Barriers to Usage of Financial Services
Limited English proficiency, lack of familiarity with U.S. financial practices, and non-permanency in the U.S. are some of the key barriers for immigrants to participate in mainstream financial services. This section will review research and literature on use and receptiveness of immigrant groups as well as best practices in overcoming barriers and improving access and use to mainstream financial services by immigrant communities.
The barriers to increased usage of financial services have their roots in a variety of sociological and cultural trends. It is impossible to move forward with increasing immigrant participation in the formal financial sector without first identifying obstacles to this participation and clarifying the origins of the obstacle. This section will discuss barriers to usage for consumers and providers of financial services, and introduce the impact of alternative financial institution such as payday lenders and check cashing centers on immigrants’ banking preferences.
Barriers Encountered by Consumers
The Financial Literacy Center (2012) classifies barriers to usage into three main categories – inexperience with domestic financial systems, logistical, and expectations on the probability of returning to the immigrants country of origin. Review of other academic and practitioner produced research indicates that distrust of financial institutions exerts a high level of influence on inexperience, as the distrust causes immigrants to avoid becoming familiar with financial institutions. Many of the relevant case studies mention logistical factors related to fees and minimum credit scores as hindrances to expanded access. Additionally, geography, or physical distance, has been proven to be a key deterrent to usage of financial services in disadvantaged communities (Joassart-Marcelli & Stephens, 2010). Table 1 presents a conceptual framework of the typology of barriers identified in this literature review.
- Inexperience & Distrust. Osili and Paulson (2005) view financial market usage as a key indicator on overall immigrant assimilation but recognize that participation in market transactions require a high degree of trust. As a whole, Hispanic immigrants express much lower levels of confidence in financial institutions than other groups, leading them to place their financial assets in riskier investment schemes (Financial Literacy Center, 2012). Compared to native whites, Hispanics save significantly less money for retirement and are more apt to borrow against long-term investments like pensions and IRAs (Financial Literacy Center, 2012).
Two factors drive much of the distrust of formal financial that is prevalent in Latino immigrant communities. The first is historical. Many countries in Latin America, including Mexico, have financial institutions that are embedded with corrupt systems and agents that use the financial sector for their own personal gain (Joassart-Marcelli & Stephens, 2010). Periods of grave economic distress, brought about by global market forces and mismanagement at home, have instilled a negative image of financial institutions as a whole, and many immigrants retain this perspective even after immigrating to the US (Osili & Paulson, 2007). For many Latinos, the banking systems in their native countries were simply untrustworthy institutions that were not safe places to put money (Osili & Paulson, 2007, and Joassart-Marcelli & Stephens, 2010). The other component to this historical factor is how widespread usage of financial services is in the immigrant’s country of origin. Approximately half of the total population of Mexico is unbanked (Young et al., 2009), while countries like Germany and Canada have estimated unbanked rates of 3% (Osili & Paulson, 2007). Experience in cash based economies, like those in Mexico and other Latin American countries, does not translate well for immigrants upon their arrival in the US, where the domestic economy is much more diversified (Young, et al., 2009).
The second factor to distrust stems from fear. There exists significant anecdotal evidence that many immigrants without legal status are afraid that submittal of documents required for opening bank accounts may trigger review by immigration authorities (Osili & Paulson, 2007). A survey performed in conjunction with a review of outreach efforts to Latinos in Louisiana found that 22% of individuals surveyed cited fear that information would be shared with governmental agencies as a reason for not utilizing mainstream banking establishments (Appleseed, 2009).
- Probability of Return. Temporal factors exert a meaningful degree of influence over financial service usage. The length of time spent within the US affects transactional account ownership in immigrants, with increases in residency corresponding to increases in account ownership rates among immigrants (FRB, 2007). Immigrants from Mexico, for example, who plan to return to their country of origin within short periods of time have much less incentive to participate in mainstream financial markets than those planning on staying longer (FRB, 2007).
- Logistical. Cost, geographic distance, and language proficiency are three driving factors behind logistical barriers to financial access. From an economic standpoint, the high entry and transactional costs, relative to the income levels of most immigrant groups, present real barriers to immigrant participation in financial systems (Osili & Paulson, 2007). A significant contributor to high costs of entry are minimum balance requirements, which tend to be overly burdensome for immigrant consumers (Newberger et al., 2006). Studies commissioned by the Federal Reserve Bank (2007) have shown a direct relation between minimum balance requirements and checking account ownership; for every $100 increase in the minimum balances, the probability of owning a checking account decreases by 1.5 percentage points. A reduction in other fees for services most used by immigrants, such as remittances and check-cashing, could not only reduce barriers to access but also lead to increase disposable income levels of affected consumers (Federal Reserve Bank, 2007).
