No bank, no rank: people without a checking or savings account find it hard to get ahead in life. States and the federal government are stepping in to help.

Imagine that today is pay day. Most of us won't receive an actual paycheck. The money will be deposited directly into our checking or savings accounts. It will be there waiting for us to draw it out through an automated teller machine (ATM), debit card, credit card or check. We may choose to go into the bank to have the teller make a withdrawal or use online banking services to pay our bills.

Now, imagine that on pay day you don't have an account at a bank, credit union or any financial institution. Your employer hands you the paycheck. You have to get it cashed, buy money orders to pay your bills and try to put some of it aside to cover the unexpected expenses that crop up every month.

That's what happens to an estimated 10 million American households--the "unbanked." They are people without savings, checking or any other account. They rely on check cashers, currency exchanges, rent-to-own companies, automobile title lenders and pawn shops.

LIVING WITHOUT A BANK

People without checking or savings accounts typically have low incomes and limited education. They have very few financial assets, according to the Survey of Consumer Finances by the Federal Reserve Board of Governors. The unbanked are mostly minorities. If you put all of them in one room, one out of three would be African American, one out of five would be Hispanic. They tend to be younger, unmarried and unemployed. Although most are 35 or younger, one out of seven is 65 or older.

Their median income is $11,400 while the median income of people using banks is $40,450. Seventy-eight percent of the unbanked, compared to 48 percent of the rest of the population, say that they spend all of their income and have nothing left to save. Interestingly, 50 percent of the unbanked previously have had a checking or savings account.

The Federal Reserve data shows that households do not use checking and other accounts because:

* They do not write enough checks.

* Service charges and minimum balance requirements are too high.

* Families do not have enough money to put into an account.

* They cannot manage or balance an account.

* They have credit problems.

BEHIND BEFORE THEY START

When someone wants to open an account, financial institutions run credit histories to determine whether they have a history of bouncing checks or failures to pay overdraft charges. A person with a poor credit history will be turned down at most institutions because those firms maintain credit records for five years.

Checking accounts can be difficult to open and maintain because some families don't have enough money to meet bank minimum balances and charges for overdraft protections.

Many respondents to the federal reserve survey said they didn't trust financial institutions, and they had no need or desire to open accounts. But lack of access may also play a role. Poorer neighborhoods often do not have banks that market their services to low-income people.

HOW DO THEY MANAGE?

Although a checking account makes it easier to pay bills, people without one do manage. They can still cash their paychecks and buy money orders at banks and credit unions, but they often pay high fees. They ask a friend or family member who has an account to cash checks for them. Many grocery stores cash checks and sell money orders, for a fee, as well.

There's also the alternative financial sector, which has gown, particularly in urban areas. These providers--check cashers, currency exchanges and wire transfer services--offer a range of services from bill payment to tax preparation to short-term loans. Alternative providers offer valuable services for people who do not use mainstream banking. But the fees they charge can cause concern.

Of course people with a checking or savings account often pay fees, particularly for overdraft protection. But people without them pay every time they use an alternative financial service. Banks and credit unions charge between $1 and $8 to cash checks for customers without accounts. Grocery stores charge up to $2 per $100 to cash a check.

Although fees vary from city to city, it costs $3 to cash a payroll check in Denver, Colo., at one grocery chain and $2 for each $ I(X) at another. Check cashers typically charge a percentage of the payroll check, between 1 percent to 6 percent of the check's face value. The percentages go up to cash a personal check.

But the issue goes beyond these charges, says John D. Hawke Jr., comptroller of the currency, whose department regulates and supervises national banks.

"The relatively small sums that people without a formal banking relationship spend to cash a few checks and buy a few money orders are not the problem," he says. "It's the compound effect of lost opportunities to build wealth and make a better life that is the problem. It's the cash tucked away--not safely in a savings account, but in a coffee can or hip pocket, vulnerable to theft or loss--that sets people back in their straggle to get ahead."

