Post crisis banking legislation and regulation: the impact on access to banking services for the unbanked



The aftermath of the financial crisis of 2008-09 spurred regulators globally to enact new and enhanced regulations for the banking industry, as a way of protecting the global financial system from similar meltdowns in the future.

These regulations have had an unintended impact on individuals’ access to banking services. Coupled with enhanced legislation to fight money laundering and terrorist financing, access to several banking products and financial services – commonly used by the general public – has been reduced.

Banking and the general public

In 2013, the Federal Deposit Insurance Corporation (FDIC) sponsored a survey of ‘unbanked’ and ‘underbanked’ households. In this study, those households referred to as ‘unbanked’ do not have an account at an insured financial institution. Additional households that have an account, but have also obtained financial services and products from non-bank, alternative financial services (AFS) providers in the prior 12 months, are referred to as ‘underbanked’. Some of the key overall findings from the 2013 study include the fact that 7.7 percent, or one in 13 households in the US, were unbanked in 2013. Equally 20 percent of US households were underbanked in 2013, meaning that they had a bank account but also used alternative financial services (AFS) outside of the banking system. The highest rates of unbanked households are found among non-Asian minorities, lower income households, younger households and unemployed households.

Roughly 28 percent of US households do not have access to or do not use basic financial services – transaction accounts, credit cards or savings accounts. They cannot access cash via ATMs, cannot write cheques, cannot participate in e-commerce, cannot get a loan, nor do they have any identifiable savings. They are thus the most financially vulnerable portion of the population.

Why do they not have bank accounts?

Many middle- and low-income people cannot afford to maintain a checking account because of minimum balance requirements or high bank fees. For low- and moderate-income people with few assets and some unpredictability in their income and expenses, banks simply don’t stack up well against alternative financial service providers. And the number of people in a financially unstable position is rising.

Alternative financial service providers

According to a study carried out in 2009, a market research firm, AITE Group, projected that global remittance flows would reach $500bn by 2010. This figure is likely understated, as estimates are not current or available for various AFS segments. The FDIC definition of an AFS provider includes non-covered but mainstream financial institutions and companies, including cheque cashing services, money service bureaux and money remitters such as Western Union, pawn shops, mobile phone providers and e-wallets. In addition to these mainstream AFS providers, there are also hawaladars, peer-to-peer lending and organised crime. These various AFS providers offer basic banking transaction products and services to the unbanked households, services such as cheque cashing, money orders, wire transfers and remittances, prepaid cards and pay day lending.

While this is not a comprehensive list, this article will focus on these, as they are the products most commonly used by the unbanked population.

Issues and challenges

These banking products and how they have been offered by both alternative financial service providers and banks have been recent news. In addition, AFS providers businesses have been under increased regulatory scrutiny.

Although individuals can use AFS providers to circumvent the banks, AFS providers themselves must use them. FinCEN specifically defines these AFS providers and details the regulations on registration, as well as their recordkeeping and reporting. There are also explicit regulations for banks on their due diligence for these types of clients.

Cheque cashing, money orders and wire transfers and remittances have not, per se, been under the scrutiny of regulators recently. However AFS providers – and the banks that provide banking services to them – are subject to a complex mix of federal, state and local laws. Failure to comply with any applicable regulation can – and has – resulted in monetary penalties and jail time.

The biggest impact on these products for the consumer comes from the Anti-Money Laundering and Anti-Terrorist Financing laws, including the Bank Secrecy Act and the USA PATRIOT Act.

To identify and verify their customers, banks and AFS providers require that the individual present an identification (ID) card – preferably a government-issued card. Approximately 3.2 million Americans do not possess a government-issued picture ID. By all estimates, those least likely to have a government-issued photo ID fall into one of four categories: the elderly, minorities, the poor and young adults aged 18 to 24. Do those demographics sound familiar?

Prepaid cards are used as alternatives for paying employees in cash or by cheque for those who have no bank accounts. A payroll card can be used to make purchases, get cash and conduct transactions online. Furthermore, payroll cards have federal protections that limit the cardholder’s liability for fraud, theft and errors. However, there are downsides. Some workers pay such high payroll-card fees that they end up receiving less than minimum wage. This may violate state wage and hour laws, as plaintiffs argued in a class action lawsuit filed in June 2013 against a McDonald’s franchisee in Pennsylvania.

