People without bank accounts have traditionally relied on cash-based financial services such as money orders and in-person bill payment to handle their banking needs. But this “underbanked” and “unbanked” population is now adopting and adapting to mobile banking in big numbers.

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There are about 17 million adults in America who do not have a checking or savings account. They are known collectively as the unbanked population, which makes up about 8 percent of all households. An additional one in five households are underbanked, meaning that they have bank accounts but also use non-bank financial services such as check cashing facilities and pawn shops.

Better financial options needed

Unbanked consumers give several reasons for not having bank accounts. About a third of unbanked households claim that they don’t have an account because they don’t have enough money. This is the most common reason given. The next most common reason people don’t have an account is because they don’t want one or need one.

Those who are unbanked often rely on the use of cash-substitutes, such as check cashing and money order vendors. Check-cashing fees may range from 1 to 5 percent of one’s paycheck or government benefit check. In 20 years, the cost of cashing a paper payroll check has more than doubled, and the cost of cashing a Social Security check has increased by 53 percent. Money orders, which can be used for payments in place of checks, cost $1.20 each for amounts up to $500 through the U.S. Postal Service; other money order vendors charge similar rates.

One obvious consequence is that these products can end up costing more than having a bank account. Consider a low-income worker who is paid $700 every two weeks and needs to buy two money orders each month: With a 2 percent check cashing fee, he or she would pay more than $30 per month just for financial services.

But, beyond the costs involved, being unbanked or underbanked may also leave families more vulnerable to loss. Consumers who rely on cash face the risk of theft. A study in the city of Seattle found payday lenders and check cashing facilities are often associated with increased rates of violent crime, possibly because payday loan recipients carry large amounts of cash on them.

Another concern, without access to secure methods of saving money such as a savings account, unbanked consumers may have more difficulty coping with emergencies.

Prepaid cards

Many unbanked consumers turn to prepaid cash cards as a financial solution. Users of some general purpose reloadable cards pay a fee when depositing funds on the card. This process is also known as loading funds. Reloading cards at retailers, for example, may cost as much as $4.95 per transaction, although some cards offer free alternatives at certain merchants or bank branches. General purpose reloadable cards also often have monthly fees. These fees may range as high as $9.95.

Recently, new entries in the reloadable-prepaid-card sweepstakes have approached fees differently, signaling a possible shift away from nickel-and-diming consumers. Some require no monthly fees at all, but instead charge for selected banking services. And others charge a $4.95 monthly fee for new customers but offer free deposits and withdrawals at bank branches and ATMs.

Government-issued prepaid cards are less costly. The fed’s Direct Express card has no initial or monthly fees, and it offers one free cash withdrawal per month at 50,000 ATMs. Direct Express also allows recipients to receive cash from bank tellers at no cost and offers free balance inquiries at ATMs and free customer-service phone calls. Similarly, California’s EDD debit card for unemployment compensation allows consumers to access cash for free through both in- and out-of-network ATMs, as well as bank tellers. Balance inquiries and customer service phone calls are always free. California, however, does not offer direct deposit for unemployment compensation.

Smartphones and mobile apps

A surprising recent trend has seen technology taking a decisive hand in serving the unbanked and underbanked. Mobile applications on smartphones are connecting them to traditional financial services in the form of online banking, according to a new FDIC study. About 33 percent of unbanked households and 65 percent of underbanked households have smartphones.

It seems smartphones are having the biggest impact on the underbanked, which includes those households that have an account at a financial institution but use alternative service providers such as check-cashing stores or payday lenders. The FDIC says that about 30 percent of underbanked households use mobile devices to get into their accounts, compared with almost 22 percent of fully banked households. About 33 percent of unbanked households and 65 percent of underbanked households have smartphones.

Looking ahead, a breakthrough in improving access for underbanked consumers who don’t have a computer at home could be mobile account opening — letting the customer set up an account directly from a mobile device rather than a desktop computer. And more mobile banking features that could be useful are the personal financial management tools that provide consumers with personalized, timely advice to help them reach their financial goals.

For the underbanked, mobile banking will not solve every problem. People who are unbanked because they feel they don’t have enough money, or they don’t have the identifications to open accounts will not find an alternative in mobile apps or any other channel. But, as employment improves and the unbanked land jobs, the need for direct deposit of  payroll checks will lead to the opening of bank accounts.

Several banks are experimenting with and testing different apps, financial planning services and speedy payment methods, says the FDIC, to respond to the needs of the underbanked and unbanked.

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