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In the past three years, the federal government and many states have lowered their costs of administering welfare and benefits programs by expanding the use of electronic payment. These initiatives promise to have their greatest significance, and meet their greatest challenge, among lower-income families, the demographic group with the lowest rate of bank account ownership and the least familiarity with electronic transactions. Although the payment programs do not require a banking relationship, the move to electronic transfer could change the financial practices of many recipients without a deposit account or with no banking relationship at all. Recipients of social security and other benefits payments who do not have a checking account may well continue to obtain cash and other financial services from alternative service providers, such as check cashing outlets and grocery stores. But in light of the increased promotion of direct deposit, many of these recipients may be more inclined to open a deposit account. The attraction of a bank account for some families without one may become heightened as governments and the payment system in general move more toward electronic transactions. An example of such a move is the federal government’s introduction this summer of special accounts to be made available at depository institutions primarily for the transfer of federal payments. In these ways, the governmental move to electronic payment may do more than the ‘‘basic banking’’ effort of the 1980s to spread the use of bank accounts to ‘‘unbanked’’ families. Moreover, the greater use of the banking system by these families could harmonize with the emphasis that welfare reform has placed on asset-building for lower-income families, a goal that may be harder to achieve without the use of a bank account. On the other hand, a move by greater numbers of lower-income families into the mainstream of the payment system is likely to be a difficult transition for many of them, given survey results on why they do not currently use the banking system. This article examines the ways in which lowerincome families obtain checking and credit services, the effects that the government move to electronic payment may have on these families and on depository institutions, and the promotional and educational efforts that may be needed to facilitate the move to electronic services.

Banking Relationships of Lower-Income Families and the Governmental Trend toward Electronic Payment