In response to the complaints about the fees associated with prepaid payroll cards, the New York State Attorney General introduced the Payroll Card Act in February 2015.

Complaints about pay day lending, include unreasonable fees, unauthorised withdrawals from checking accounts and other abuses. In March of this year, the Consumer Financial Protection Bureau unveiled a framework of additional proposed rules to regulate payday lenders and other costly forms of credit.

Pulling all of the information together from above, it is clear that approximately 28 percent of households in the US use alternative financial service providers for mundane financial transactions. The demographics of these households confirm that they are the most financially vulnerable of the population and are consistent with traditional banks’ most risky credit clients. These clients normally do not qualify for conventional bank loans and products, and most of these financial transactions are cash-based. Furthermore, there is seldom an ongoing relationship with these individuals, i.e., the customer population is transient. These alternate financial service providers are considered one of the riskiest anti-money laundering/anti terrorist financing (AML/ATF) client types by conventional banks and the regulators.

To protect these households, as well as the financial system, legislators have passed or proposed numerous bills since the financial crisis – including legislation to create the Consumer Financial Protection Board (CFPB). Indeed, traditional banks have had limits placed on the fees and requirements they can establish to offer the banking products used by the unbanked and the underbanked. Additionally, regulators have heightened scrutiny and expectations surrounding the information required to ‘know your client’ for alternative financial service providers.

When you combine all these factors together, the results are clear. Traditional banks are exiting many of these products; both JPMorgan and Citibank will either exit or spin-off their prepaid card businesses soon. Due to increased concerns of money laundering, banks are closing branches along the Mexican border. In their efforts to ‘de-risk’ their portfolios, traditional banks are reducing or exiting relationships with AFS providers. Whilst regulators are concerned about this and have stated that this is not their intent, they have not been willing to consider this during AML reviews of the traditional banks. Some immigrant populations from countries that are considered high risk for money laundering and terrorist financing no longer have access even to the alternative service providers, as the banks providing banking services to the MSBs are refusing to process payments to and from these jurisdictions. Traditional banks are also exiting all payday lending products, and exiting the alternative financial service providers that continue to provide payday lending.

Ultimately, traditional banks and AFS providers cannot afford the crushing fines and jail terms inherent in the recent legislation.

So what?

The population impacted by these decisions and risk management policies have limited options for access to financial products. This is also true for the alternative financial service providers.

The alternative financial service providers will end up seeking out smaller, banks, which will charge higher fees for these banking products. The money laundering and terrorist financing controls in place at larger banks are unlikely to be as sophisticated in smaller banks. In addition, for cross-border transactions, larger banks – which exited the business with the alternative financial service providers, but provide banking services to smaller banks – are now one step further removed from the actual person or company initiating the wire and understanding the reason for the transaction.

The requirement for a government-issued form of identification is growing among AFS providers, and many in this population cannot produce one. For payroll, this may mean a reversion back to cash for those who have no bank account. This is a much more risky method of payment, due to the robbery potential. It is also more costly, as cash needs to be managed under dual control, and is risky for the same reasons for employers.

For short term lending, one of the only options available is through a criminal network – ‘loansharking’. Loan sharks often enforce repayment by blackmail or threats of violence. There is also an emergence of ‘peer-to-peer’ lending. This is the practice of lending money to unrelated individuals, or ‘peers’, via an internet marketplace. These are not regulated, nor controlled in any way. It also assumes that this population has access to a computer and is savvy enough to engage in this marketplace.

Immigrants from primarily Africa, the Middle East and Asia have commonly relied on an informal method of money transfer called hawala, meaning ‘transfer’ or ‘wire’ in Arabic banking jargon. The hawala system refers to an informal channel for transferring funds through service providers, known as hawaladars, using codes and faxes. While hawala is used for the legitimate transfer of funds, its anonymity and minimal documentation have also made it vulnerable to abuse to finance illegal activities, including terrorist financing.


Despite the efforts of legislators to protect the financial system and the most financially vulnerable of its citizens, the reality is that the policies, legislation and controls have had the opposite effect. As the traditional banks continue to exit these products and reduce their relationships with AFS providers, the risk in the financial system will increase and transparency will decrease.

This 28 percent of the US population is now even less able to access the basic banking services and will see their already diminished access continue to decline. And many of the alternative products and solutions increase the risks to themselves and their families.


Carolyn E Vick is an affiliated consultant at InternationalKYC. She can be contacted by email:

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Carolyn E Vick


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