Importance of Payday Business to the Unbanked Student`s

Importanceof Payday Business to the Unbanked

Importanceof Payday Business to the Unbanked

TheUnbanked household purchases a variety of financial products thoughnot from the bank. Various businesses have been set up in US tofacilitate transactions to the unbanked such business includescheck-cashing services, payday loans, family remittance, money ordersand consumer loans among others. Unbanked households in the UnitedStates are continuously increasing in the today’s economy. A recentsurvey by Sherrie et al. (2006) showed that approximately 9.1% of allfamilies in the United States remains without any transaction account(unbanked). The US Treasury has tried to promote money transactionthrough account by providing incentives to those that are newlyopening accounts. Where the unbanked wants to seek financialservices, they can do so with the introduced electronic transferaccounts (ETAs) since they are associated with low transaction costs(Federal Deposit Insurance Corporation, 2015). The government is alsoencouraging and promoting check-cashing business to the unbanked. Thesituation has also created more opportunity for the Payday loanbusiness that offers short-term loans to the employees at a higherinterest rates based on their pay slips.

ResearchMethodology and Data Collection

Themethodology applied here will help to analyze the interrelationshipand the role of the payday loan businesses to the unbanked.Quantitative research was carried out on the US population to accessthe rate of the unbanked. Both raw data and secondary data was usedto arrive at a conclusion of the survey. Law data was collectedthrough administration of questionnaire whereby the respondents wereasked for their views on the thematic issues concerning the unbankedand check-cashing business to the unbanked. The findings wereanalyzed using specific data analysis software to enable developmentof inferences. Random sampling technique was used in selecting thesample. This method is more preferable as it gives each individual inthe entire population an equal chance of being selected in the surveyand hence increasing the reliability of the survey.


Thesurvey saw that certain groups in the population exhibits similarrelationship between the payday loan service decisions and theunbanked. This is a clear indication that the sample selectedconsisted of respondents who are a good replica of the entirepopulation. The questions administered through the questionnaire werealso consistent so as to increase the reliability of the findings. Avariance model that express the variance function of the expectedvalue of the study were also taken into consideration. The generalfunction of the independent variables was to evaluate the importanceof the pay day lending business to the unbanked.


Thestudy was guided by the general research question to determine if thedecision of being unbanked is jointly made depending on the paydaylending services. The following aspects will be looked at indetermining the relationship between the dependent and independentvariables.

  1. Demographic factors:

  2. Employment status:

  3. Reasons for unbanked

  4. Role of Payday lending business to the unbanked

Therelationships of the independent variables (xi)to the dependent variable (Y) were measured using the probabilityconcept and the coefficient of correlation the relationship can bederived as shown in the equations below

Y= βx1+ αx2 +ε x1

Wherexi =are the various dependent variables contributing to the changes inpayday lending business to the unbanked in the United States.


Prob{x1, x2}= 1

Therefore,the model relating the variables can be expressed as

Ø{αx2BVN(βx1+ βx1)* αx2

Demographicfactors will include aspects such as age, race, level of education,gender, and the marital status. The examined sample was asked abouttheir entrances and exits in the banking systems and also the factorscontributing to the transitions. Consistent results have beenobtained in the subsequent research in the economy of the UnitedStates. Payday loans are the advance short-term loans acquired andsecured with ones’ pay slips (Wooldridge &amp Jeffrey 2012). Whenone has obtained a payday loan, his or her salary will be reduced torepay the loan and hence leaving the individual with low disposableincome.

Age– the survey revealed that the most affected group is the youthsand the individuals at the retirement age. The population oflow-income earners in the US consists of a high proportion of theyoung generation and the aged. The group has very little or nosavings, and they perceive no need for a bank account. Thispopulation makes the highest percentage of the unbanked.

Race– The study found no significant correlation between the race andthe decision on unbanked. This is because the financial decisionsamong the households are never based on the racial status.

Thelevel of education is another independent variable that was used inthis survey of investigating the importance of payday lendingbusinesses to the unbanked. It was found that majority of the lesseducated people have got a little income and therefore, little or nosavings. The uneducated population is therefore expected to consistof the considerable percentage of the unbanked households.

Genderand marital status– The respondents were also asked for these demographic fields, andit was found that gender and marital status contributes more to thedecision being made on the unbanked households. It was found thatfemales and most especially the unmarried hold a significant portionof the unbanked population in the United States.

Otherportion of the unbanked households gave varying reasons for nothaving a bank account. For instance, about 14.9 percent said thatthey are unbanked since they don’t have easy access to the bankingservices. The banking system in always poor in rural areas andtherefore, one may need to have an account, but since the servicesare not available in some geographical areas, he or she ends up beingunbanked (Wooldridge &amp Jeffrey 2012).

Dueto the need of quick cash to support current transactions, householdsought to seek short-term loans from the payday lending organizations.However, due to the high demand for these loans, the rate of interestcharged are high compared to the interest rate on the long-term loan.The lenders of the payday loan also perceive high risk. Hence theycharge high rates to compensate for the risk.

Conclusionand recommendation

Fromthe findings analyzed above, it is clear that payday lending businessshould be made to target a specific population depending on theiremployment status and the income level. The low-income earners arethe highest users of the payday loan. This loan is much preferablesince it takes minimum time to be processed, unlike another long-termloan which involves complex procedures, terms and conditions.RhineGreenTouissaint-Comeau methodology should also be utilized toassess the reasons why such a big percentage has remained unbanked.It is only by conducting a survey of the reasons for the unbankedhousehold that can help one in identifying the needs of the consumersand striving to satisfy them. The entrepreneurs have also sought thebusiness opportunities in filling the gap in the economy (FederalDeposit Insurance Corporation, 2015). The Unbanked population ismostly the low-income earners whom even their net savings is negativeor insignificant. Recent statistics has shown that the majority ofthe unbanked population consists of the less educated, younggeneration, unemployed, and the unmarried. The unbanked-employedpopulation are the individuals with no savings, and they end uprelying on payday loans. The study revealed that there is a strongrelationship between the level of employment, gender and age with thepayday business (Wooldridge &amp Jeffrey 2012).

Fromthe study we can conclude that the selected independent variablesdistributed by demographic factors such as age, sex, education levelof education and Hispanic origin have a strong relationship with thedependent variable in this research. The inferences have been madefrom reliable formulae used to analyze the data obtained from theselected sample. The population estimates were used to ascertain theconsistency of the suggestions provided by the Census Bureau’spopulation and projection program.


SherrieL. W. Rhine, William H. Greene and Maude Toussaint-Comeau. (2006).Househlod survey. RetrievedMarch 07 2016 from

Wooldridge,Jeffrey M. (2012),&nbspIntroductoryEconometrics. Second Edition, Ohio:South Western.