For The Unbanked, a Second Chance

photo: Franco Folini

Surely you’ve heard that there are a lot of people in the US who don’t have a bank account. The “unbanked,” as they’re called, feature in all sorts of political arguments—about predatory lending, about personal responsibility, about the state of America’s finances.

Lost in those arguments is anything about the actual people involved and what we could reasonably do to help them. So let’s meet one Seattleite who ended up without a bank. His story is typical, and until recently, it would have had a frustrating, unhappy, running-to-stand-still ending. But an innovative city program helped him out, and it’s probably coming to your city soon.

Meet Michael

Michael, 40, lives in Seattle and works as an office manager. (To protect his privacy, he asked me not to use his last name.) “I used to be basically a professional person that was employed at a local company, a fairly large one,” he says. “But I ended up getting fired from my job and getting divorced, kind of around the same time.”

When he needed some extra cash between paychecks from part-time and temp jobs, he went to a payday lender. He gave them his checking account number so they could direct-deposit his loan. Then, when it was time to repay the loan, the payday lender tried to take the payment out of his checking account—and overdrew it. They tried again. And again. “It hit my account so many times that it was an enormous amount of money that I had to pay,” he says, “and I just couldn’t pay it before the bank closed it.”

This got him listed in ChexSystems, which is the bank account equivalent of having a bad credit report. You get into ChexSystems for overdrawing your account and failing to pay the fees on time, or for writing bad checks. Banks typically won’t let you open an account unless your ChexSystems record has been clean for a year.

So Michael started taking his paychecks to a check cashing service. Cashing checks at one of these storefronts is the opposite having a savings account: since the service takes 1% to 3% of every check you cash. Without a bank account, you can pay interest, but you can’t earn it.

Michael joined the ranks of the unbanked. His money lived outside the banking system and is hardly alone. According to an FDIC survey, as of 2009, 7.7% of Americans are unbanked and an additional 17.9% are “underbanked,” meaning they regularly use check cashing, payday loans, pawn shops, or money orders. African Americans, Latinos, and the poor are more likely to be unbanked. (By the way, wouldn’t “bankless” be a better term?) You can check out the data for your own city at EconomicInclusion.gov.

Michael knows he screwed up. “I’m the one who set up the payday loan thing anyway, so I certainly see my fault in it,” he says. “But I kind of feel like the system is sort of set up so if you get into that situation, it’s just… there’s no way of getting out.”

Getting out

Then he saw an ad on a bus for Bank On Seattle-King County. A lot of organizations—banks, credit unions, government, community organizations—have their hands in the program, which started in 2008. (The first such program launched in 2006 in San Francisco.)

The goal of Bank On is to open bank accounts for people who’ve never had them (including immigrant groups who may never have had contact with formal banking before) or who’ve lost the privilege because of past mistakes. It’s not a welfare program, and it has nothing to do with abstract principles of inclusion: it’s a recognition that life without a bank account is a waste of time and money, a drag on the local economy, a total pain in the ass.

As of June 2010, Bank On customers have opened 24,000 accounts at local banks, credit unions, and national banks, and the vast majority of those accounts are still open, active, and in good standing.

Financial institutions who participate in Bank On agree to provide customers with an account that meets certain criteria, including a low opening balance, no minimum balance, and no monthly fees. The bank agrees to waive one set of overdraft fees per year (“one set” is banker-speak of “a bunch of overdrafts that come in on one day”), and you’re welcome as long as your ChexSystems record has been clean for six months.

Michael found a home for his money at HomeStreet Bank, which has opened about 300 accounts through the program. I spoke to Kathy Williams, a chipper executive at HomeStreet. “The purpose of this program is to assure people that we can take a second look, and sometimes a third look,” says Williams. “People may have made mistakes in the past, often when they were younger or going through a difficult time, and we would believe that this time they would be much more capable of handling a checking account.”

To this end, the bank’s staff sits down with new Bank On customers and explains to them in plain language how a checking account works and what you can and can’t do with one. “In many cases, this has not been done for them in the past,” says Williams. Bank On account holders are given an ATM/debit card with no overdraft privileges: charges are simply denied rather than incurring one of those obnoxious $35 fees. Customers who keep their account open for three months and complete a financial literacy class receive $100 cash.

Tomorrow, the world

Seeing the success of Bank On in Seattle and San Francisco, over 80 cities have now implemented or are planning to implement the program. And the Obama administration has proposed $50 million for a Bank On USA program in the 2011 federal budget.

It would be easy to bash Bank On as a program that gives bank accounts to people who don’t deserve them. But if you’re looking for a moral hazard here, you won’t find it. Sure, it’s good PR for banks, but they pay to be in the program and they take all the risk. They’re looking to take in deposits, not charity cases.

A checking account is about the most boring financial tool in the world, and people who have them love to complain about them. Can banking really make a difference in people’s lives?

“Having that account makes life easier in so many ways,” says Michael. “Nowadays there’s so many things you need to do via debit card.” Before getting his checking account, he was unable to join a gym because they required plastic on file for automatic payments. “I was feeling like, hey, I want to get healthy, I’m trying to restart my life here, and I want to join a gym. Well, now I can do it because I actually have a way to do it.”