VoxEU Column Institutions and economics

Unbanked households: Evidence of supply-side factors

There is an urgent need to understand why many households in the US do not hold a bank account. This column argues that supply-side factors – standard bank practices that ration certain households – play a role in this. The evidence comes from the staggered interstate branching deregulation after 1994 that provides an exogenous shock on bank competition. Further findings suggest that access to bank accounts improves access to credit without translating into higher ratios of debt to income.

There is an urgent need to identify the drivers of the unbanked phenomenon. Holding a bank account is indeed key to accumulate savings. In addition, unbanked households are charged very high fees by alternative financial services, which they largely use.

One of the main questions is whether being unbanked is driven by supply- or demand-side factors (see, for example, Barr and Blank 2008). The ‘demand-side’ view attributes the unbanked phenomenon to cultural determinants – the poor may distrust financial institutions or may not have culture of saving – or to a lack of financial literacy. Alternatively, the ‘supply-side’ view suggests that standard bank practices create hurdles for the poor. Minimum account balances, overdraft fees, a large distance between branches, and the proliferation of formal steps to open an account result in costs that may be too high for poor households to manage (Washington 2006, Barr and Blank 2008). These two radically different explanations have different policy implications. While the demand-side view predicts interventions at the household level through financial literacy programmes, for example, the supply-side view suggests that banking regulation, by giving banks incentives to change their behaviour, may reduce the share of unbanked households.

Evidence of supply-side factors

In a recent paper (Célérier and Matray 2014), we provide evidence that supply-side factors significantly drive the share of unbanked households among low-income groups. We use the staggered interstate branching deregulation in the US after 1994 as an exogenous shock on bank competition.

In 1994, the Interstate Banking and Branching Efficiency Act (IBBEA), also known as the Riegel-Neal Act, allowed nationwide acquisition of banks across state lines, thus increasing the competitive pressure from out-of-state banks. However, states were allowed to erect four barriers to the entry of out-of-state banks. Over time, these barriers have been progressively relaxed across states, which led to a gradual re-shaping of the competitive environment of the banking industry.

We find that the intensified bank competition resulting from the interstate branching deregulation is associated with a drop in the share of unbanked households. More precisely, we show that the share of unbanked households decreases by 4 percentage points after a state has relaxed all barriers to out-of-state-bank entry.

Figure 1 illustrates this result. This figure plots the change in the likelihood of holding a bank account after deregulation in states that deregulate relatively to a control group of states that do not deregulate. While the likelihood of holding a bank account is similar between the two groups of states before deregulation, it becomes relatively higher in states that deregulate after deregulation.

Figure 1. Effect of banking deregulation of probability to hold a bank account

Who benefits the most from the increase in competition?

  • We find that the effect of banking deregulation on the share of unbanked households is heterogeneous across household types.

Households that are more likely to be rationed by the bank, such as lower-income households, or households living in rural areas, benefit more from intensified bank competition. We also find a larger impact for educated households, for which being unbanked is more likely to be driven by bank practices than by a low financial sophistication.

  • Second, we find that intensified bank competition significantly reduces the white-black gap in access to bank accounts.

For the same level of income, black households are indeed 20% less likely than white households to hold a bank account in states with a history of discrimination, but this gap narrows to only 15% after deregulation, to the level observed in states with no history of discrimination. This result suggests that banks may discriminate against black households.

All these observations suggest that bank practices, rather than household behaviour, are largely responsible for the large share of unbanked households.

What are the implications for newly banked households?

The fact that low-income households are more likely to hold a bank account following deregulation raises two questions.

  • First, does this increase in the likelihood of holding a bank account have any effect in terms of asset accumulation?

After all, newly banked households could open a bank account and just let a few dollars on it. However, we show that having access to bank accounts improves wealth accumulation. Deregulation increases the share of low-income households with interest-earning assets both in banks and in other financial institutions. Because we control for several income variables at the household level as well as state macroeconomic conditions, this result implies that for an equal amount of income, low-income households are more likely to accumulate wealth when they have access to bank accounts.

  • Second, does the resulting intensified bank competition translate into higher levels of indebtedness?

One may indeed fear that bank competition fosters ‘predatory lending’ and that bank accounts are only offered coupled with loan contracts.

However, we find that deregulation strongly increases access to bank accounts regardless of whether the household takes a loan or not. Most importantly, owning a bank account improves access to credit without translating into higher ratios of debt to income.


We find evidence consistent with supply-side factors driving the large share of unbanked households. This result suggests that being unbanked is not only driven by cultural factors, preferences, or low financial sophistication, but also by bank practices that tend to ration certain types of households.


Barr, M S and R Blank (2008), “Access to Financial Services, Savings, and Assets Among the Poor” National Poverty Center Policy Brief 13.

Célérier C and A Matray (2014), “Unbanked Households: Evidence of Supply-Side Factors”, Working  Paper

Washington, E (2006), “The Impact of Banking and Fringe Banking Regulation on the Number of Unbanked Americans”, Journal of Human Resources 41 (1), 106-137.

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