# **1  Introduction**

Most households in developing countries do not have savings accounts with banks. Using estimates based on household surveys conducted in 20 developing countries, Claessens (2006) reports that on average only 26% of these households keep savings in formal institutions.1 These data also show that most “unbanked” households do save, suggesting considerable use of informal savings instruments which may offer lower interest rates and less security than savings in banks. Not opening a bank account could also mean having to use more expensive ways of cashing checks and paying bills.

In this paper, we use data from a nation-wide survey of Mexican households to investigate why so few people have savings accounts. We examine, in particular, the view that bank usage is low simply because the poorer the household, the more likely it is that the cost of a bank account outweighs its benefits.

The literature on financial access overwhelmingly finds that within a country or a region, poorer households are significantly less likely to be banked. For example, over 35% of low-income households in the US do not have a bank account (Washington (2004)). Relative to a national mean of 50%, 73% of low-income households in South Africa are without bank accounts (Paulson and McAndrews (1999)). Caskey et al. (2006) find that 90% of the urban unbanked in Mexico City and 79% of the urban unbanked in the US have below-median income.

Three main hypotheses have been put forward to explain why people remain unbanked. One hypothesis states that the unbanked are those to whom opening a bank account does not make economic sense, because relative to the size of their deposits and withdrawals, the costs of accounts are too high, or the bank branch is too distant. A second hypothesis is that the unbanked are those who do not trust banks, because they have had bad experiences with banks, have heard of others who lost their money in banks, or simply because they lack financial education. A third hypothesis states that the uneducated stay unbanked because they are more comfortable dealing with the informal financial sector, even if it is more expensive.

The most common conjecture in the literature is that households do not use banks because they are poor and the costs of banking are too high relative to their small and infrequent financial transactions. According to this view, bank usage is low wherever the poor are numerous and bank accounts expensive because of poor branch penetration or eligibility barriers, and therefore, expanding bank outreach would solve the problem. Consistent with this hypothesis, Beck et al. (2007a) use information from banks in 58 countries to show that physical access, affordability, and eligibility barriers to banking are often high enough to potentially exclude a large section of the population from using banking services, while Beck et al. (2007b) present cross-country evidence of a correlation between bank penetration and household or firm use of banking services. But this evidence alone does not establish causality, since it might reflect a correlation between bank access and unobserved factors affecting bank use. Some studies (Pande and Burgess (2005), Aportela (1999)) have attempted to get around this problem by looking at exogenous sources of regional variation in bank penetration within a country over time.

1This is in sharp contrast to the near universal usage of bank accounts observed in OECD countries.