The Imaginary Hobgoblin of ‘The Unbanked’

In Sunday’s Washington Post, Michelle Singletary provides some unbelievable commentary about the 60 million Americans who mostly decide on a voluntarily basis to forego bank accounts, and she then goes on to support government intervention through the Community Reinvestment Act (didn’t that contribute to the housing crash?) to “open banks’ doors to all.”

Here is the opening:

Millions of Americans — 60 million, in fact — conduct their day-to-day financial business outside the banking system, leaving many to be preyed upon by payday-loan companies, rent-to-own establishments and other non-bank institutions.

Banks have largely ignored the unbanked and underbanked, arguing that it’s difficult to figure out how to make money off them. But the Federal Deposit Insurance Corp. says it may look at using the Community Reinvestment Act — and the weight that the act carries in bank examinations — to encourage financial institutions to provide low-cost banking services and products.

A new FDIC report found that 17 million U.S. adults are unbanked. An additional 43 million are classified as underbanked. You’re considered unbanked if you don’t have a checking or savings account. The FDIC defined underbanked households as those that have a checking or savings account but use non-bank money orders, check-cashing services, payday loans, rent-to-own agreements or pawnshops at least once a year.

The FDIC survey, conducted by the Census Bureau, is the most comprehensive look to date at the unbanked and underbanked. The survey finally provides proof of the problem that consumer advocates have been trying to address for years, lobbying for products and services for the millions of people shut out from the traditional banking system. Under a 2005 law, the FDIC is required to monitor the financial industry’s efforts to bring people into the mainstream banking system.

MP: Where to start? Here an alternative version of the opening sentence:

Millions of Americans — 60 million, in fact — VOLUNTARILY conduct their day-to-day financial business outside the banking system, leaving many to be preyed upon SERVED by payday-loan companies, rent-to-own establishments and other non-bank institutions.

Second sentence:

Banks have largely ignored the unbanked and underbanked, arguing that it’s difficult to figure out how to make money off them.

That statement seems ludicrous from beginning to end, and makes it appear that banks routinely turn certain people down when they show up with fund and attempt to open a checking or savings account. Banks make money by converting savings and checking deposits into loans, and would therefore have no incentive to ignore or turn down new customers, and banks would have no trouble at all figuring out how to make money from any customer’s deposits – they loan them out!

Given the proliferation of U.S. banks (more than 8,000) and the proliferation of banks advertising for new accounts and for free checking (examples here, here, here and here for the DC area), it seems absurd to suggest that new government regulations are necessary to address the phantom problem of “unbanked and the underbanked.”

H.L. Mencken accurately sums up the situation this way:

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.