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Expanded banking services can benefit low-income households
Expanded banking services can benefit low-income households
ANN ARBOR—Buying a home or car. Saving for a child’s college education. Having money available for an emergency. Establishing credit.
These goals can be difficult to attain for low-income households without bank accounts. Financial institutions can promote greater economic opportunities by expanding their services, a University of Michigan professor says.
Without bank accounts, low-income households face higher costs for transacting basic financial services through check cashers and other alternative providers, said Michael Barr, an assistant professor at the U-M Law School. In addition, these families will find it more challenging to save and plan for the future.
About 22 percent of low-income families—more than 8.4 million households earning less than $25,000 per year—don’t have bank accounts, according to a 1998 consumer finance study.
In the recent issue of Yale Journal on Regulation, Barr explores the dual financial services market in which banks mainly serve middle- and upper-income people, while low- and moderate-income people often rely on check cashers and other alternative service providers.
"Better access to financial services is critical for low-income persons seeking to enter the economic mainstream," Barr said. "The lack of long-term savings undermines their ability to purchase a home or to send their children to college."
The government can offer incentives—such as tax credits—for financial and technological innovation to help lower banking and savings barriers that include minimum balances to open or maintain an account and fees for checks.
Barr said low-income families should save for possible short-term crises, such as injury or job loss, as well as for longer-term goals, including college tuition for children and retirement. Individuals without a bank account are cut off from mainstream sources of credit, whether for short-term consumer borrowing or home ownership.
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