• Achintya Ray, Ph.D is Professor of Economics in the Tennessee State University College of Business.

Success in life critically depends on one’s ability to participate in the modern financial system. Our bank and credit union accounts form the main foundation of our financial lives.

Most of us get our paychecks deposited into bank or credit union accounts. We also pay our bills by writing checks or using bill payments from those accounts. We routinely check our savings using smartphone apps connected to those accounts.

The credit and debit cards we use are also linked to multiple banks and allow us to participate in a digital economy effortlessly while keeping transaction costs low.

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Households without a checking or savings account at a bank or credit union incur significant fees by being forced to use high-cost services such as payday loans, check cashing services, high-fee prepaid cards, etc. Unfortunately, hundreds of thousands of Tennessee households find themselves in this situation every day. FDIC Survey of Household Use of Banking and Financial Services revealed that about 8.1% of Tennessee households are unbanked, meaning no one in those households had a checking or savings account at a bank or credit union.

Assuming an average household size of 2.5, about 220,000 households containing more than half a million people are unbanked in Tennessee. Nationwide, around 5.4% of households are unbanked. Unfortunately, Tennessee’s financial exclusion rate (measured by the percentage of unbanked households) is 50% higher than the national average. This is an epidemic proportion.

In addition, Tennessee’s financial exclusion is much deeper and broader than each of our neighboring states: Alabama (7.6%), Arkansas (7.1%), Georgia (7.4%), Kentucky (6 .5%), North Carolina (3.4%), South Carolina. (5.2%) and Virginia (4.4%). This widespread financial exclusion imposes considerable costs on the people of Tennessee. If Tennessee had the same level of financial exclusion as North Carolina, we would have had about 126,000 fewer unbanked households.

Detailed analysis of Nerdwallet suggests that each person without a bank account faces about $198.83 in additional costs for using check cashing and money order services. In other words, an unbanked household with 2 earners is expected to lose enough money on check cashing and money order services that could have helped them cover about 2 months of utility bills.

Indirect costs don’t help the situation either. Implicit interest rates on predatory payday loans involving very small amounts can often be as high as 300%, as the Nerdwallet analysis suggests. Simple back-of-the-envelope calculations suggest that 220,000 unbanked households, each losing $350 a year in costly fees and interest, will collectively incur about $77 million in avoidable costs.

The true financial impact of the financial exclusion epidemic may be considerably higher than even that astronomically high number. To put that into another perspective, a $100 million avoidable loss is a large enough sum of money that it could cover $2,500 in tuition and fees for 40,000 college students.

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Unbanked households also face considerable challenges in building their credit history, obtaining a mortgage or car loan. The inability to build a good credit history also affects your ability to build wealth throughout life, perpetuating the vicious cycle of poverty and increasing reliance on various welfare programs. Integration with the financial mainstream can be one of the key drivers for building wealth and reducing chronic dependency on welfare programs.

Tennessee urgently needs a strong public-private partnership to address the epidemic of financial exclusion. Several governments and leaders in the banking community are in an excellent position to take advantage of today’s technology to attract hundreds of thousands of households to open affordable FDIC-insured checking accounts at banks and credit unions.

These accounts can be linked to secured debit cards and credit cards that facilitate affordable digital transactions that will allow these households to not only save money but also participate in a burgeoning digital marketplace without having to worry about high transaction fees.

Achintya Ray, Ph.D is Professor of Economics in the Tennessee State University College of Business.