Expanded banking services can benefit low-income households

Buying a home or car. Saving for a child's college education. Having money available for an emergency. Establishing credit.

These goals can be difficult to attain for low-income households without bank accounts. A U-M professor says financial institutions can promote greater economic opportunities by expanding their services.

Banks could offer checking accounts without minimum balances and no-fee checking to lower barriers, says Michael Barr, assistant professor at the Law School. Government could assist banks in making such services available by offering tax incentives.

Without bank accounts, low-income households face higher costs for transacting basic financial services through check cashers and other alternative providers. In addition, such families find it more challenging to save and plan for the future.

About 22 percent of low-income families—more than 8.4 million households earning less than $25,000 per year—don't have bank accounts, according to a 1998 consumer finance study.

In the recent issue of Yale Journal on Regulation, Barr explores the dual financial services market in which banks mainly serve middle- and upper-income people, while low- and moderate-income people often rely on check cashers and other alternative service providers.

"Better access to financial services is critical for low-income persons seeking to enter the economic mainstream," Barr says. "The lack of long-term savings undermines their ability to purchase a home or to send their children to college."

Barr says low-income families should save for possible short-term crises, such as injury or job loss, as well as for longer-term goals. Individuals without bank accounts are cut off from mainstream sources of credit, whether for short-term consumer borrowing or home ownership, Barr says.

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