Are you ‘unbanked’ or ‘underbanked’?


Financial illiteracy is a calamity in the making

The North American Securities Administration Association declares that “The need for financial education in the United States has never been greater. The precipitous drop in savings rates and the rise of personal debt indicates a looming crisis that will be averted only through the combined efforts of public and private sectors, educators, and in the end, individuals making informed choices about their own financial futures.

“These problems will not be solved by education alone, but we are certain that they cannot be solved without education.”

This ominous quote calls attention to what is a genuine calamity in the making, not just in America but throughout the world. A great deal of the analysis and personal angst surrounding the most recent financial crisis and the resulting recession focused on a worldwide financial establishment that, in the view of many, had wickedly “run amok.” During this time, a number of financial experts cited the onset of new and expanded banking practices as having a decidedly detrimental effect on the global economy.

For example, when the financial crisis emerged in 2007, Americans quickly became familiar with terms such as deregulation, subprime and adjustable rate loans, credit default swaps, the housing bubble, collateralized debt obligations, mortgage-backed securities, hedge funds, predatory lending, over-leveraging, and the shadow banking system.

Notwithstanding the role financial institutions had played in the crisis, the lack of financial literacy among Americans has also contributed to an economic emergency unparalleled since the Great Depression began more than eight decades ago. One of America’s leading financial analysts, Todd Harrison, warned that financial literacy is an enormous public need that has long been overlooked.

“Our finance-based economy, financial engineering and government intervention,” said Harrrison, “have commingled to create the most critical juncture in market history. The decisions we make today, both personally and with regard to policy, will have profound implications for future generations.”

The tangible void in financial literacy plagues Americans across all social, cultural and economic strata; however, it disproportionately besets low-income communities, particularly communities of color. Among the most common indicators related to the absence of financial literacy skills is the number of households that are either unbanked or underbanked.

“Unbanked” is a term referring to households that maintain no banking relationship at all, while “underbanked” households maintain a bank account but primarily utilize alternative financial institutions such as payday loans and check-cashing stores to pay bills and cash checks. These secondary and suspect institutions help perpetuate a cycle of debt and bad credit.

A recent study by the Federal Deposit Insurance Corporation (FDIC), reports that in the United States, nine million households are unbanked while 12 million are classified as underbanked. Collectively, this represents more than one-quarter of all American households.

The FDIC also reports that 54 percent of African American households and 43 percent of Hispanic American households are unbanked or underbanked. While the State of Minnesota and the Twin Cities Metropolitan Area fare somewhat better than the national average in each of these categories, the disparate effect on households of color, particularly Black households, is strikingly similar.

Statewide, the FDIC notes that Minnesota has a total of more than 56,000 unbanked households and more than 236,000 underbanked households. Nearly one-half of all Black households in the state meet one of these two criteria, as do more than 45 percent of the estimated 94,000 Black households in the Twin Cities.

In fact, Black households represent approximately 60 percent of all unbanked households in the metro area. Although not as disparately affected as Black households, other households of color are considerably more likely to hold this status as opposed to White households.

Another critical issue around the issue of financial literacy arises in the effort to assist low-income citizens in the transition to self-sufficiency. Financial literacy is paramount, particularly for those moving from unemployment and public assistance to full or even part-time employment.

As Help Minnesota Save notes, “Financial literacy is a steppingstone up and out of poverty. While having a job is a necessary component of financial security, a job alone is not enough. Many low-income families get stuck on a path of debt, bad credit, and access only to second-tier financial resources, rather than an asset-building path that provides sustainable well-being.”

Moreover, financial literacy is an essential tool to possess in all households in our communities, regardless of our current socioeconomic status. We should all develop a savings plan, set financial goals, find ways to reduce debt, carefully manage credit, and strategically acquire and build assets.

And every bit as important, we must impart this knowledge to our children.


Clarence Hightower is executive director of Community Action Partnership of Ramsey & Washington Counties. He welcomes reader responses to 450 Syndicate Street, St. Paul, MN 55104.