# **I.  Introduction and Summary Findings**

This paper examines the ways in which lower-income households obtain basic financial services in urban communities in the United States and in Mexico. In addition, the paper discusses the efforts that private sector and government organizations are making to lower the cost or improve the quality of those services. The goal of the paper is to summarize available information on these issues and to assess the rationale and challenges facing the strategies that both countries are employing to improve the financial services available to lower-income households.

In the paper, we give particular attention to “unbanked” households, by which we strictly mean households that do not have deposit accounts with any regulated deposit-taking institution. But we also use the term more broadly to include lower-income households that use high-cost informal-sector non-bank lenders when they seek consumer loans. In many cases, these are unbanked households, but they may also include households with deposit accounts.

As noted above, our emphasis in the paper is on lower-income households living in large urban areas. Two considerations explain this focus. First, in both countries, the best survey data on the use of financial services among lower-income households applies only to urban areas. Second, while there are undoubtedly many similarities among the unbanked in rural and urban areas, there are also differences in the financial institutions with which they interact and differences the reasons that these households are unbanked. To try to cover both the rural and urban unbanked in two countries in one paper, would make this rather long paper much longer and less focused.

Before plunging into the details, it is useful to review some distinguishing features of the two countries that explain some major differences in the extent to which lower-income households are unbanked, their use of non-bank financial services, and strategies for improving financial services to the unbanked. Most importantly, there is a substantial difference in typical household incomes across the two countries. On a purchasing power parity basis, national income per capita in Mexico in 2002 was U.S. $8,540 p.a., while it was $35,060 p.a. in the United States (World Bank, 2003). This difference means that what we consider to be a lower-income household in the U.S. would often qualify as a middle-income household in Mexico. The difference in typical household incomes between Mexico and the U.S. also creates a substantial difference in the percentage of households who are unbanked. Based on 1992 data, the research division of the US Federal Reserve concluded in 1997 that 151 percent of families in the U.S. do not have any type of transaction accounts. In Mexico City, a recent survey found that 76.4 percent of households in the same situation.

Numerous other distinguishing features of the two countries contribute to differences in the percentage of unbanked households and ways that they obtain financial services. Here we mention three. First, banking in Mexico is much more concentrated than in the U.S. In 2004, the year of the World Bank study, Mexico had fewer than 20 commercial banks and a similar number of registered cooperatives and credit unions in Mexico City<sup>2</sup> . The five largest banks hold 82 percent of all deposits. The United States, in contrast, has over 10,000 banks, without counting

> 2 The number of registered cooperatives and credit unions has since grown significantly, but mostly outside of Mexico City.

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