Banking Relationships of Lower-Income Families and the Governmental Trend toward Electronic Payment - includes related articles - Statistical Data Included

Federal Reserve Bulletin, July, 1999 by Jeanne M. Hogarth, Kevin H. O'Donnell

NOTE. See general note to table 1.

(1.) Discover, MasterCard, Optima, and Visa. IRA Individual Retirement Account.

(*) Number of respondents too few to be meaningful.

Not surprisingly, holdings of other financial products vary by ownership of a deposit account (table 4). Lower-income families with a deposit account are more likely to have a major credit card, a first mortgage, and a vehicle loan, and they are more likely to have insurance and term savings such as certificates of deposit.(8)

Cross-Use of Checking Accounts and Check Cashing Outlets

Many families with bank accounts also use check cashing outlets and various retail stores to obtain cash, and many families without accounts use banks for cashing checks. The 1996 survey by Treasury asked families where they cashed their benefit checks. Banks were most commonly cited (88 percent reported using them); even among families without accounts, 58 .percent reported cashing their checks at a bank. Among all respondents, nearly one-fourth used grocery stores, 8 percent used check cashing services, and 2 percent used other retail stores. When questioned about their willingness to have their payments electronically deposited, some account-holding check recipients said that having their checks mailed gave them greater certainty about the arrival of payments and about resolving errors.(9)

A 1996 survey of low-income families with and without accounts found that about half (48 percent) of the respondents cashed checks at depository institutions and 17 percent used check cashing outlets,(10) The same survey revealed that one out of seven account holders used check cashers. Looking at the opposite case, survey and trade association data indicate that about half to two-thirds of consumers who use check cashers may have checking accounts.(11)

GROWTH OF ALTERNATIVE FINANCIAL SERVICES

The number of check cashing outlets in the United States has grown sharply over the past decade or so, from about 2,100 in the mid-1980s to about 6,000 in 1997 (the latest year measured). The expansion, roughly on the order of 9 percent per year, has generated several attempts at explanation.

Some attention has been given to changes in the number of branches and community banks in the midst of growth in mergers and acquisitions. As noted, however, surveys do not reveal a noticeable problem with the location or hours of depository institutions for those without accounts. Moreover, access to the financial mainstream is clearly not the issue for the many users of alternative financial services who have transaction accounts.

Recent work on the effects of consolidation in the banking industry has some bearing on the analysis of changes in the market for financial services. A study employing a newly constructed database covering banking consolidation and neighborhood characteristics for 1975-95 found that the number of banking offices rose about 30 percent over the period. In general, the number of offices per capita in higher-income areas increased while the number in lower-income areas decreased. By 1995, the number of banking offices per capita was roughly constant across neighborhood income categories.(12)