Most middle-class folks are dimly aware there's a parallel financial world out there in other peoples' neighborhoods, where the less fortunate rely on check-cashing firms, pawnshops, and short-term lenders instead of banks. What they may not know is that these "fringe" financial institutions meet needs that banks often don't, and that their customers are paying a very high price for their "unbanked" status.
The price goes beyond the very high fees typically charged by "fringe" institutions for their services. People without bank accounts are locked out of many of the most fundamental means for accumulating savings, and ultimately, wealth. As Anne Kim, director of the Progressive Policy Institute's Project on Work, Family and Community explains in an important new report, progressives in and out of government need to encourage banks to begin seriously competing with fringe institutions for basic financial services for the poor. It's an under-appreciated but potentially strong source of business for the banks themselves, but, more importantly, could provide a big boost into the economic mainstream of the country for the working poor.
The "unbanked" are a larger group than you might think. According to Federal Reserve estimates, 13.2 percent of American households do not have a checking account, and 9.5 percent have no bank account at all. More than half of "unbanked" households are nonwhite or Hispanic. The "unbanked" also tend to be disproportionately young, less educated, and earning low incomes. In other words, these citizens meet almost every criteria for social disadvantage, and their reliance on fringe financial institutions help keep them that way.
But their use of such services, and their avoidance of banks, is mostly quite rational. Check-cashers, for example, offer immediate access to paychecks without the sometimes-lengthy delays banks impose for check clearance. "Fringe" institutions typically offer convenient evening and weekend hours, not "bankers' hours." They also provide quick short-term loans, and their fees, while often relatively high, are sometimes less prohibitive than the minimum-account-balance fees charged by banks. And finally, "fringe" institutions often bundle their financial services with other essential services for low-income families, such as prepaid phone cards, money orders, and low-cost fax machines.
Less rational, but still compelling reasons for using fringe institutions rather than banks include perceptions of hostility from bank employees; the personal experiences of many immigrants from countries with less stable and reliable banks; and the mistaken belief that maintaining small cash balances in bank accounts could make families ineligible for federal benefits necessary to supplement wage income.
Kim recommends several avenues for beginning to "bank" the poor. She urges banks to begin offering some of the kinds of services that are particularly important to low-income families, in part through partnerships between banks and community-based organizations or existing "fringe" institutions to compete for the business of low-income families. Banks need to take a page from the recent realization of many retail firms that low-income neighborhoods represent one of the few great, untapped markets in the U.S. economy. Just as banks have innovated in recent years to provide customized services for upper- and middle-class customers (from PC banking to a whole array of new savings and investment devices), they should consider customized services to attract the poor. The competition they could provide would also drive down the cost of financial services now dominated by fringe institutions.
Federal, state and local policymakers can also contribute to this effort, by (1) authorizing and funding small bank-based pilot projects to show the potential impact of banking services for the poor, (2) promoting more aggressive use of the incentives provided for low-income financial services by the federal Community Reinvestment Act, and (3) expanding public and private financial education programs to help low-income families take advantage of the best services at the best price.
As Kim concludes: "The growth of the check-cashing industry and its profiteering cousins indicates the emergence of a second-class system of financial services for poor Americans -- and one that diminishes wealth rather than promoting its accumulation. Reaching out to the unbanked will have what some call a 'double bottom line' benefit: by effectively entering low-income markets, banks can not only make profits for themselves but can create a great deal of good for low-income consumers and their communities."
