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Evan Horowitz

If you don’t have a bank account, how do you manage your money?

How would you cash checks, pay your bills, and manage your money if you didn’t have a bank account?

Lots of people do it, with help from a variety of sources. About 8 percent of all families in the United States don’t have bank accounts, relying instead on an array of alternative financial services, from postal orders to pawn shops and prepaid debit cards to Walmart check-cashing.

Why don’t we all have bank accounts?

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The FDIC has asked people this question, and the most common answer is that people think they don’t have enough money for an account (followed by people who say they just aren’t interested).

The consequence is that about 10 million families in the United States don’t have bank accounts, and another 20 percent are “underbanked,” meaning they have a bank account but they don’t use it for all of their financial transactions.

The numbers are smaller for Massachusetts. Only about 5 percent of families in the state lack bank accounts, compared to 8 percent nationwide. But here, too, poorer and less-educated families are the ones who are most likely to be unbanked or underbanked.

What alternatives do people rely on?

The universe of alternative financial services is widespread, and though it has been changing rapidly in recent years, it is hardly new. Among other things, it includes:

Check-cashing services. From big retailers like Walmart to small, licensed shops across the Commonwealth and around the country, there are many places to get your check cashed for a fee. In fact, about $65 billion flows through the check-cashing industry each year, which is larger than the entire economy of Vermont, Maine, or Delaware.

Prepaid debit cards. Between 2011 and 2013, the amount of revenue generated through prepaid debit cards grew by over 50 percent. As part of that wave, a number of big retailers have started selling prepaid debit cards, which customers can use to pay bills and store money, and they can even make direct deposits to the card. T-Mobile, Walgreen, Target, and Walmart all offer such cards, partly to earn money from fees, but also to give shoppers another reason to visit their stores.

Payday loans. These are small, short-term loans that people take out to cover expenses until their next payday. The Consumer Financial Protection Bureau has found that a typical loan can carry an interest rate of nearly 400 percent.

Pawn shops. Pawnbroking has been part of Western civilization at least since ancient Rome. A pawn shop is basically a pseudo-bank that offers loans to customers and takes their goods as collateral. While the practice of pawnbroking may be old, it is still growing, generating about 9 percent more revenue in 2013 than it did in 2012.

Is it risky to use nonbank alternatives?

It can be. Payday loans, for instance, are notoriously predatory. But even they can provide vital credit to people who can’t otherwise borrow.

The most basic thing to keep in mind is that while these alternative financial services are regulated, they are not subject to the same regulations as banks are. If your prepaid debit card is stolen, for instance, there is no legal limit to your potential liability. Likewise, there are few regulations governing the kinds of fees that providers can charge.

There’s a good reason that these services are regulated differently than banks: They don’t involve the basic business of banking, which is taking customer deposits in order to make loans. But that means consumers using alternative financial services have fewer protections, at least until the Consumer Financial Protection Bureau finishes drafting new rules.

Who wins and loses as the options expand?

In the banking industry, as elsewhere, more choices can mean more pressure to push down fees, particularly if the real goal of well-known brands like Target and Walmart is not to earn money on debit cards but to get customers to walk through the door.

While it may be good for consumers, competition from these big, established retailers poses problems for traditional banks and traditional nonbanks alike.

Banks were among the groups that lobbied aggressively — and successfully — to stop Walmart from getting a full banking license when it applied in 2006. And just a few months ago, when Walmart announced its “Walmart-2-Walmart” money- transfer system, the stock prices of money-wiring companies like MoneyGram and Western Union started to fall.

Ultimately, though, this competition to offer new, nonbanking alternatives is designed to attract those millions of Americans who don’t have bank accounts. And if it allows them to avoid exorbitant fees and better manage their money, these underserved consumers may turn out to be the big winners.

Estimates of the amount of money and revenue in the various alternative financial services come from the Center
for Financial Services Innovation
.


Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz.
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