Access to a bank transaction account (being “banked”) is a key index of living standards improving over time. Recent FDIC data suggests that the United States is actually “unbanking the banked.”

One-quarter of the U.S. population is unbanked or under-banked, up from around 15 percent a generation ago*. While there are certainly a variety of factors in play, Congress is accelerating this trend by attacking the two revenue streams that allow banks to defray the costs of providing a transaction account to middle-income, low-balance households: overdraft fees and interchange on debit card transactions. Eliminating these will effectively end “free checking” for most consumers and make the majority of consumers unprofitable to serve. As accounts become more expensive, big winners will include cash and “alternative” financial providers; these latter sound glamorous, until you consider that they include check cashers and payday lenders.

One of the key advantages of banking essentially the whole active population is that it reduces the role of cash in the economy. The social costs of cash, including tax evasion, crime, and corruption, in addition to the expense of providing and handling it, are very high. For this reason, governments and banks in many countries have been fighting a “war on cash” for decades through measures like mandating the direct deposit of all salaries.

The social advantages of a banked population have only recently become evident. The first checkable bank accounts were offered to the general public by joint stock banks in the United Kingdom during the 1830s. They required a minimum balance equal to three-and-a-half times the average per capita income, because branch access and payments services the banks offered in return for deposits were (and still are) expensive to provide. Banking was a luxury good.

After World War II, access to transaction accounts spread rapidly. By 1960, most U.S. consumers had checking accounts. The United Kingdom moved from 20 percent banked to 90 percent in a generation. Other developed economies achieved similar results. “Banking the unbanked” has become a goal of public policy in the developing world. Banking is a necessity: It helps ordinary people save, access credit, and pay their bills.
So why is the U.S. government moving in the opposite direction?

*FDIC, 2009

Also appears on The Heart of Commerce Blog.

Topics: Debit, Payments Strategy