Columbia, S.C. — About a third of South Carolina’s households turn to pawn shops, payday lenders, rent-to-own companies and other alternatives instead of using banks for all of their financial needs.
This population – known as the unbanked or underbanked – is made up of South Carolinians who have low incomes or are not doing a good job of managing their money, said Stephen Kirkland, a CPA with Kirkland, Thomas, Watson & Dyches in West Columbia.
Unbanked and underbanked households are falling behind, in an economy that rapidly is moving toward electronic banking, Kirkland said.
“It’s almost like not having email,” he said. “You just kind of get left out of a lot of things.”
The underbanked often operate in cash and can have difficulty paying bills because so many service providers have gone to electronic payments or accept only cash or credit cards, Kirkland said. They also pay more to have access to their money – from paying a fee to cash their paychecks, to taking out expensive loans with payday lenders to buying money orders to pay bills.
People don’t have bank accounts for a range of reasons: they don’t think they have enough money to open one, they don’t trust banks or they can’t open an account because of a history of banking or credit problems, according to a survey by the Federal Deposit Insurance Corp.
In 2009, as the Great Recession was wiping out jobs and decimating bank accounts across the nation, the FDIC recognized consumers were turning to providers other than banks so it created a survey to identify who was unbanked and why.
“We were trying to bring those unbanked and underbanked into the financial services arena,” said LaJuan Williams-Young, FDIC spokesperson.
The FDIC issued the survey again in 2011 and found the percentage of households in the nation that did not have bank accounts jumped to 8.2 percent from 7.6 percent and the amount of underbanked increased to 20.1 percent from 18.2 percent.
The good news is that South Carolina is bucking the national trend. Unbanked households in the state decreased to 9.3 percent in 2011 from 10.3 percent in 2009. The underbanked in South Carolina also went in the opposite direction, dropping to 20.6 percent from 24.3 percent.
The FDIC survey changed its definition of underbanked slightly between the two years to include in 2011 consumers using alternative financial services at least once in the past year instead of twice, using a Refund Anticipation Loan in the past year instead of in the past five and included “non-bank remittance” – money sent or received from a place other than a bank – in the past year.
“It’s a positive move that more South Carolina consumers are establishing relationships with banks because it gives them access to more cost effective financial products,” said Carri Lybarker, administrator of S.C. Department of Consumer Affairs.
Otherwise, they are often stuck paying higher interest rates and fees to use their money, experts said. Alternative lenders often call charges fees instead of interest in order to make more money because some states have interest caps, the CPA Kirkland said.
South Carolina does not have a cap, Lybarker said. But if lenders charge above 18 percent, they must file with the state’s consumer affairs office.
Spartanburg-based payday lender Advance America, for example, charges a $15.40 fee for a $100 in-store payday loan fee in South Carolina, according to the company’s website. That amounts to a more than 400 percent interest rate for a 14-day term.
Consumers of these loans must have a bank account and a job, but these loans often are used by those in the underbanked segment who can’t get a loan from a traditional lender.
To attract more people to banks, the S.C. Banker’s Association educates consumers on financial literacy including the importance of maintaining good credit and what consumers can do to establish credit, said Fred Green, president of SCBA.
Affordable accounts with little or no cost also could contribute to the decrease in those without bank accounts, experts said.
South Carolina Bank and Trust offers a free checking account to its customers with a minimum deposit of $50. The account is a primary product the bank uses to grow its customers, SCBT President John Windley said
“We open a lot of these checking accounts across the state of South Carolina because it is one of the more economical accounts out there on the market today,” Windley said.
Still, with almost 30 percent of households in South Carolina unbanked or underbanked, the state faces challenges. Kirkland said the problem is a cycle between generations. If parents do not know how to manage their finances, then they can’t teach their children. The responsibility for financial education should also rely on the state’s schools, he said.
Public schools already have some programs in place to teach financial literacy. A state law mandates 11 standards for financial literacy in K-12 instruction, but implementation and curriculum is controlled by individual districts, said Chanda Robinson, Education Associate for Social Studies Professional Development with the S.C. Department of Education.
Another organization, South Carolina Jump$tart Coalition, works to improve knowledge of the state’s youth about personal finance and has a board of leaders from groups like the South Carolina Credit Union League and government agencies.
But Kirkland said more needs to be done.
“The solution, in my opinion, is the schools need to do a better job of teaching people about finances and money management,” he said. “There are some well-educated people who do not know much about these subjects, including medical doctors.”