Banking the Unbanked Spurs Payday Loan Usage among Black Households

This study examines the impact of bank account ownership on racial disparities in the use of alternative financial services (AFS) such as nonbank check cashing, pawn shops, and payday lending. Using data from the National Survey of Unbanked and Underbanked Households (2015–2021), I employ causal decomposition analysis to investigate the counterfactual effect of banking the unbanked on AFS usage across racial groups. Findings reveal a complex relationship between bank account ownership and AFS usage. While increasing account ownership among the unbanked reduces racial gaps in nonbank check cashing and pawn shop loans, it paradoxically leads to increased payday loan usage among banked Black households. This trend persists even after controlling for local banking environments and state payday lending policies. The results suggest a distinct dual effect of owning bank accounts. On one hand, it substitutes for check cashing services and reduces the need for pawning items. On the other hand, bank account ownership, often a prerequisite for payday loans, may grant Black households with inadequate credit records more access to this alternative credit market. This research suggests that addressing both financial inclusion and the underlying causes of credit inequality is necessary, rather than simply focusing on banking the unbanked.