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‘Unbanking’ fuels financial fallout

ALBUQUERQUE, N.M. — More than a third of the households in the Albuquerque metro area do little or no mainstream banking,

substantially higher than the national average and a possible window on an underground economy and “shadow” world of consumer financing.

Fresh farm produce sold at farmers markets, such as the Albuquerque Northeast Farmers' & Artisans' Market shown here, legitimately captures the essence of the underground economy, which is largely cash-based. (Adolphe Pierre-Louis/Albuquerque Journal)

Fresh farm produce sold at farmers markets, such as the Albuquerque Northeast Farmers’ & Artisans’ Market shown here, legitimately captures the essence of the underground economy, which is largely cash-based. (Adolphe Pierre-Louis/Albuquerque Journal)

“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,” said David Seely, president and CEO of Kirtland Federal Credit Union.

So-called “unbanked” and “underbanked” households have for years been a concern of the Federal Deposit Insurance Corp. because they illustrate a lack of public confidence in the banking system.

Banks and other financial institutions are the backbone of the economy, as the Great Recession amply demonstrated, so having a major share of households either not using them or barely using them almost certainly impairs the performance of the local economy.

“One of the things that makes our society work is that people have to buy in,” said Daniel Yu, a chartered financial analyst at REDW Stanley Financial Advisors.

“Having a third of our population underserved by banks is not in the best interests of society because it fosters a subculture of people who feel the system is rigged against them and fosters a sense of hopelessness,” he said.

A little more than one in 10 households in the metro – or 11.1 percent – had no bank accounts while nearly one out of every four households, or 24.4 percent, had only one or two bank accounts, typically just checking, while still using “alternative financial products.”

Alternative financial products is the term used for money orders, check cashing, remittances, payday loans, refund anticipation loans, rent-to-own services, pawn-shop loans and auto-title loans, according to the FDIC report.

The Expo New Mexico Flea Market, where one can find 1,300 vendors on 25 acres on any given weekend, represents the cash economy on a grand scale.

The Expo New Mexico Flea Market, where one can find 1,300 vendors on 25 acres on any given weekend, represents the cash economy on a grand scale.

Altogether, unbanked and underbanked households accounted for 35.5 percent of all households in the metro. Based on Census Bureau data, that means 121,705 in the four-county metro are underserved by Main Street banks.

For comparison, 27.4 percent of all households nationwide were classified as either unbanked or underbanked.

The findings are based on the June 2013 survey sponsored by the FDIC and later compiled and analyzed in a report titled, “2013 National Survey of Unbanked and Underbanked Households.”

Where cash is king

Using the percentage of unbanked and underbanked as an indicator of an underground or shadow economy is based on the premise that cash is king with that segment of society. Cash income is easier to conceal from tax collectors than other forms of income.

At least two national studies point to upwards of 18-19 percent of all income in the United States is not reported for income-tax purposes, a related indicator of the underground economy. Tax evasion has been on the rise over the past 10 years or so, the studies say.

Farmers markets have traditionally been all-cash affairs. Increasingly, accommodations are being made for the use of various plastic cards, including those for federal Supplemental Nutrition Assistance Program, or SNAP, recipients. (Adolphe Pierre-Louis/Albuquerque Journal)

Farmers markets have traditionally been all-cash affairs. Increasingly, accommodations are being made for the use of various plastic cards, including those for federal Supplemental Nutrition Assistance Program, or SNAP, recipients. (Adolphe Pierre-Louis/Albuquerque Journal)

New Mexico’s labor force participation rate was 59.3 percent in 2013, same as Arizona and lower than that of Colorado, Oklahoma, Texas and Utah, according to the Census Bureau. The national rate was 63.6 percent.

The comparatively low rate in New Mexico likely reflects people working jobs outside the official labor force, observed Dale Dekker of the Dekker Perich Sabatini design firm.

“I do think we have a fairly robust barter and cash economy that probably operates outside the banking and regulatory environment and therefore does not show up in any data,” he said.

A staple of the underground economy is “handyman” work, from pulling weeds to auto repair, said Chuck Sheldon of T&C Management, which manages 1,400 rental units in the Southeast Heights, almost all of which are east of San Mateo.

“Sixty percent of our tenants don’t have checking,” he said. “They pay their rent with money orders.”

Some work for legitimate employers but get paid in cash. For those with marginal incomes, an incentive to keep earnings off the books is the potential to lose public assistance if they exceed income limits, Sheldon said. Some get help from nonprofit charities and food banks.

“They’re working, but it may be under the radar,” he said.

Based on percentage of gross state product, New Mexico had the third-largest underground economy among states at an average of 9.1 percent between 1997 and 2008, according to a 2013 research study by Mississippi State University business professor Travis Wiseman.

New Mexico ranked behind only West Virginia at 9.3 percent and Mississippi at 9.5 percent for having large underground economies. States with the smallest underground economies were Delaware at 7.3 percent, Oregon at 7.4 percent and Colorado at 7.5 percent.

The 1997-08 study period predates the Great Recession and its lingering hangover, and underground economies have undoubtedly expanded since then. States hardest hit by the recession, like New Mexico, have likely registered higher rates of expansion.

Given the absence of a huge mafia presence or deep-seated culture of dodging taxes, as found in some European countries, Yu said he doubts the underground economy here approaches the threshold of 20 percent and higher found in Greece, Italy and Spain.

On the other hand, Sheldon believes an underground economy equal to 20 percent or more of the gross product is possible, even probable, given the large share of households either not using banks or barely using them.

Unbanking on the rise

The ranks of the unbanked in Albuquerque jumped from 7.2 percent of all households in 2011 to 11.1 percent in 2013, compared to a drop nationwide from 8.2 percent in 2011 to 7.7 percent in 2013, the FDIC report says.

BizO_jd_24aug_Financial-Services“That is nearly a 50 percent increase, pretty huge when you think about it,” said Dekker about Albuquerque’s 2011-13 increase.

The biggest reason for not having a bank account, given by nearly 37 percent of survey respondents nationwide, was not having enough money. In Albuquerque, that would translate to 13,550 households without enough money to put in a bank, Dekker noted.

More than a third of the unbanked nationwide say they would probably open a bank account if their circumstances changed, while an equal share said they wouldn’t open an account no matter what happened.

Little or no access to banking does not affect overall consumer spending in a direct way, since money is money no matter how it’s paid out. Indirectly, however, little or no access to banking can hamper a person or household’s attempt to access mainstream credit.

Consumer credit – basically loans to buy stuff – is a major driver of consumer spending, which makes up from 62 percent to about 70 percent of the gross domestic product or GDP.

Banking regulations stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Patriot Act of 2001 have created an almost adversarial credit environment for people whose finances are in cash, said Greg Levenson, president and CEO of Southwest Capital Bank.

“Post-meltdown on the lending side, we ask for a lot of information to comply with consumer protections and other federal regulations. Documenting income is real important,” he said. “Anybody who deals in cash is suspicious if we can’t verify their earnings.”

This government oversight is one source of the widespread alienation to mainstream banking, he said, adding, “A lot of people are afraid of Uncle Sam.”

The upshot is that 35.5 percent of the metro’s households turn at least occasionally to alternative financial products, which is the crux of the FDIC’s concern.

Frequently, these products provide emergency financing to households living paycheck to paycheck. The terms of the loans commonly have exorbitant interest rates and rollover provisions that critics say can lead to chronic indebtedness.

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