STEPPING IN TO HELP

Both the federal government and states are working, often in conjunction with community organizations and financial institutions, to help citizens move into the financial mainstream.

The Debt Collection Improvement Act of 1996 encourages individuals to receive their federal benefits by direct deposit instead of through paper checks. So the U.S. Treasury Department developed several programs that help the unbanked open accounts.

One program, the Electronic Transfer Account (ETA) is a low-cost direct deposit account for people who receive federal benefit checks, such as Social Security, pension payments and veterans' benefits. Banks have the option to allow other direct deposits to be made to the federally insured account and may even offer interest. Account holders pay $3 a month and have access to the money through debit cards and ATM withdrawals.

Financial institutions that offer ETAs receive $12.60 per account from the Treasury Department to offset the cost of setting them up. More than 500 financial institutions offer them in more than 18,000 locations in every state except Delaware, and in Puerto Rico and the Virgin Islands.

The department is piloting another new program, First Accounts, designed to reach those who don't get federal benefits and are ineligible for ETAs. Fifteen grants totaling $8.35 million were awarded in May 2002 in 25 states. Participating banks and credit unions are setting up accounts for the most people possible. They also offer financial literacy training to new account holders.

The Treasury Department also provides incentives for FDIC-insured banks and thrifts to do more in economically distressed communities. Through grants, these banks and thrifts are opening new savings accounts, providing home mortgage loans or increasing investments in community development financial institutions (CDFIs).

These specialized businesses work in market niches and provide mortgages for first-time home buyers or financial services for low-income households and businesses. So far, 13 institutions awarded funds have provided $39.4 million in financial services and education programs in distressed communities alone.

Arthur A. Garcia, director of the Treasury's Community Development Financial Institutions Fund, says there's a great need for "capital and basic financial services in many under-served, distressed communities across the country." Partnerships between banks and CDFIs are a way to make sure "all people have adequate access to affordable credit, capital and financial services," he says.

Financial institutions are working individually to attract the unbanked by changing account features and customer services standards. Many banks are creating money transfer programs for immigrant consumers who send money to family members in their native countries. Credit unions and thrifts are hiring tellers and telephone operators who speak other languages. By helping individuals open checking and savings accounts, banks, credit unions and thrifts receive credit for the Community Reinvestment Act (CRA) requirements. The CRA requires that financial institutions serve the credit needs of their communities. When the firms are reviewed by regulators, how well they serve the low- and moderate-income neighborhoods in the community figures into their evaluations.

IMPROVING FINANCIAL LITERACY

State legislators are looking at ways to help low-income people develop money management skills.

"Financial literacy programs help create financial stability for families, which helps strengthen communities. The more people learn about credit and develop money management skills, the more likely they are to use credit wisely and build assets," says Delaware Representative Donna Stone, past chair of the NCSL Financial Services Committee.

Nearly a third of the states considered legislation this session that would provide financial literacy programs in schools.

Laws passed in four--Colorado, Hawaii, Mississippi and Washington. Arizona, California, Michigan and Rhode Island passed resolutions that designate April as Financial Literacy Month.

Colorado's new law encourages school districts to adopt a financial literacy curriculum and make it a graduation requirement. It charges the state education department to create a resource bank of materials to help school districts and charter schools design financial literacy programs.

Mississippi now authorizes school boards to establish financial literacy programs for sophomores and juniors. School boards are allowed to coordinate with volunteers from community organizations, including the U.S. Department of Agriculture Rural Development, U.S. Department of Housing and Urban Development, Junior Achievement, other nonprofit organizations and bankers.

Washington's new law creates a financial literacy public-private partnership with members from the Legislature, schools, executive branch agencies and the financial services sector. The partnership must develop a definition of financial literacy and then identify ways to increase the skills of public school students.

New York enacted the Student Financial Education Act in 2003, which allows credit unions to open and maintain student branches in schools. If approved by the school's governing body, a credit union can provide services and financial education to students otherwise not eligible for credit union membership. The student branches are strictly limited to students attending the school where the branch is located.

