Unbanked By Choice
A Look at How Low-Income Los Angeles Households Manage the Money They Earn

The Opportunity for Banks and Credit Unions

The size and density of the underserved Los Angeles community revealed by this study offers financial institutions an opportunity to secure relatively substantial cash deposits in addition to greater fees for transactional services. At least in Los Angeles, the data suggest there are thousands more unbanked households than prior surveys indicate. The FDIC’s 2009 national survey of the nation’s unbanked population estimated that they represented 7.7% of the nation’s population and 9.2% of the Los Angeles MSA. These numbers are much higher in low-income neighborhoods like those surveyed by PHG, where estimates of the Unbanked range between 17% and 28%, and perhaps higher among less-educated individuals and non-English speaking households.¹⁴ Among Los Angeles County’s population of nearly 10 million persons, we conservatively estimate there are 1–1.25 million unbanked individuals.¹⁵ 

The Unbanked represent an emerging, untapped market for bank services. Some 85% are unbanked by choice and 63% have never had an account. In Los Angeles, high-density, low-income neighborhoods such as those surveyed contain high concentrations of Unbanked, making them attractive targets for bank efforts to attract market share. In a number of the City’s urban communities the “income density” (a metric that quantifies income relative to area, measuring local purchasing power) aggregates between $300,000 and $400,000 per acre, which is three to four times the regional average.¹⁶ Used by retailers and developers to identify underserved markets for investment, income density is a metric of growing popularity. Simply put, when it comes to market demand for basic, affordable, quality retail goods, including bank products, any lack of per capita income in low¬income urban neighborhoods is more than compensated by the exceptional density of the region.

Our research indicates that Los Angeles’ low-income communities present a loyal, solid customer profile that would utilize between four and six revenue-generating financial services. Geographic proximity and a fair and transparent fee structure appear to be the key components of customer loyalty. Trust of financial service providers (whether a mainstream bank or an alternative provider) appears to come with experience and working relationships. The Banked trust banks, but not AFS providers.

Our findings further show that those who use AFS—both the cross¬over and the AFS¬only segments—also offer banks an unclaimed market for the financial services these households now purchase from alternative providers. Our prior research has shown those who use AFS pay a median amount of $700 a year just to cash checks, and an undetermined additional amount for other services.¹⁷ In the study area alone, representing a 2000 U.S. Census count of 578,705 persons, aggregate AFS fees could amount to tens of millions of dollars annually.

The crossover population appears to provide a particularly strong potential market for banking services. While crossover customers maintain a bank account for certain purposes, such as to receive direct deposit from an employer, they purchase other financial products based on perceived value from AFS providers. Regularly using both banks and AFS providers, this group has no significant negative perceptions associated with either industry player.

Similarly, the Los Angeles region’s substantial cash economy segment may offer a promising market for banks. The study indicates that these are working, multiearner households that spend and transact regularly in the local economy. They have lived in this country, on average, for well over a decade. Although they transact only in cash, their trust intuitively lies with the U.S. banking system over AFS providers. They are disciplined money managers: on a salary well below the poverty line in a median range of $10,000 to $14,999, they set aside almost $3,000 per year to send to their families abroad. Viewed as a form of saving, the remittance behavior of these families is impressive.

To date, the banking industry has largely missed these market opportunities. Some banks are moving to offer fee-based transactional products that compete with AFS services.¹⁸ Conversely, some AFS providers plan to offer low-balance depository products for their loyal customers.¹⁹ However, the nation’s largest banks have so far proved unwilling to meet the underserved population on its terms. Outside of the publicly led Bank On effort, few financial institutions have taken voluntary steps to encourage unbanked individuals to open accounts and build assets, even when legislation offers a path to do so. For example, the USA PATRIOT Act allows banks to accept alternative, foreign government-issued identification like the Mexican Matrícula Consular to open bank accounts for unbanked immigrants regardless of their legal status.²⁰ In 2001, Wells Fargo Bank was a leader in accepting the alternative identification, opening more than 400,000 new accounts within 30 months. The Mexican government estimated that 4 million Matrícula Consular were issued in the United States as of 2004, a number that has likely doubled or tripled since then.²¹ Despite having the legal authority to do so, few financial institutions accept foreign government–issued identification other than passports, nor do they make other efforts to reach out to unbanked immigrants.

Read Full Section: Discussion and Next Steps (PDF)