Millions of Americans Who Avoid Banks Offer a Peek at the Underground Economy

Much of the country buys, sells, and makes a living outside official scrutiny


What's your preference when making purchases? Do you still swipe a card? Do you prefer to pay with an app on your phone? Or are you one of those brave trendsetters trying to make a go of it by using bitcoin for day-to-day purchases?

It's a changing world, and an increasingly digital one. Money often seems to be embodied more by the brisk transfer of electronic signals than by the anonymous exchange of paper notes and metal coins. Denmark actually plans to shut down the printing presses (the physical ones—don't expect the money supply to suffer any restrictions) and some economists think everybody else should follow suit.

Who uses the stuff anymore, anyway? Right?

Well, except for that vast chunk of the population that actually prefers cash as the primary—or even exclusive—means of exchange. Many Americans happily and quietly avoid banks and trendy purchasing choices in favor of old-fashioned paper money. Lots of business gets done that way, though nobody knows just how much—which may be the whole point.

Last week, the Albuquerque Journal pointed out that over a third of households in the city either avoid banks entirely (the "unbanked") or else keep a checking account but do much of their business through cash, check-cashing shops, pawn shops, money orders, and other "alternative financial products" (the "underbanked").

A few weeks earlier, the Kansas City Star reported a similar local situation, with 12 percent of households and 45 percent of African-American families completely avoiding banks.

In both cities, the phenomenon is growing.

Nationally, according to the Federal Deposit Insurance Corporation (FDIC), 7.7 percent of U.S. households are unbanked and 20 percent are underbanked. Another 5.3 percent are unknown. Not having enough money to open an account is an understandable and widely cited reason to not do business with banks. Use of banks rises along with income—though 5 percent of households making $30,000-$50,000 are still unbanked and 13 percent of those making over $75,000 remain underbanked. Maybe that's because 34.2 of respondents to an FDIC survey say they don't like or trust banks, and another 30.8 percent find bank fees too hefty or unpredictable to tolerate. Twenty-six percent cite privacy as a reason for keeping clear of banks – bankers say that increased federal reporting and documentation requirements drive many customers away.

"A lot of people are afraid of Uncle Sam," Greg Levenson, president and CEO of Southwest Capital Bank, told the Albuquerque Journal.

So, many people operating outside the traditional financial system avoid the institutions by choice. They'd rather deal in cash, and use prepaid cards when plastic is an absolute must.

And deal they do. The unbanked may take a pass from traditional financial institutions, but that doesn't mean they're refraining from buying, selling, or making a living.

"A third of our population unbanked and underbanked negatively impacts consumer spending, is a clear sign of alienation and indicates the extent of our underground economy," David Seely, president and CEO of Kirtland Federal Credit Union, told the Journal.

Edgar L. Feige an emeritus professor of economics at the University of Wisconsin–Madison, agrees. His research suggests that the U.S. government wildly overestimates the amount of currency circulating overseas; that domestic holdings of cash dollars add up to $2,300 for every man, woman, and child in the country. "[L]arge amounts of cash are employed to undertake transactions that individuals and firms prefer to hide from the government either to avoid taxes, regulations or punishment for illegal activities. Cash, being an anonymous medium of exchange leaving no paper trail, is the logical choice for undertaking such transactions."

At the St. Louis Federal Reserve Bank, Yi Wen, an assistant vice president and economist, and Maria A. Arias, a research associate, have also commented on the "private sector's dramatic increase in their willingness to hoard money instead of spend it" in the official economy.

Unsurprisingly, Feige's estimate that up to 23 percent "of total reportable income may not properly be reported to the IRS" is larger than the official number.

Further evidence that the unbanked are not thoroughgoing conscientious objectors to economic activity lies in the recent disconnect between official employment and income numbers on the one hand, and the money passing through people's fingers on the other.

"Despite the sharp drop off in the labor force participation rate, consumer spending has nevertheless continued to surge," wrote Bernard Baumohl, chief economist at the Economic Outlook Group, two years ago. "One explanation is that many of those who have left the labor force since the last recession have managed to earn income in the shadow economy and their spending still shows up in the official retail sales and personal consumption data."

It's a fair bet that those who "have managed to earn income in the shadow economy" and want to keep their income unreported to the feds and undiminished by fees are heavily overrepresented among the unbanked.

In July of this year, Baumohl reported that robust economic activity and weak official employment and income figures continue to be divorced from one another.

It's good news that there's more prosperity out there than we measure with official figures. That many Americans steer clear of banks doesn't mean that they're all suffering. A good number of them are making a living under the radar, and choosing to shield their money from prying eyes and high fees the same way.

There are costs to avoiding banks, just as there are costs to working off the books. Cashing checks can be expensive, bank accounts are often safer than shoeboxes, and it's difficult to take out loans to build a business are make a big purchase when you have no financial history to speak of.

"Lacking access to government-insured savings or opportunities to build credit, they not only incur risk of theft, fraud and loss, but by using alternative financial service (AFS) providers such as check cashers or payday lenders, they also become prey to expensive predatory products and services that make it harder for them to achieve financial security," the Pew Health Group scolded in a report criticizing those who spurn financial officialdom.

But most people aren't idiots. When they avoid expensive, snoopy financial institutions, it's because they've decided the benefits outweigh the costs. And since the rest of us have very little idea of what they're all up to—one of those benefits, for sure—who are we to say they're wrong?