Where do you go when you need $400?
The Unbanking of America
by Lisa Servon
In a May 2016 Atlantic story, Neal Gabler wrote:
The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all.
This seems astonishing, but Gabler writes that it could happen to any of us, because it also happened to him.
What happens when people can not come up with $400?
Lisa Servon’s timely new book, The Unbanking of America, explains how and why Americans are using “alternative financial service providers” to circumvent traditional banks. The how is told through her engaging first hand account of working at check cashers and retail payday loan establishments. Thy why is basically…half of America is broke, and millions of Americans do not have bank accounts.
When you have to pay your construction workers, but can not wait until the money is transferred into your bank account, you go to an alternative financial service provider like a check casher.
When your car breaks down, and the only way to get to work to get money to pay rent and your food for your kids, you take out a payday loan.
How did we get here?
As Joe Nocera explained in his 1994 book A Piece of the Action, the bank industry was de-regulated in the 1970s. They no longer had strict regulations around investment banking or bank fees. There were now many more opportunities to earn cash from their customer base. There were not just investment opportunities to sell to the middle class, but also a vast array of fees to charge them. The bigger banks consolidated, and increased margins, while the smaller Main Street banks diminished. The “3–6–3” era of banking — 3% on deposits, charge 6% on loans, and get to the first hole by 3pm- was gone. The banking industry was no longer boring as Paul Krugman wrote in one of his many post-Great Recession opinion pieces(kudos to Krugman for not going insane, but continuing the message that begs to wonder- why don’t policy makers ever listen to him?).
Servon, somewhat surprisingly, omits Nocera’s book from her research, but adds to where A Piece of the Action leaves off. Banks since the mid 1990s became less interested in the low-middle class consumers’ bank accounts, and focused attention and service on customers with more wealth, and started squeezing the poor with fees.
One telling example in Servon’s book is the computer script banks wrote to handle overdrafts. Instead of writing the script to serve the customer, they wrote it to serve strictly the bottomline of the bank. Servon explains — if you have $100 in your account, and you wrote a check for $25, $75, and $125 and they all get deposited on the same day, the bank will maximize your overdraft fees by clearing the $125 first. Now that the customer has a $25 negative balance, there will be an overdraft fee for each additional check cleared. According to Servon, “nearly 11% of consumers between the ages of 18–25 have more than ten overdrafts per year.”
This is simply one anecdote, but indicative of a larger problem- consumer satisfaction in banks eroded. Customers now expect the banks to add additional fees when they least expect it.
For millions of Americans, banks are less accessible, their wages have decreased, overall costs of living has increased, and there is a diminishing safety net system. Americans are broke.
With millions of Americans desperate for immediate cash, a market opportunity presented itself to check cashers and payday loan stores. So much of what we know about personal finances come from our parents, not our schools, and most of us who grow up in a traditional banking environment are not taught that check cashers is for those without bank accounts that need cash immediately, and payday lenders have bank accounts, and the repayment of the loan is deposited from their account.
Why would someone pay a place 1.95% of a check value when at a bank it would be free? Servon took a leave from her teaching to go work “undercover” at some of these alternative banking service providers (she told her check casher colleagues she was doing research). During her research as a teller, she meets the the construction worker who need to pay his workers immediately or needs to pay people without bank accounts. He is willing to lose the 1.95% so he can pay his workers immediately.
The APR on payday loans is often between 300–600%. This can create a perpetual cycle of debt, but what decision would you make if you had a medical expense that had to be paid? More than 85% of payday loan customers use their loan on everyday expenses like a utility bill, food, credit card bill, medical expenses, and car payments.
Why would you not use a credit card instead of a payday loan? The credit card acts as the last line of defense. For many Americans their credit score prevents them from getting other credit cards, and their last credit card is the safety net that the government once provided. Payday loans do not affect credit scores because they are not reported the the credit score bureaus.
Servon concludes by asking her readers to demand financial justice, but the underlying problem is not simply the financial industries exploitation of the middle class. The systemic problem is ultimately the reason why Americans are so strapped for cash. If there was more income equality, and greater opportunities for good jobs and a proper safety net, the demand for quick cash alternatives would lose their appeal. It is economic justice we should all demand and seek. Only in a country where 47% of Americans can not come up with $400 in cash does the “unbanking of America” occur.
