Banking Without Banks: How Bank Account Ownership Influences Racial Disparities in Alternative Financial Services

Racial minorities, often sidelined by traditional financial systems, are a primary demographic for alternative financial services (AFS). While promoting financial inclusion is seen as a way to address racial disparities in the use of AFS, this claim is often complicated by selection and post-treatment biases. Drawing on data from the National Survey of Unbanked and Underbanked Households (2015–2019) with over one hundred thousand households and adopting causal decomposition analysis, this study investigates the effect of bank account ownership on racial disparities in three AFS channels: payday lending, pawn shop loans, and check cashing. Results confirm that Black and Hispanic households are more inclined to use these AFS compared to their White counterparts. Notably, the results uncover a distinct impact of hypothetically increased bank account ownership for unbanked households. While it decreases the reliance on nonbank check cashing among banked racial minority households, it paradoxically escalates payday loan usage within Black households when they become banked. These results suggest that while expanding bank account ownership can reduce certain AFS dependencies, it inadvertently perpetuates a form of exclusive inclusion that leads more financially included Black households to opt for payday loans.