There are approximately 23 million and counting unbanked and underserved Hispanics in the U.S. The Latino Community Credit Union’s guide Financial Education for Immigrants outlines the barriers that prevent use of conventional financial institutions by Hispanics. They include:
- Cultural barriers: Most Latin American countries are much more cash-based than the U.S. Historical macroeconomic instability or political unrest has fostered a distrust of banking systems. Some Latin American nations do not have deposit insurance programs, deterring people from parking their savings in a bank.
- Language and literacy barriers: A lack of English proficiency coupled with insufficient literacy adds to the existing confusion regarding finance and credit. Many conventional financial institutions do not offer services in Spanish.
- Documentation issues: Many Hispanics and financial institutions misunderstand what kinds of documentation are needed to open an account with a financial institution.
- Lack of use of conventional financial institutions: A lack of experience with financial institutions means unbanked Hispanics are unaware of how they can benefit from conventional FIs.
- Lack of affordable and accessible financial services: To a certain extent, low-value customers are excluded from conventional financial institutions. Retail banks that rely solely on interest income may not be willing to accept customers with low depository balances.
Unbanked and underserved Hispanics address their financial consumer needs in several ways. Many keep large quantities of cash at home or on his or her person. They do not save, build credit and wealth, or plan for their financial future. Many use fringe-banking providers such as check cashers or pawn shops that charge exorbitant fees and interest rates. The vast majority of underbanked Hispanics overpay for sending remittances home to family and friends because they are unaware of cheap and safe alternatives.
Many conventional financial institutions do not make an effort to serve unbanked immigrants. The FDIC Survey of Bank Efforts to Serve the Unbanked and Underbanked reveals that very few banks have made it a strategic priority to target the unbanked and underbanked. Banks appear to assume doing business with low-income households is not profitable. When asked to rank order the challenges banks face in serving or targeting unbanked and underbanked, banks list “profitability issues” first, followed by “regulatory barriers” and “fraud concerns.” Of the 40 percent of banks that perceive regulatory impediments, many cite concerns related to maintaining compliance with the Patriot Act and the Bank Secrecy Act. There is a clear disconnect between those people who are excluded from the banking system and the conventional financial institutions that could be serving this excluded group.
Financial Literacy Education
Financial service providers, policymakers, academics and Latino community activists agree that incorporating the unbanked and underserved Hispanic community into the U.S. banking system requires a lot of specialized outreach. As reported in the aforementioned FDIC survey, when asked to rank the most effective strategies for reaching out to unbanked and underbanked customers, banks identified “teaching financial education sessions” as the most effective, followed by “financial outreach with other organizations” and “off-premise outreach visits.”
The process of introducing conventional financial services to underserved Latinos begins with financial literacy education. Consumers need to understand that safe and affordable options beyond fringe-banking providers are available. Consumer finance is not an easy topic to understand. Financial literacy education may not change Hispanic migrants’ personal finance habits, but it will empower households to make more informed decisions.