Slipping Behind
Low-Income Los Angeles Households Drift Further from the Financial Mainstream

Following low-income Los Angeles households during a period of economic decline, our survey identified key factors in the departure from banking, challenges still facing local efforts to promote banking and patterns in financial services use and financial well-being.

THE UNBANKED POPULATION PERSISTS IN LOS ANGELES

Despite the efforts of the Bank on LA campaign, during the period of our research, more respondents became unbanked than became banked. While our survey was conducted during a period of severe job loss in the survey population, we found that the main reason households fell out of banking was not job loss but being hit with unexpected bank fees.

• Over a 12-month span, more people left banking than joined banking. Between the two phases of the survey, 13 percent of respondents who had been banked in Phase I dropped their bank accounts and 8 percent of respondents who had been unbanked in Phase I opened checking accounts. The newly unbanked population, those who closed their bank accounts since the first survey, largely demographically mirrors the overall survey population.⁴
• Unexpected fees were the primary drivers of account closure. The Newly Unbanked most often cite unexpected and unexplained fees as the reason for their departure from banking. One-third (32 percent) of the Newly Unbanked cite these fees; another quarter (27 percent) cite either lack of funds or unemployment. Small numbers of respondents cite poor customer service (6 percent), and all other options included in the survey were selected by less than 1 percent of respondents. One-third (35 percent) of newly unbanked individuals do not attribute their decision to end their banking relationship to any option available in our survey.⁵ 

• Overall, neighborhoods targeted by the Bank on LA pilot program did not account for more of the Newly Banked than did neighborhoods not targeted by the Bank on LA pilot. The Newly Banked were evenly distributed across neighborhoods proportional to the distribution of successfully recontacted survey respondents. Newly banked individuals represented anywhere between 2 percent and 7 percent of all respondents in a given neighborhood. The neighborhood with the most significant increase in newly banked residents was Lincoln Heights, which was not a Bank on LA pilot site. Close behind Lincoln Heights were two Bank on LA pilot neighborhoods— Vernon Central and Boyle Heights. Each one had 6 percent of its respondents report that they had begun banking.
• The Bank on LA program appears to have slowed the rate at which the city’s poor leave banking. In six of the eight neighborhoods in our survey, respondents left the ranks of the Banked at a greater rate than they joined. The other two neighborhoods were essentially flat in this regard. In the four neighborhoods targeted by the Bank on LA pilot program, slightly more people left banking than entered banking. However, the net loss over the past 12 months in the four Bank onLA pilot neighborhoods (-1.25 percent) was less than half the net loss in the four control neighborhoods (-2.93 percent), a statistically significant difference.⁶ 
• Brand awareness of Bank on LA is very low. Overall, only 6 percent of respondents are familiar with Bank on LA by name. Awareness is highest among the Newly Banked (13 percent) and lowest among the Newly Unbanked (3 percent). Among all unbanked individuals, Bank on LA’s target population, 9 percent are familiar with the program. Among all survey respondents, awareness of the campaign in pilot neighborhoods (7 percent) was only slightly higher than in control neighborhoods (6 percent). Overall, more than half (54 percent) of the Unbanked report receiving some sort of literature encouraging them to open an account, though they did not identify it as coming from the Bank on LA campaign.
• The newly unbanked rely heavily on the cash economy. Most newly unbanked individuals rely on the cash economy, with 59 percent conducting business entirely in cash and another 26 percent conducting business mostly in cash with some use of AFS as well. One-quarter (28 percent) of the Newly Unbanked continue to save money, keeping cash hidden in a “secure place.” However, most of these savers (63 percent) are saving less than they did when they had a bank account.
• While most of the Unbanked have never had a bank account, those who did previously have accounts chose to close them. Among the Unbanked, more than half (58 percent) have never had a bank account. However, three in ten (30 percent) previously had a bank account and willingly closed it. Only 6 percent of the Unbanked previously had an account and now are unable to qualify for one, generally because of past trouble in maintaining sufficient funds to support a checking account.

THE LOW-INCOME POPULATION IN LOS ANGELES FACES SUCCESSIVE BARRIERS TO BANKING

The growing ranks of the Unbanked and Newly Unbanked, and the fact that many banked individuals also rely on alternative financial services providers, indicate that the low-income population in Los Angeles faces obstacles not only in opening an account, but also in keeping it open, and in using it to its full benefit to build savings and credit. The issues that prevent families from keeping and fully using an account are distinctly different than the problems that prevent them from opening an account.

• The primary obstacles to opening a bank account are minimum balance requirements, concern over hidden fees and perceived lack of proper identification. Fully half (50 percent) of the Unbanked cite their perceived inability to deposit the minimum opening balance as a primary obstacle to opening an account.⁷ The impact of the barrier posed by this requirement grew significantly from the first phase of the survey, when less than a third (29 percent) of the Unbanked identified the minimum opening balance as a barrier to opening an account. Identification was another obstacle for many respondents. Although financial institutions have the legal authority to accept identification issued by foreign governments, 14 percent of unbanked individuals cite the lack of proper identification or documents as a reason for not having a checking or savings account. Fees are another issue: 12 percent of the Unbanked identify a concern with hidden or expensive bank fees as the primary reason they choose to remain unbanked. Other common barriers to opening a bank account include a lack of understanding about banking systems (10 percent), lack of time to open a bank account (14 percent) and difficulty managing accounts (10 percent). Only 2 percent of unbanked respondents report being unbanked because they appear on the watch list known as ChexSystems.⁸ 

