By: Felix Salmon
October 8, 2010
Candice Choi has a great first-person story about the cost of not having a bank account. She gave up her account for a month, to experience the inconvenience and expense of being unbanked at first hand.
The latter is relatively easy to quantify, and it's substantial: Choi paid $93 in fees over the course of the month, which is a rate of well over $1,000 per year -- very big money, given the disposable income of most of the unbanked. And she has a lot of advantages over most of the unbanked -- a very high degree of financial literacy, an ability to read and understand English-language small print, and residence in a state (New York) which caps check-cashing fees.
Go read her story in full: it's not so long, and after reading it you'll be hard pushed to understand why people might voluntarily remove themselves from the banking system.
Yet that's exactly what they do, for reasons Choi elucidates well:
A federal study last year found that about one in four U.S. households skirts banks and relies on services such as check-cashing and payday loans. Many of these households bring in less than $30,000 a year.
Some do it because they believe they don't have enough money to open a bank account or were burned by fees in the past. But it's not always a matter of choice: Many can't open an account because of a history of bad checks or damaged credit.
There are other reasons too. Language barriers intimidate some would-be customers, or they simply feel banks aren't welcoming. For others, literally handling their own money offers a sense of control at a time of financial anxiety.
One thing worth remembering here is that below a certain level, the poor have much the same relationship with money as the hungry do with food. It becomes something you're always conscious of, something you're always worried about. At that level, it really does feel a lot better to have a dollar in your pocket than to have a dollar on deposit at a financial institution which is prone to charging seemingly arbitrary fees for any or no reason.
One of my readers, Brian Jaklitsch, sent me Choi's article with some questions of his own, making the important point that if the fees were cut in half, the savings would certainly be put to much better use elsewhere. He added:
I realize that the world isn't as simple as I wish it were, so maybe what I am about to suggest is impossible, but you have to wonder why some large institution with enough clout to begin to change the way things are done hasn't looked into capturing some of this market as a way to bring the lower end of the spectrum into the system. Or at least, I do. Is it really that impossible for a large bank to work on lowering such fees to the point where they either end up breaking even or making a very small profit (or, possibly, taking a tiny loss) but figure out a way to bring lower-income people into the system by allowing them to take advantage of the lower fees?
The answer here is that banks could try this -- but there's no economic incentive for them to do so. The poor and unbanked tend to be "high-touch" customers: they come in to the branch a lot, they don't like using automatic bill-pay or ATMs, and generally they consume a lot of teller time without the bank having very much to show for it. Some banks, especially in countries like Brazil, are doing some very novel and interesting things with banking the poor -- but they work because the scale there is so enormous, and they're going after the base of the pyramid. In the US, the unbanked population isn't nearly as homogenous or as large, relative to the population as a whole.
There are three ways that banks make money from offering basic bank accounts. The first is the old-fashioned way: getting a stable low-cost funding base from deposits. The second is by cross-selling other products, like loans or credit cards. And the third is fee income.
With the Consumer Financial Protection Bureau cracking down on the bad forms of the second two sources of income, that basically leaves the first -- and poor consumers simply don't keep enough money in their bank accounts for it to be worth the banks' while. Banks can make a little bit extra on interchange fees on debit cards, but that's not going to make the difference between a profitable consumer and an unprofitable one.
There's more hope from credit unions: they exist to serve their customers, rather than to make large profits, and they're generally much more willing to sign up for government programs trying to decrease the rolls of the unbanked. But it's hard work, and there are no easy ways of doing this. Which means that the check-cashers and payday lenders are likely to be around for a long time yet, acting as yet another tax on poverty.