For Immediate Release
February 8, 2006
Contact:
Dr. Ebonya Washington
203-432-9901
State laws requiring banks to offer low-cost accounts to low-income people and limiting check-cashing fees appear to increase slightly the number of low-income minority households with bank accounts, suggests new research published in the Journal of Human Resources. In addition, the study found, laws limiting check-cashing fee caps have a more immediate impact than those requiring banks to offer low-cost accounts.
“Governments and public interest groups are concerned about people who do not have bank accounts. This group is less likely than people who have bank accounts to own a home, to get a loan, and so forth,” explains the researcher, Ebonya Washington, Ph.D., of Yale University’s Departments of Economics and Political Science and a faculty research fellow with the National Bureau of Economics. “Some have hypothesized that if you don’t have access to mainstream financial centers, it makes it harder to secure the American dream and to be financially sound.”
During the past 20 years, the federal government and state governments have implemented policies aimed at encouraging bank account “takeup” among low-income households, Washington says. Six states currently have “lifeline banking” legislation mandating banks to offer low-cost accounts to low-income persons, and more than 20 states have laws capping the fees that “fringe banks”—storefront check-cashing outlets and pawnshops—can charge to cash checks.
To assess the impact of the state laws on bank-account ownership, Washington analyzed demographic and banking-status data for more than 105,000 low-income households in 45 states and the District of Columbia. All of the households participated in the federal government’s Survey of Income and Program Participation between 1985 and 2000. She compared bank-account ownership in states with and without the laws, and before and after the laws were enacted.
The results show that “binding” price cap laws—those that limit fees to 2 percent of a check’s face value—were associated with a 4.5 percentage point increase in the number of Black and Hispanic households with checking accounts after about one year. Lifeline banking legislation was associated with a 4.2 percentage point rise in the number of low-income minority households with bank accounts, but only after a three-year lag.
No changes in the number of low-income white households with bank accounts were seen after enactment of either type of legislation.
Washington speculates that limits on fees charged by check cashers might result in bank-account takeup among low-income minorities because lower fees could decrease profits and cause some neighborhood check-cashing outlets to close. This in turn might encourage people to open bank accounts.
“Check-cashing fee cap legislation is not necessarily designed to have any effect on bank accounts, but you can see how it might if cashing a check at a check casher is a substitute for cashing it at a bank,” Washington asserts. “If you cap fees at check cashers, people might start using check cashers more. On the other hand, check cashers that need to or want to charge higher fees might close, so there would be fewer check cashers and people would use banks instead.”
Washington further suggests that lifeline banking legislation may not have a large impact on bank-account takeup among low-income households because banks have not adequately advertised the availability of state-mandated low-cost accounts to low-income people.
“If we’re interested in increasing the number of people who have bank accounts, we might think about the need to get the word out more about this type of legislation and/or about alternative means of achieving that end,” she says.
The analysis also showed that 37 percent of the low-income households studied did not have bank accounts in the year 2000. Compared with households that hold transaction bank accounts, “unbanked” households were less likely to own a car or house, more likely to receive transfer income (such as government welfare payments), and less likely to be headed by married couples. Unbanked households were also less likely than banked households to be headed by employed persons.
The study author points out, however, that it currently is not known whether getting people to open bank accounts will narrow those gaps.
In addition, Washington reports that the number of check-cashing outlets climbed from 2,151 in 1986 to 5,400 less than a decade later, according to the Consumer Federation of America. Check-cashing outlets are mainly located in poor urban areas, but the number in middle-income non-urban areas has grown rapidly in recent years.
The study results can be found in the Winter 2006 issue of the Journal of Human Resources, published by the University of Wisconsin Press.