<u>Abstract: This paper examines the ways in which lower-income households obtain basic finan-</u> cial 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. It summarizes available information on these issues and assesses the rationale and challenges facing the strategies that both countries are employing to improve the financial services available to lower-income households, giving particular attention to “unbanked” households, meaning households that do not have deposit accounts with any regulated deposit-taking institution, and also to lower-income households in large urban areas.

In comparing the experiences of the two countries the paper reviews 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. The underlying differences between the countries’ typical household incomes - national income per capita in Mexico in 2002 was U.S. $8,540, compared with $35,060 in the United States (World Bank, 2003) – may also influence the difference in percentage of unbanked - 9.1 percent of families in the U.S. compared to 76.4 found in a recent study in Mexico City.

The paper surveys data on the urban unbanked in the U.S. It asks five questions. Who are the unbanked? Where do the unbanked get basic financial services? Why don’t the unbanked use banks? What is the problem with being unbanked? And, finally, what private-sector and government initiatives are underway to improve financial services for the unbanked? It then addresses the same questions for Mexico. The answers to these questions are offered in a summary comparative form in the introduction. In both countries unbanked households are similarly characterized by low income and education levels although in Mexico the unbanked include persons well above the median income. The unbanked in both countries tend to rely on cash transactions and on services provided by commercial outlets, although in Mexico the unbanked rely on informal forms of saving and borrowing not present in the U.S. At the same time, the unbanked in Mexico show a high rate of home ownership, suggesting an alternative form of saving not present in the U.S. As to why the unbanked do not use banks, in both countries the issue of trust appears to a minor degree, but while the unbanked in Mexico perceive barriers in the costs and requirements of financial institutions, in the U.S. the unbanked point to their own financial situation and lack of savings as a reason for not using banks. In both countries the unbanked pay a significant cost in terms of additional transaction fees, time, and insecurity, in not using formal sector financial services. Concerning initiatives to improve access to financial services, the U.S. has a longer history of both regulatory and private sector practices encouraging retail banking practices. The Mexican government has recently begun to address the situation by focusing on the “popular” banking sector, and assisting credit unions and cooperatives to develop broader services. In its final section, the paper analyzes the rationale and challenges facing the strategies that both countries are employing to improve the financial services available to lower-income households.

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