THE HIGH COST, FOR THE POOR, OF USING A BANK
In September, I attended a meeting on how to help low-income people get better access to financial services. I found myself sitting next to an executive from a large financial-services firm, who told me that he had recently pretended to be without a bank account for an entire afternoon. He and several people in his department had been sent to check-cashing stores in places like Harlem to cash checks, send money, and pay bills, to experience what it might be like to live without a bank account. He became animated as he pulled a file from his briefcase and showed me the stack of receipts he had accumulated in his afternoon of living on the edge. He was outraged by how much it cost to send money from Manhattan to Brooklyn, and that he had been forced to spend an extra $1.50 to pay a bill. He had ended his day puzzled about why anyone would use check-cashing services instead of banks.
As I peered at his receipts, I immediately recognized one of them. It came from RiteCheck, a check casher in Harlem and the South Bronx where I recently worked for four months. To try to get my own perspective on the financial lives of the urban poor, I spent eight hours a week working as a teller at RiteCheck. As part of my research, I also interviewed fifty RiteCheck customers and spent a month staffing a hotline run by the Virginia Poverty Law Center for people experiencing difficulties with payday loans—small, short-term, unsecured loans that are typically advances on the borrower’s paycheck. I came away from my experiences with a very different take on the problem of access to financial services than my new friend.
There have been a lot of reports lately on the growing numbers of people without bank accounts, and on those who have accounts but continue to use alternative financial services such as payday loans. All this has convinced policy makers and many consumer advocates that low- and moderate-income people are victims of “financial exclusion.” They have therefore concentrated on moving these people to banks.
The numbers of “unbanked” and “underbanked” people are indeed growing. Seventeen million people nationwide are unbanked, up from ten million in 2002; forty-three million are underbanked. In very low-income areas like the South Bronx, where I worked, more than half of the residents have no bank account.
I had decided to work as a teller to understand why low- and moderate-income people are choosing not to use banks, if they’re really the best option. The answer was surprising: it turns out banks are often costlier for the poor than check cashers and other alternative services.
To understand why, consider loans of small amounts. People criticize payday loans for their high annual percentage rates (APR), which range from three hundred per cent to six hundred per cent. Payday lenders argue that APR is the wrong measure: the loans, they say, are designed to be repaid in as little as two weeks. Consumer advocates counter that borrowers typically take out nine of these loans each year, and end up indebted for more than half of each year.
But what alternative do low-income borrowers have? Banks have retreated from small-dollar credit, and many payday borrowers do not qualify anyway. It happens that banks offer a de-facto short-term, high-interest loan. It’s called an overdraft fee. An overdraft is essentially a short-term loan, and if it had a repayment period of seven days, the APR for a typical incidentwould be over five thousand per cent.
To be sure, payday lending is a growing business, increasing from ten billion dollars in 2001 to nearly thirty billion dollars in 2010. But Americans paid more than that on overdraft fees in 2011: a record thirty-eight billion dollars. (Banks are allowed to charge checking-account customers, on average, a hundred and forty dollars per day in overdraft fees.)
What’s more, many of the customers we interviewed told us that a lack of transparency at banks contributed to the costs they incurred; they found it difficult to predict when and what they would be charged. At RiteCheck and most other check cashers, in contrast, the fees for each transaction are typically displayed on large illuminated signs that span the row of teller windows, like the menu sign at a fast-food restaurant.
The Pew Health Group recently analyzed two hundred and fifty types of checking accounts at the nation’s ten largest banks, and found that banks’ checking-account disclosures are anything but transparent. These disclosures have, on average, a hundred and eleven pages—more than “Romeo and Juliet.” One RiteCheck customer, who had opened a bank account in the past, said, “You always have problems with [fees], you always have bounced checks, you know what I mean? Checks that are late.” Customers like him live so close to the edge that they cannot keep extra money in their accounts to buffer these expenses.
Interestingly, banks deposit funds into customers’ accounts only five days a week, but withdraw funds seven days a week, which makes planning difficult for those with no margin for error.
It’s no coincidence that, during the period when the number of check cashers and payday lenders has grown, banks have instituted a range of new fees and raised existing charges on A.T.M. withdrawals, wire payments, debit-card replacement, and paper statements, among other services. Some of this is an attempt by banks to make up the revenue they lost as a result of legislation that clamped down on what they could charge for overdraft fees and debit-card swipe fees—fees that banks charge retail stores for each debit-card transaction. Banks expect to take in eighty-five dollars to a hundred and fifteen dollars in annual fees from each account, and this is particularly difficult to do when serving low- and moderate-income people.
Meanwhile, free checking accounts are becoming harder to find. Only thirty-nine per cent of non-interest-bearing checking accounts were free in 2011, down from seventy-six per cent in 2009. The average monthly service fee on checking accounts increased twenty-five per cent from 2010 to 2011.
Researchers and the media tend to use words like sleazy, predatory, and abusive to describe check cashers and payday lenders. Yet banks are seldom described in similar terms. They should be. The people who populate the unbanked and underbanked categories are often making a clear choice to use check cashers and payday lenders instead of (or in addition to) a bank. Not a single person I interviewed expressed a desire to be “more banked.” (There’s another reason, as important as the high cost of traditional banking, that poor people eschew banks. As I’ve written at the Atlantic Cities, check-cashing customers trust their neighborhood check cashers much more than they do banks. These customers appreciate the level of service they receive, which they feel is absent in banks.)
This all seems to suggest that most banks, as they are currently configured, don’t do a good job of serving low-income customers. Banks and check cashers have very different business models. Check cashers are transaction-based businesses with low overhead; banks require a great deal more overhead because of the complexity of their business model. Banks, driven to maximize shareholder value, seem to believe that serving low-income customers will hurt their bottom lines, and they might be right.
Joe Coleman, the president of RiteCheck, put it this way: “Banks want one customer with a million dollars. Check cashers want a million customers with one dollar.” Banks and credit unions with a “community development” focus have a mission and organizational structure that puts low- and moderate-income communities at the core of their business, but they don’t have the reach to serve all of the communities in need.
For low- and moderate-income people with few assets and some unpredictability in their income and expenses, banks simply don’t stack up well against check cashers and payday lenders. The number of people in a financially unstable position is rising. Yet policy makers continue to assert that banks are the answer. An official from the F.D.I.C. called me a few months ago, following the publication of an article I had written on the human side of the check-cashing business. She made it clear that the F.D.I.C. aims to move the unbanked and underbanked to bank accounts because it feels that banks are the appropriate route to the “financial mainstream.” But the F.D.I.C.’s arguments lack recognition of the complexity of the situation. The agency’s Web site, for example, highlights only the downsides of check cashers and payday lenders, and only the benefits of banking (benefits, by the way, that most low-income people don’t have enough money to enjoy).
If the experts are right, and banks really are the best way to serve low- and moderate-income people, they at least need better incentives to do more to serve the poor.
I applaud the desire of my acquaintance at the September meeting to get close to the problem of how to help the poor access better financial services. I’ll bet that most of the people crunching numbers for surveys of the unbanked and studies of payday lending have never set foot in one of these stores. But his story also shows that it can be dangerous for higher-income people to draw judgments about other people’s decisions based on their own world views.
Lisa J. Servon is a professor and former dean at the Milano School of International Affairs, Management, and Urban Policy at the New School. She teaches and conducts research in the areas of urban poverty and economic development. Her books include “Bootstrap Capital: Microenterprises and the American Poor” and “Bridging the Digital Divide: Technology, Community, and Public Policy.”
Photograph by Ashley Gilbertson/VII.