UNBANKED BY CHOICE:

A look at how low-income Los Angeles households

manage the money they earn

July 2010

www.pewtrusts.org/safebanking
UNBANKED BY CHOICE:

A look at how low-income Los Angeles households manage the money they earn

American families without a bank account live

in a dangerous financial world.

1 Lacking access

to government-insured savings or opportunities to

build credit, they not only incur risks of theft, fraud

and loss, but by using alternative financial service

(AFS) providers such as check cashers or payday

lenders, they also become prey to expensive

predatory products and services that make it harder

for them to achieve financial security. Prior research

by the Pew Health Group (PHG) on California families

confirms the widely shared view that having a bank

account generally provides access to basic financial

services at a lower cost than using AFS.

2

To reduce these risks and costs, PHG’s Financial

Security Portfolio has helped unbanked households

open a safe and affordable bank account as the first

step in joining the financial mainstream. The PHG

Safe Banking Opportunities Project provided

research and technical assistance to help more than

50 cities and localities kick off “Bank On” programs

that bring together banks, local government and

community groups to promote responsible bank

account ownership. More recently, we investigated

the products and services that banks might provide

to attract and serve more unbanked individuals.

3

In 2009, we began an in-depth study of the financial

behaviors of similarly situated unbanked and banked

low-income families to inform policy solutions that

would bring more Americans into the financial

mainstream. This is the first report from a multi-phase

survey of 1,000 banked and 1,000 unbanked households

in greater Los Angeles, randomly selected from eight

low-income study areas for in-person interviews at

several intervals over the course of a year (July 2009

to July 2010). Our findings from the first wave, or phase,

of this study suggest several policy directions for

further investigation to help unbanked families shift

to the safer world of the banked. The data shows

different patterns of financial behavior between the

Banked and the Unbanked in our study. Moreover,

it reveals that the Banked and Unbanked further

segment into distinct sub-groups based on their

usage of financial services and providers: a banked

only group, a cross-over group that has bank

accounts but also uses AFS, an unbanked AFS-only

group, and an unbanked cash economy group that

uses cash only.

We found some demographic differences between

the two groups. The banked respondents in our study

are older (40 years) on average than their unbanked

counterparts (34.5 years). Both types of respondents

are likely to be foreign born (65% for the Banked and

69% for the Unbanked), but each has resided in the

United States for many years (21 years on average for

the Banked, 14 for the Unbanked). Members of both

groups tend to be employed in similar non-technical

professions and have similar unemployment rates

(12–13%), but the Banked earn higher wages and

salaries (an average of $29,400 annually compared to

an average of $17,300 for the Unbanked). With average

family sizes of 4.4 and 4.7 persons, respectively, this

puts the Banked just above the federal poverty line,

and the Unbanked below it. Close to two-thirds of the

Banked (60%) have completed high school, compared

to less than half (48%) of the Unbanked (Appendix A).

EXECUTIVE SUMMARY

www.pewtrusts.org/safebanking

July 2010

Banked Only: households with at least one

bank account that use banks for all financial

services and transactions.

Cross-Over: households with at least one

bank account that regularly use non-bank

providers for some financial services or

transactions (sometimes popularly referred

to as “underbanked”).

AFS Only: households that do not have

a bank account and rely on non-bank

alternative financial service providers for

financial services or transactions.

Cash Economy: households that do not

have a bank account and conduct all

their financial dealings in cash.

2
3

www.pewtrusts.org/safebanking

UNBANKED BY CHOICE:

A look at how low-income Los Angeles households manage the money they earn

• Having a bank account correlates with saving. All the neighborhoods surveyed are low income.

Still, more than twice as many Banked (24%) as Unbanked (11%) report they are earning enough to pay

their bills and save for the future. The Banked are more likely to save no matter what form their income

takes—direct deposit, check or cash. About half of all surveyed, Banked or Unbanked, are making

enough to pay bills but not to save.

• How workers are paid strongly influences banking status. Direct deposit requires a bank account,

but payment by check also strongly correlates with being banked. The Unbanked are twice as likely as

the Banked to be paid in cash on their primary job.

• The low-income Banked maintain long-term banking relationships. More than two-thirds have

been banked five years or more, overwhelmingly with a single institution. Forty percent have been

banked more than 10 years. Being charged fees without explanation is the major reason cited by

the Banked that would cause them to leave their current bank.

• About one-third of the Banked also use AFS. Sixty-three percent of the banked population uses

banking institutions exclusively, while the rest turn to check cashers, supermarkets, liquor stores and

other AFS providers in addition to banks. Of these cross-over, or “underbanked,” users, 78% use AFS

services at least once a month.

• Most Unbanked have never had a bank account. Nearly two-thirds (63%) of unbanked respondents

in this study have never had a bank account. Almost one-quarter of the Unbanked (22%) previously had

an account, but later opted to close it and remain unbanked. Some Unbanked (9%) previously had an

account, but say they cannot now qualify for one.

4 Three percent of those unbanked in the United States

had bank accounts in another country.

• Many of the Unbanked conduct their financial transactions exclusively in cash.

Almost one-third (29%) of the surveyed Unbanked exist in the cash economy. As discussed below, we

conservatively estimate there are at least a million unbanked persons in the Los Angeles Metropolitan

Statistical Area (MSA), making the cash economy segment some 300,000 strong. The other two-thirds

of the Unbanked rely on AFS providers for financial transactions.

• Members of the cash economy segment “save” by remitting. Even though the Banked earn

more on average than the Unbanked, those in the cash economy group send as much or more money

to their families abroad each month than the Banked, while those in the AFS-only group remit the

least on average.

• All respondents tend to like and trust the financial provider they have. The Banked are

not more satisfied than the Unbanked. Those in the cash economy segment trust banks more than

AFS providers, though they use neither. Most of these respondents, particularly Latinos, do not

place high trust in credit unions.

SUMMARY OF FINDINGS