Credit scores, minimum credit requirements, and income verification requirements also influence immigrants’ usage of financial services. Due to the uncertainty of their legal status within the US, and the low usage of credit in most individuals’ country of origin, many underserved immigrants have nonexistent or very poor credit ratings (Young et al., 2009). Internal practices within banks are overly reliant on credit rating systems like ChexSystems (used by over 80% of domestic banks) that reinforce a rigid approach to loan approvals that are hard for immigrants to overcome (Newberger et al., 2006; Federal Deposit Insurance Commission, 2008). Verification of employment and earnings presents yet another obstacle to access, as the work history of many immigrants contains employment primarily in the informal sector of the economy (Frias, 2004). Surveys in the metropolitan Chicago area indicate that for a small minority of immigrants making the minimum wage or below, a primary reason for not owning a checking or savings account is that they feel they lack enough money to save (Appleseed, 2008).
Language proficiency has been noted to be positively correlated to financial usage rates. The FDIC (2012) found that households that only speak Spanish were disproportionately represented among unbanked households. Despite only comprising only 2% of all households, Spanish-speaking household made up 9.2% of unbanked households and only 1% of fully banked. In a review of relevant surveys, Osili and Paulson (2007) found that immigrants who identify as having poor English skills had much lower rates of account ownership than all other immigrant groups.
Spatial distance between physical outlets of financial institutions and immigrant populations is the final determinant of access. Graves (2003) posits that “banks avoid poor and minority neighborhoods at a rate greater than payday lenders target such neighborhoods” (p. 312), creating vast deserts of communities that lack bank establishments. Using anecdotal evidence, some researchers have hypothesized that restrictive business hours act as a disincentive for immigrants, yet this claim has not yet been proven by empirical evidence (Greene, Rhine, & Toussaint-Comeau, 2003). For a variety of socio-economic reasons, low-income and minority neighborhoods tend to serve as receptors for immigrants upon their arrival to the US (Osili & Paulson, 2007). This leads to high concentrations of immigrants living in locales with limited opportunities to interact with financial institutions. Osili and Paulson (2007) believe that “ethnic concentration may have a have a direct (original emphasis included) effect on financial market outcomes by limiting/curtailing the flow of information about mainstream financial services” (p. 15).
Barriers Encountered by Providers
Whereas the barriers faced by immigrants are numerous and diverse, many of the barriers to providers of financial services are at their core related to outreach. Financial institutions are cognizant that a sizable segment of the population in many of the communities they serve do not access their services, but many have yet to develop effective marketing efforts to bring the unbanked into their base of consumers (FDIC, 2008). Many banks continue to place a low priority on reaching these customers, implying a lack of internal organizational motivation throughout the industry (FDIC, 2009). This inactivity and inefficiency has created the perception among underserved communities that alternative establishments, such as payday lenders and check cashing centers, “are more convenient, faster, less expensive and present lower barriers to qualification” (FDIC, 2012, p. 48) than mainstream banks.
Language serves as a primary factor in the overall efficacy of outreach efforts. A survey of financial institutions in the state of Louisiana found that 33% reported difficulties in hiring and retaining bilingual staff to serve their Latino customers (Appleseed, 2009). Lack of materials and staff conversant in Spanish poses a significant hurdle to informing immigrants of the services available, leading to a low-level of awareness among Latinos of services offered by traditional banks (Appleseed, 2008).
A secondary tier of factors deals with the uncertainty related to acceptable forms of documentation and exposure to fraud. Half of the respondents in the Louisiana survey agreed with the sentiment that dynamic and ill-defined government regulations on proof of identification posed problems in dealing with immigrant consumers (Appleseed, 2009). The usage of fraudulent documents or identities for new accounts can result in substantial financial liabilities, and banks have become increasingly risk averse since the beginning of the most recent economic recession (FDIC, 2008). The fear of financial exposure serves as a disincentive to expanding outreach efforts beyond traditional markets.
About this project
The Tomás Rivera Policy Institute, a university research center with the mission to address the challenges and opportunities of demographic diversity in the 21st century global city, has produced these featured digital publications using the USC Media Curator, an online publishing platform designed to bring together innovative research from across the University of Southern California and beyond. This project curates research relevant for immigrant service providers on the topics of Access & Use of Technology, Access & Use of Financial Services, Notario Fraud, and Driver's Licenses for the unauthorized.