New York Assemblywoman Catherine Nolan wants to also improve financial know-how in adults. She is sponsor of a bill that would use money generated by civil penalties from another program to help the New York State Banking Department create programs for adult consumers.

"The goal is to target heads of households who would benefit from learning how to manage money," she says "The world of finance has become increasingly complicated, and, in many ways, unattainable to poorer households. Whether it be through micro loans or Christmas clubs, it benefits the whole community if all families have a financial stake in the future."

Illinois Representatives Art Tenhouse and Thomas Holbrook are working on a bill that would encourage financial institutions to deliver credit union products and services and financial literacy programs to low-income people and those in economically disadvantaged areas of the state.

Under the bill, the financial institution would be allowed to hold state money in a deposit account as a public depository. The institution would pay a lower amount of interest on the state money if it provides products and services to the unbanked.

MAKING A DIFFERENCE

"Informed, financially educated consumers are better able to make good decisions for their families and thus are in a position to increase their economic well-being," says Jeanne M. Hogarth, program manager in the Division of Consumer and Community Affairs at the Federal Reserve Board.

She says there are many ways to bring more people into the financial mainstream. "A one-size-fits-all response will not work," she says, "because of the diverse nature of the 10 million families without accounts at banks or credit unions." Instead, many approaches and programs are needed, and there still will be people who choose not to use a mainstream institution.

Hogarth says that financial literacy programs being encouraged by legislators, special efforts by the treasury department, banks and credit unions are making a difference.

REASONS FOR NOT OWNING CHECKING ACCOUNTS

REASONS                                              1989     1992

Do not write enough checks to make it worthwhile     34.4%    30.4%
Do not like dealing with banks                       15.0     15.3
Do not have enough money                             21.2     21.2
Service charges are too high                          8.6     11.3
Minimum balance is too high                           7.7      8.7
Cannot manage or balance a checking account           5.0      6.5
Do not need/want an account                             *      3.2
Credit problems                                         *      0.7
No bank has convenient hours or location              1.2      0.8
Other                                                 6.8      1.9

REASONS                                              1995     1998

Do not write enough checks to make it worthwhile     25.3%    28.4%
Do not like dealing with banks                       18.6     18.5
Do not have enough money                             20.0     12.9
Service charges are too high                          8.4     11.0
Minimum balance is too high                           8.8      8.6
Cannot manage or balance a checking account           8.0      7.2
Do not need/want an account                           4.9      6.3
Credit problems                                       1.4      2.7
No bank has convenient hours or location              1.2      1.2
Other                                                 3.5      3.1

REASONS                                              2001

Do not write enough checks to make it worthwhile     28.6%
Do not like dealing with banks                       22.6
Do not have enough money                             14.0
Service charges are too high                         10.2
Minimum balance is too high                           6.5
Cannot manage or balance a checking account           6.6
Do not need/want an account                           5.3
Credit problems                                       3.6
No bank has convenient hours or location              0.4
Other                                                 2.1

* Responses not coded separately in 1989

Source: The Federal Reserve Board of Governors

SURVEY OF CONSUMER FINANCES

The Board of Governors of the Federal Reserve System, in cooperation with the U.S. Department of the Treasury, questions U.S. families every three years. The data collected provide a picture of what Americans own--from houses and cars to stocks and bonds--how and how much they borrow, and how they bank. It is designed to provide detailed information on the financial characteristics of U.S. families and includes information on:

* Use of financial services.

* Pensions.

* Labor force participation.

* Demographic characteristics at the time of the interview.

Information is also collected on families' total cash income before taxes for the calendar year preceding the survey.

The Federal Reserve Board began working on the 2004 Survey in June. Participants are chosen at random from 79 areas across the United States, using a scientific sampling procedure. Summary results for the study will be published in early 2006 after all data have been assessed and analyzed. For additional survey information go to www.federalreserve.gov/pubs/oss/oss2/scfindex.html

Heather Morton covers banking and financial services for NCSL.