Who are the unbanked? – Marketplace
Consumer advocates often use the word “predator” to describe payday lenders and check tellers, but many Americans still look to these services rather than traditional banks. Lisa Servon, professor of town planning at the University of Pennsylvania, said that’s because in many cases it’s a rational financial decision – or the only option. His research, which included working as a check teller in the South Bronx and payday lender in Oakland, Calif., aims to better understand who uses these services today and why.
Marketplace Morning Report host David Brancaccio told Servon about his book, “The Unbanking of America: How the New Middle Class Survives.” Below is a transcript of their conversation.
Brancaccio: So people bring their paychecks. Just give me an idea of the types of jobs people were doing that would come to this place in the South Bronx?
Servon: A lot of them were, I would say, some sort of work in the service industry, restaurants, home helpers. The people whose jobs, I think, embody a lot of the new jobs in the new economy, where people are paid by the hour instead of paid work – often jobs that don’t necessarily come with benefits. I think people often came because they needed their money right away. If they deposited those checks in a bank, it would take them three or four days to clear. But if they brought them to the checkbox, they could cash them for a small fee, give them the money they needed right away.
Brancaccio: This comment targets the most controversial part of this: the big or small fees. Payday loan reviewers say these places are a bad deal, and the subtext often suggests it’s about financial education. Anyone who knew anything about money would stay away, but you conclude that it’s a rational decision to go to a payday lender like this?
Servon: That’s right. And I was more surprised or as surprised as anyone else when I realized, and I spoke to the clients who came in, I interviewed a lot of them after I finished working. And one of the main reasons, especially in the check cashing industry – and I think we need to talk about fees differently in check cashing and payday loans – but [people] told me that one of the reasons they came to the checkbox instead of a bank was because they thought the bank was too expensive, and that really surprised me. Because you’re right, what you see in the newspapers and all the literature on these companies is that they are predatory and they charge people too much. In New York State where I worked, the cost at the time was 1.95% of the face value of a check to cash it. So, you know, you are paying $ 1.95 out of $ 100. If you wrote your landlord a check, say, and that check cleared before the deposit you made. You pay $ 35 overdraft fees, and that’s the kind of math people do. I think when we deem them too expensive, these alternative financial service providers, it’s largely because we can’t imagine – at least I couldn’t – live so close to the edge and have so little, so small. a margin in my finances.
Brancaccio: I mean, this is the subject of the book, how people survive on what on paper might look like middle class income. Sometimes it’s just surviving.
Servon: Sometimes people earn enough if you add up what they’ve earned over the course of a year, but there are spikes and dips in their income. So let’s say you’re an hourly employee and you get 40 or 50 hours for a couple of weeks and then it drops to 20 and you don’t get any warnings. Or maybe as a woman I interviewed recently in California who worked for the justice system for 36 years and was put on leave when the state was in financial trouble. Suddenly she has to adapt to this drop in income immediately and she can’t. So she ends up taking out payday loans just to make ends meet and pay the rent. These peaks and valleys are therefore more frequent. Income volatility has doubled over the past 30 years. And this means that people are not prepared for these drops in income and if an unforeseen expense arises during this time, they are often not able to find the money to deal with it and end up taking an expensive loan like a payday loan and roll over it, thus becoming even more in debt. Income volatility therefore plays a huge role in the financial instability that many Americans face today.
Brancaccio: Remind us of the distinction, there is check cashing where you worked in the South Bronx, 1.95% of the face value of the check. But there are also payday loans, it is a different rate of interest.
Servon: Okay, what you pay at the cashier of the check is a commission based on the face value of the check. And the payday loan is illegal in New York State and several other states, which is why I went to California to do this job. In California, which is fairly typical, although these charges and fees differ from state to state, the cost of a loan was $ 15 for every $ 100 borrowed. So you take that $ 100, you actually pay $ 15, you get $ 85. And the reason they’re called payday loans is because they’re due on the date of your next paycheck, which is either two weeks or four weeks, depending on whether you get paid monthly or twice a month. . What happens in many cases, but not in all, is that when that two week deadline arrives, you are not able to repay the loan. And so you end up taking it back, another loan, and paying $ 15 more for that same $ 85. So these fees add up quickly, and this is what consumer advocates and many policymakers oppose is the idea that the loan is often used in a different way than it is. has been conceived.
In my research, what I’ve tried to do is really pick up on the situations people find themselves in that lead them to take out these loans and recognize that they often don’t have other options. And so, while many people I have spoken to have said, “Yes, I hope I never have to take these loans again, I have paid a lot more than I have borrowed”, many other people said, “It was the only place I could go when, for example, my car broke down and I couldn’t get to work, and if I couldn’t get to work I would lose. my job ”, or“ I had to choose between putting food on the table for my children or making them go hungry, and the only way to feed them was to take out a payday loan. Now consumer advocates will often rightly say that this is not a long term solution to the problem, but I think it is also not getting rid of all those loan providers because the demand is always there and the demand is there because people don’t make enough money, don’t have benefits and are really in the vagaries of this job market, which doesn’t guarantee them a stable income.
Brancaccio: So when I ask you what’s an alternative – part of it is raising standards, increasing income for middle class families for sure – but when it comes to personal finances, is there a better way? way to approach this so that it is not the only option for people?
Servon: So one way to do this is to look at some of the innovations that have arisen in fintech. There’s a company called Ripple in San Francisco that uses blockchain technology, the space-age bitcoin kind of stuff, to figure out how to move value from one place to another immediately and at no cost. This would mean to consumers that instead of waiting three or four days for a check to clear, the amount of that check would be immediately available to them. So you get rid of a lot of overdrafts and the need to cash checks.
Brancaccio: Okay, so technological innovation, but what about the traditional banking system or the big banks? Could they do a better job?
Servon: They could absolutely do a better job. You know, the big four banks currently hold half of all our deposits, and they don’t necessarily behave well with consumers. They could charge less for overdraft fees, which were virtually non-existent in the 1970s, and they could also change their practices to be much more user-friendly. One of the practices that I discovered while writing the book is a practice that many banks do called “debit rescheduling,” where a consumer, for example, has $ 100 in their account and writes a check. $ 500 to its owner, spends $ 50 on groceries with his debit card, and pays a $ 25 phone bill. If all of these fees hit their account on the same day, the bank uses software to set that $ 500 fee first, so you get an immediate overdraft, then the $ 75 fee and then the $ 25 fee, which results in three overdrafts for a consumer. Where he could put the first two fees first, which would erase, then the third, giving the consumer only one overdraft fee. So consumers really need to look at what their banks are doing and choose small community banks, credit unions, or other financial service providers that treat them with more respect.