• Repeated ATM and overdraft fees make bank accounts expensive for this population. Banked individuals in our survey use out-of-network aATMs frequently, incurring fees on more than half of their ATM transactions. We do not know whether this is due to a lack of ATM infrastructure in their neighborhoods or lack of understanding about how their banks’ ATM systems work, but the collective impact of these fees is high. Fees for using an out-of-network ATM average $3.74 per use.⁹ At the rate of use reported in our survey, these fees cost a banked individual $162 each year. Banked individuals who incur out-of-network fees do so an average of 3.6 times per month. Expensive overdraft penalty fees also pose significant concern. Three in ten (29 percent) banked individuals had been charged an overdraft fee in the past seven to 12 months. Of those who overdrafted, 64 percent were charged multiple fees as a result.
• Banked customers continue to use costly Alternative Financial Services (AFs) providers to obtain banking products that they perceive as providing greater control of funds and liquidity. Almost one-third (31 percent) of banked individuals supplement their banking relationships with services from AFS providers. The most commonly used products are remittances (49 percent) and money orders or cashier’s checks (34 percent). Another 10 percent of crossovers—those who have a bank account and also use AFS—use these providers for check cashing. More than one-third (38 percent) of crossovers indicate that they have bills that require a money order, and nearly all get their money orders from AFS providers rather than a bank. Four in ten (43 percent) of crossover customers using AFS bill pay services are concerned about timing of transaction posting and cash liquidity: over one-third of crossovers (37 percent) indicate that they can pay bills faster at a storefront check casher than at a bank, and another 7 percent are specifically worried about bouncing a check if they use the bank.
• Among the crossover customers, banks hold considerable advantages in location and customer service. On both customer service and prices, 79 percent of crossover customers prefer banks to check cashers. For proximity to home or work, 59 percent of crossover customers prefer banks to check cashers. Among crossover customers, nearly one-third (30 percent) report using AFS because they need access to their cash quickly. Another 38 percent of crossovers use check cashers because these providers enable customers to purchase several services at one time.
  

BANKING IS TIED TO FAMILY ECONOMIC SECURITY

• The banked utilize savings mechanisms and linked accounts. Nearly all banked respondents (94 percent) keep at least some of their extra money in a financial institution, and almost as many (88 percent) have at least one savings account in their name. Among these savings accounts, 29 percent are being used for long-term goals, including paying for education, home ownership and retirement. One-third (33 percent) of banked respondents in this phase of the survey report that they do not save at all. However, nearly half of the banked (47 percent) save when they can. one-third (34 percent) of the banked use an automatic savings feature to move money regularly from a checking account to a savings account. One-quarter (24 percent) of the Banked move money between accounts as needed to manage cash flow. Almost one-fifth (19 percent) have an overdraft transfer feature linked to their savings account.

• In times of economic decline, the Banked fare better. The majority of households in both banked and unbanked populations live below the poverty line.¹⁰ While both groups experienced similar rates of decline in household income between Phase I and Phase II of the survey, the Banked were better able to keep their heads above water. Over the 12-month study period, 41 percent of the Banked and 45 percent of the Unbanked report declines in household income. In characterizing their overall financial situation, 16 percent of all respondents indicate that they make enough money to pay bills and save for the future. Among banked individuals, 25 percent are able to pay bills and also save for the future. This rate has held steady in the nearly 12 months between survey phases. Among unbanked individuals, only 9 percent report making enough money to pay bills and save for the future, down from 11 percent in the first phase of the survey. The cash-only subsegment of the Unbanked fares worst, with 5 percent of cash-only respondents reporting that they make enough money to pay bills and save for the future.

• The Unbanked are somewhat more likely to struggle to pay their bills. Over one-third of the Unbanked (37 percent) report being unable to pay all of their bills. Within that group, 41 percent of respondents in the cash-only subsegment indicate this same trouble. The Banked fared a bit better, with 31 percent reporting inability to pay all of their bills.
• The Banked continue to set earnings aside through remittances. This largely foreign-born population sets a significant percentage of their earnings aside in the form of remittances sent back to family in their country of origin. While the frequency of remittances is comparable between banked and unbanked respondents—55 percent of the Unbanked and 52 percent of the Banked transfer money two or more times per month—the average amount transferred is significantly higher among the Banked. The data also show that the Banked remitted more money than the Unbanked in both phases of the survey and increased their remittance amounts over the period of the survey, despite suffering job loss. Specifically, the Banked remitted on average $210/month in the first phase and $261/month in the second. in contrast, the average amount remitted by the Unbanked declined from $199/month to $181/month over the survey interval. 

• Cash security is a significant concern for participants in the cash economy. One-fifth (19 percent) of the unbanked population transact in cash whenever possible. The preference for the cash economy is slightly down compared to the first phase of the survey (29 percent). Close to one-fifth (18 percent) of individuals who rely on the cash economy have been victims of cash loss, whether by theft, damage or loss. Nearly all of these individuals have experienced a cash loss within the past year (90 percent) or within the past three years (98 percent). Among the Unbanked who have experienced cash loss, the average loss was $729, equal to nearly two weeks of the respondents’ average household expenses.