—Photo by H. Armstrong Roberts/Getty Images

A couple of years ago, Eileen Fay was, as she puts it, blacklisted by her bank.

Fay, 59, a part-time writer and transcriber who lives in upstate New York, is on disability, but she doesn’t make quite enough to cover her monthly expenses. “Due to my low income, I had many brushes with bounced checks,” she says. “Often I’d be just a few cents short, but they’d charge me $35 for insufficient funds. Naturally, that hurt me terribly, often meaning I could not pay another bill. As the fees added up, the bank got testy, even though I paid them all.”

Fay says the final breakup with her bank came a couple of winters ago, when her car got stuck in a snowbank and had to be towed. The towing cost of $108 incurred yet another overdraft charge, and that’s when, she says, she was told she could no longer have an account with her bank.

For most Americans, a bank account is the first step on the road to financial security. The estimated 28 million people without a checking or savings account often find it difficult, if not impossible, to get decent rates for a mortgage, a credit card or an auto loan. Instead, they must rely on costly check-cashing services, payday loans and pawnshops, which rake in fees of $8.5 billion a year and fuel a lifestyle that keeps the working poor poorer.

“Over a lifetime, the average full-time, unbanked worker will spend more than $40,000 just to turn his or her salary into cash,” wrote former President Bill Clinton, a Democrat, and California Gov. Arnold Schwarzenegger, a Republican, in a Jan. 24, 2008, Wall Street Journal column on the plight of those living outside the financial mainstream.

“Usually, the unbanked have been what we would call the working poor—people who are working really hard, maybe working two jobs, sometimes even three, to make ends meet,” says George Ramirez of San Diego, Calif., a senior vice president at Union Bank. “Or maybe they’re new immigrants. But lately, it’s also the working middle class and professional folks, like police officers, nurses, firefighters.”

What they all have in common, says Ramirez, is that “they somehow become kind of disenfranchised. They had a checking account, but then they were overdrawn and they couldn’t pay back the fees, and they’ve skipped out on that account, and then they’re on the Chex Systems, which is the credit bureau for bank accounts that are overdrawn. It ends up on their record, which can linger for years. And many banks won’t take people who are on the Chex Systems list, and so that may put them out of the game as well.”

In some parts of the country, the situation is changing. In 2006 San Francisco’s financial institutions and its city and county governments started Bank on San Francisco, the nation’s first program to reach out to unbanked households. The Bank on Houston program soon followed San Francisco’s success. In January 2008 Schwarzenegger announced the launch of Bank on California, the first such program to go statewide. Now some 50 cities and counties are setting up similar programs.

One financial institution—KeyBank, an Ohio-based bank with branches in 13 states—is working to adapt to the unbanking lifestyle, rather than asking the unbanked to change their ways. Its KeyBank Plus program, now found at more than 175 branches in upstate New York, Ohio, Colorado and Oregon, allows people to cash payroll and government checks at a discounted rate without opening a bank account.

Helping people become financially stable and eventually have the option of mainstream banking products is the ultimate goal. But not everyone will open an account.

“If people are unable to open a traditional checking account, they often feel that check cashers are their only option,” says Emmanuel Glover, vice president of community banking at KeyBank, which started the program in Cleveland in 2004. “We’ve been looking at that situation and asking, ‘How can we bring the clients back in?’ ”

The solution: KeyBank offers low-fee check cashing and free financial education classes, lets people open accounts with a $10 deposit and helps people transition off of Chex Systems. KeyBank also has started an ATM check-cashing pilot program at a Cleveland branch: If a customer signs up with a teller, repeat transactions can be done at the ATM—that is, the customer can deposit government and payroll checks, the ATM scans the check and the client receives the cash on the spot.

Despite such efforts, returning an individual to the banking system often involves financial education and setting boundaries. Unplanned and unexpected bank fees can add up: According to a survey last year by the Consumer Federation of America, the average fee charged for overdrafts by the country’s 10 largest banks is $34.65, up 15 percent since the previous survey in 2005. Sixty percent of the largest banks add a sustained overdraft fee if an overdraft is not repaid within a few days. These banks add $6 to $8 per day until the overdraft and fees are paid, or they charge a flat fee. It’s not difficult to imagine how someone might find it impossible to catch up.

