process credit union charters has not been paired with a program to track how effective those institutions are at increasing access.

The report recommends that FDIC, OCC and NCUA devise outcome-oriented performance metrics to measure their impact on drawing underrepresented groups into the banking world.

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