'Shadow banks' - payday lenders, pawn shops - loom large in South, study finds
Nearly one in four S.C. households either lack bank accounts or rely on payday lenders, check-cashing services or pawn shops for financial transactions, according to a study released Wednesday by federal regulators.
The first-ever study by the Federal Deposit Insurance Corp. found that the poor, minority and immigrant families tended to use nontraditional banking services - often called "shadow banking."
About 432,000 South Carolina households, or 24.2 percent, were underbanked - that is, they have bank accounts but also use more costly financial services, according to the report. The study also determined that 182,000, or 10.2 percent of S.C. households, don't have a relationship with a bank, period.
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The state ranked No. 8 nationally in the percentage of households without bank accounts, and No. 3 for the percentage that are underbanked. The national average was 7.7 percent for households that were unbanked, and 17.9 percent were underbanked.
The FDIC study has been long-anticipated by the banking community, said Penny Cothran of the S.C. Bankers Association. "Unfortunately, some of these statistics are not a surprise," Cothran added.
The FDIC study closely mirrors a survey that the S.C. Bankers Association did in 2007-08 on the banking habits of Midlands residents, Cothran said.
That survey of Lexington and Richland counties found that about 25 percent of households that have a bank account don't use the banks for other services. Instead they borrow from payday lenders or use money orders instead of checks.
But Cothran added that the high percentage of unbanked or underbanked S.C. households might have more to do with culture and lack of personal finance education than the state's high rate of poverty and unemployment.
The state banking association has a long-running public education program that sends bankers into the schools to teach students about savings and checking accounts, credit cards and the basics of borrowing.
"If you're not receiving at school any personal finance education, then you may think it's a good idea to go to a pawn shop or a payday lender," Cothran said.
From Thomas Jefferson to today, there's been a long-running distrust among Southerners to put their money in banks, said Steven Mann, a finance professor at USC's Moore School of Business.
"Thomas Jefferson was in debt up to his eyeballs and resented the fact that he had to borrow from a bank," Mann said.
Mann, though, said he thinks the large percentage of households that use alternative and more costly financial services represents an opportunity for local banks to grow their business.
"You charge high prices when you have a customer base that can't go anywhere," Mann said.
The report is part of an FDIC effort to bring the so-called "unbanked" into the financial mainstream.
FDIC Chairman Sheila Bair said access to a bank account gives households "an important first step toward achieving financial security." Vulnerable families need the ability to save for emergencies and borrow on affordable terms, she said in a statement.
"By better understanding this group - who they are and their reasons for being unbanked or underbanked - we will be better positioned to help them take that first step," Bair said.
The Census Bureau conducted the survey in January on behalf of the FDIC.
"This is giving us a picture that we've never seen before," said Barbara Ryan, the report's lead writer.
The report also found that 1.3 million households across the nation closed bank accounts in 2008. More than 31 percent said they closed them because of overdraft fees, service charges or high minimum balance rules.
The survey also found:
- 54 percent of black households, 44.5 percent of American Indian/Alaskan households and 43.3 percent of Hispanic households have limited access to banking.
- Households in the South are more likely to be unbanked or underbanked.
- About 28 percent of households headed by unmarried people are underbanked. For households with married couples, the number is 15.4 percent.