If you’re one of the millions of Americans on Chex Systems’ list, there’s more to getting back in a bank’s good graces than just asking. Until Jan. 1, 2009, unbanked individuals could participate in Get Checking, which provided six hours of training in the basics of operating and managing a bank account. Graduates were guaranteed a checking or savings account at a participating financial institution. Get Checking is being retooled and becoming part of a new program, Checking Network USA, that will offer similar training in the classroom or on the Web for the banking community and the unbanked.

Union Bank’s Ramirez is a firm believer in the Get Checking approach. “Look,” he says, “you may have kind of blown it in the past, but come to a six-hour education program that lasts a few weeks and we’ll help you get back on your feet.”

Even considering the overdraft fees, being unbanked can be more costly than maintaining a bank account. Payday loans carry annual interest rates that, in some situations, can reach several hundred percentage points.

And as Mike Griffin, senior vice president of community banking at KeyBank, notes, “We did some research early on, and people would say that they knew what the costs of a check casher were. The check-cashing service might take $7 out of every $100, but focus group participants would say, ‘I know what I have. I know how to budget that.’ ”

Ramirez says the effort to enter the financial mainstream is worth it.

“This stuff happens generationally,” he says. “Some things are hard to break, and this is a cycle that you want to break. My parents were a classic example of that. For years, they thought that payday loan lenders, that sort of thing, were the only alternative that they had, and I didn’t realize that there were other possible, better alternatives. I broke out of the cycle, and here I am.”

It’s an unpleasant cycle, as Eileen Fay can attest. Recently, her telephone was disconnected and her utility company was threatening to cut her electric power. And because she had paid $350 for an operation for her cat, she was also behind on her rent.

But after her last experience with a bank, Fay says, she is afraid to open another account and possibly be hammered by fees, so she selects what is, for her, the lesser of two evils: “I have to waste money on postal orders for bills and sometimes waste more money on a check-cashing place.”

Still, not everyone wants a bank account. Some people have made unbanking work for them, and even prefer it.

Debbie Lawrence, 53, and her husband, Evan, 54, don’t have a checking account. Every payday, Evan, a civil engineer in Macon, Ga., rushes to a bank to cash his check, minus a fee, and then divvies up his income into envelopes. He and his wife, who blogs about their frugality on her website, Bird on a Wire, will use cash from those envelopes to pay the bills. Although Debbie does put small amounts of money into a savings account for their future, she and Evan don’t use any bank services to pay bills or get cash.

Evan began doing this about 20 years ago, when he found himself in financial trouble after his first marriage failed, and Debbie has learned to adapt. Aware of the “unbanked” stereotype, she points out that “we’re both educated”—Evan has an engineering degree, and she holds a bachelor’s degree in business marketing and a master’s in philosophy.

Darcy Volden Hoag, 39, founder of an online business, says she stopped using a traditional bank several years ago after a bad experience with an account. “I had a deposit of several thousand dollars get held up unknowingly,” she says. “In the meantime, all the checks that I had written to my supplier started bouncing.” Her bank fees totaled $1,500.

“I’ve been doing un-banking for five years now,” says Volden Hoag, who lives in Austin, Texas. She uses PayPal and TheMoneyBox.com to pay her bills—for a fee, of course. It’s an arrangement that works well for her.

“My money is available immediately—no waiting,” she says. “When there is no money, there is no money. In other words, if you were to try and use it and you didn’t have enough to cover the charge, it won’t go through. What that means is there is never an overdraft fee.”

Still, says Kathleen Day of the Center for Responsible Lending, a Durham, N.C., research and policy organization, it’s much smarter to have a bank account than not, provided you can be thoughtful and know that there can be pitfalls.

“There are downsides to them both—having a bank account and not,” she says. “But the difference is, if you’re careful, you can manage the downside of the banking system. There is no way to get rid of the fees that you incur when you’re unbanked.”

Geoff Williams writes on personal finance.