James lives in a working-class neighborhood in Cleveland. Despite holding a steady job for years, he’s never had a bank account. Like many Americans in similar situations, James cashes his paychecks at a local check-cashing outlet, paying a 2% fee each time. He keeps his savings in cash at home and uses money orders to pay bills, incurring additional fees with each transaction.
James represents a significant portion of America’s population – the “unbanked.” According to research by economists Claire Célerier and Adrien Matray, about 30% of low-income Americans don’t have basic bank accounts. While poverty is often framed as an income problem, their groundbreaking research reveals that lack of access to basic financial services may be a crucial but overlooked barrier to economic mobility and wealth building.
“Financial inclusion is not just about having a convenient place to store money,” explains Adrien Matray, an economist at the Atlanta Fed and co-author of the study. “Our research shows it’s a fundamental tool for wealth accumulation and economic advancement, especially for low-income households.”
The Wealth-Building Power of Bank Accounts
In their study published in the Review of Financial Studies, Célerier and Matray found that simply having a bank account can dramatically improve financial outcomes for low-income households. Using data spanning 1993-2005, they discovered that low-income households with bank accounts accumulated approximately $6,900 more in assets compared to similar households without accounts.
This wealth difference isn’t explained by income disparities. In fact, the researchers found that banked households had incomes only about 30% higher than unbanked households, yet their wealth was more than four times greater.
“The magnitude of this effect surprised us,” Matray says. “Having a bank account translated into wealth that was about four times larger than unbanked households with similar incomes and demographics. This suggests that financial inclusion has a multiplier effect on wealth accumulation.”
How does having a bank account translate to such significantly higher wealth? The researchers identified several key mechanisms:
First, bank accounts provide a secure place to save money that earns interest, unlike cash kept at home. This helps households gradually build wealth through compound interest, even if the interest rates are modest.
Second, financially included households invest significantly more in durable assets, particularly vehicles. The study found that banked households were 56% more likely to own a vehicle and invested about $5,900 more in vehicles than their unbanked counterparts. This investment in reliable transportation expands employment opportunities and earning potential.
“We found that the main durable asset low-income households invest in is their vehicle,” says Matray. “This makes sense because reliable transportation can dramatically expand job opportunities and economic advancement.”
Third, bank accounts improve access to affordable credit. Having a banking relationship helps households build credit history and qualify for loans with better terms than those available from alternative lenders.
A Buffer Against Financial Hardship
Perhaps most importantly, the researchers found that financial inclusion provides a crucial buffer against economic shocks. When households experienced job loss, those with bank accounts were significantly less likely to face financial strain than unbanked households experiencing the same hardship.
“The difference in financial resilience was striking,” Matray emphasizes. “While the probability of financial strain increases around 50% for unbanked households after a layoff, it remains stable for households with a bank account. This suggests that banking services give low-income households tools to manage their personal finances and maintain a financial cushion that absorbs negative income shocks.”
This finding underscores a critical but often overlooked dimension of financial inclusion; it doesn’t just help people build wealth during good times – it also helps them preserve that wealth during difficult periods.
The Supply-Side Problem
Why do so many Americans remain unbanked despite these benefits? While some might assume that unbanked individuals simply don’t see value in banking services, the research suggests otherwise.
Célerier and Matray studied what happened when regulatory changes made it easier for banks to open branches across state lines. As states removed barriers to interstate branching, bank branch density increased by approximately 20% in poorer counties. Therefore, when banking services became more accessible, more low-income households opened accounts.
“This result suggests that low-income households are partly rationed by the supply of banking services,” Matray explains. “In other words, many people remain unbanked not because they don’t want bank accounts, but because banks haven’t made these services sufficiently accessible or affordable.”
Beyond Individual Benefits
The benefits of financial inclusion extend beyond individual households. When financially included households can better weather economic shocks, they’re less likely to default on rent payments, benefiting landlords and property owners. They’re also more likely to maintain spending during personal economic downturns, supporting local businesses.
“We found that households with a bank account are less likely to defer their rent payments when they experience financial difficulties,” Matray notes. “This implies that financial inclusion might have positive benefits beyond the directly affected households.”
These broader economic benefits suggest that expanding financial inclusion could create positive spillover effects throughout communities, especially in low-income areas.
The Path Forward
The research has clear implications for policymakers interested in promoting economic mobility and reducing poverty:
“If unbanked households rely on informal or alternative financial services that are as efficient as standard financial services to accumulate wealth, promoting financial inclusion might be ineffective,” Matray explains. “But our research shows the opposite is true. In economies with well-developed financial systems like the United States, being unbanked may be particularly costly.”
First, expanding access to basic banking services should be a priority. This could involve incentivizing banks to open branches in underserved areas or supporting innovative mobile banking solutions that reduce the need for physical branches.
Second, regulations should address affordability barriers like minimum balance requirements and high fees that disproportionately affect low-income households. Bank accounts designed specifically for lower-income customers could help bridge the financial inclusion gap.
Third, financial education should highlight the wealth-building advantages of mainstream banking over alternative financial services like check-cashing businesses and payday lenders, which typically charge high fees.
A Foundation for Financial Mobility
James eventually opened his first bank account when a community bank opened a branch near his home, offering accounts with no minimum balance requirements and minimal fees. Within two years, he had saved enough for a down payment on a reliable used car, which expanded his job opportunities. When his employer offered direct deposit, he started automatically transferring a small amount to savings each payday.
His experience mirrors what Célerier and Matray’s research confirms: financial inclusion provides essential tools for wealth accumulation, especially for those with limited resources.
“Overall, we find that marginal returns to financial inclusion among low-income populations affected by supply-side changes are high,” Matray concludes. “These results suggest that unbanked households are constrained by the supply of banking services and can benefit from them.”
As policymakers and financial institutions work to expand access to banking services, they’re not just connecting people to accounts – they’re opening pathways to financial security and economic opportunity.
In an economy where the gap between the haves and have-nots continues to widen, ensuring that all Americans have access to basic financial services represents a crucial step toward building a more inclusive economy that works for everyone.
