Factors that contribute to becoming unbanked

Abstract The proportion of US families that are unbanked (i.e., have no type of checking or savings account) has steadily declined for more than two decades. Nonetheless, more than nine million families still do not participate in the financial mainstream, and roughly half these unbanked families previously held a traditional bank account. This study uses the 2004 longitudinal Survey of Income Program Participation to examine the dynamic process within which changes in families' circumstances contribute to their becoming unbanked. Our findings suggest that families are significantly more likely to become unbanked when there is a decline in family income, loss of employment, or loss of health insurance coverage. Race and ethnicity, level of education or family income, and marital or housing status are also important determinants of whether families participate in the financial mainstream or not. To our knowledge, this is the first analysis of the dynamic process by which families change bank status. Participation in mainstream financial markets improves a consumer's ability to build assets and create wealth, protects them from theft and discriminatory, predatory, or otherwise unsavory lending practices, provides federal and state consumer financial protections, and offers financial safety nets against unforeseen circumstances (Rhine, Greene, and Toussaint-Comeau 2006). Consumers benefit from the ability to deposit and cash checks, store and save funds, gain access to cash when needed, pay bills, purchase money orders, make account-to-account money transfers, and send or receive wire transfers using their bank accounts. (1) The proportion of unbanked families, those without either a checking or a savings deposit account has steadily declined for more than two decades. In 1989, close to 15% of families were unbanked (Kennickell et al. 2000). By 2009, that number had fallen to 7.7% (Bricker et al. 2011; FDIC 2009). This suggests that the number of families participating in the financial mainstream has substantially increased. Upon closer inspection, however, a striking countervailing trend is revealed. For more than a decade, roughly half of unbanked families once held a traditional bank account. Little is known about how changes in a family's attributes or circumstances influence their bank status over time. Several studies have shown that the different states of bank status are unequally distributed for families of different racial/ethnic groups or by immigrant status. (2) For example, Rhine and Greene (2006) found that minority or immigrant families were significantly more likely to be unbanked than white or US-born families, respectively, over a four-year period. However, detailed study of changes in banking status remains lacking. This study examines the dynamic process by which families' circumstances contribute to changes in bank status from being banked in one period to being unbanked in a subsequent period. Of particular interest is how specific types of shocks may result in a family becoming unbanked, thereby leaving the financial mainstream. We used the 2004 longitudinal Survey of Income Program Participation(SIPP) to estimate a recursive bivariate probit model in which bank status in the later period is conditioned on the bank status in the initial period. Our findings suggest that a family's shift away from the financial mainstream (switch from banked to unbanked status) is significantly influenced by declines in family income, by lost employment, and by a loss of health insurance coverage. Race and ethnicity, level of education and family income, marital and housing status, and geographic location also play important roles in whether or not families exit the financial mainstream. To our knowledge, an analysis of the dynamic process by which families change bank status has not been previously undertaken. Documenting how changes in attributes or circumstances influence some families to move out of the financial mainstream provides useful information to policymakers and others interested in better understanding why families become unbanked and move out of the financial mainstream. …