By: Jana Kasperkevic
November 3, 2013
Lisa Servon is a professor of urban policy at the New School in New York who studies low-income communities. In 2012, ironically, she found that she needed another job, in order to make ends meet.
"I have worked in poor communities for so long," she says, "I thought, 'I know poor people are pretty smart about their money actually, because they don't have very much of it.' And it just led me to want to really understand what was at the bottom of it all."
So Servon took jobs that would challenge everything she knew about poverty: working at a check-cashing place in the Bronx and at a payday lender in California, gaining an inside view of the underbelly of the financial system.
"I had the same presumptions about [such businesses] that most people have, that they are abusive, that they charge really high prices, that they take advantage of poor people," Servon says.
In the Bronx, Servon became one of the three cashiers' working day shifts at one of Rite Check's 12 locations in the borough. What she saw surprised her: she started to gain new insight into why wealth inequality in America causes people to skirt the banking system, with its hidden fees and long check-clearing times. People with no bank accounts, low incomes or unreliable cash flow - a growing percentage of Americans - often choose an alternative that the middle class might consider desperate.
In this edited transcript of our conversation, Servon describes a part of society and the financial system that much of the middle class rarely sees.
Guardian: Has this experience changed the way you see things?
Servon: I did not expect to find this. I don't necessarily think that check cashers are the answer, but I do think that right now, given the way that banks operate, check cashers are doing a better job of servicing a lot of people.
I actually think that all these [proposed] taxes on businesses are kind of misguided. I think the focus should be more on the fact that you have so many people who are actually working really hard and not making enough to have a bank account. You know, real wages have been declining since 1972. If you make minimum wage, you are making about one-third of the average hourly wage. That's the problem in my mind. So [if] you shut down the check cashers you are still going to have all these poor people that aren't making ends meet. It's not going to solve the problem.
You mentioned people having preconceptions when it comes to check-cashing places. Can you talk a little bit about the fees involved and how they compare with banks?
One of the key things that has happened [since the 2008 financial crisis] is that you have more and more people who are living paycheck to paycheck. So for example, in the Bronx 75% of the people have no discretionary income. There is zero slack in their budget.
So one of the things that become incredibly important to them is being able to get their money fast and to have liquidity. If you go to the bank, they want to hold on to your check until it clears. It's less risk for them. Whereas at the check casher, they charge you a little bit of money - in New York State, it's 1.95% of the face value, which is about the lowest. In California, it's more. People are really aware that they are paying that. They are paying that price for liquidity.
The other thing is that if you were to map the increase in the check-cashing industry over the last 10 years there would be another line that would look very similar on the graph. That would be the increases in bank fees. If you compare it to 10 years ago, ATM fees have gone up, monthly service fees have gone up. Last year overdraft fees were at an all-time high - I think it was $38bn. So there is that piece of the situation: the straight-up cost of banking.
The other piece of the situation is transparency. In a sense, check-cashers have their signs right there. You walk into a bank, it might look nice, but there is no signage anywhere. I sometimes think: what if I were an immigrant and someone said, 'You should open up a bank account,' and I don't speak English. I walk in and there's nothing there that tells me what's going on in this place.
One of the ways this all plays out is when an individual has to know his or her minimum balance fee, and what day the monthly service fee is coming out. I spoke to an audience of 300 the other week and I said: 'How many of you know what day of the month your monthly service fee comes out?'
If it was $5 or $10, these people live so close to the edge that it matters. It's not always the same day and [with] overdraft fees you could be charged, I think, even up to $140 a day in overdraft fees.
People who live so close to the edge feel like they can manage check-cashing better, because they go to the window, they cash their check, they have this pile of cash in their hand and they have these three bills and they see that it's all happening right now with this cash. There is not going to be anything hidden.
You mentioned that there is trust between the people who work at check cashers and people who use them. Did you see camaraderie between the workers and the customers?
Definitely, it's one of the things that really impressed me at Rite Check when I started working there. Somebody comes in and you know, "Oh, this person is going to want to see last night's lottery numbers." You just print them out so they are ready. You get to know your customers, what they do. You see them with their kids or grandkids, and the next time they come you say, "How are your kids?"
We were actually told when we went through training that we were supposed to use customer's names three times during a transaction. So I would say: "Hey Jana, how are you doing today? What can I do for you? You have a check for me to cash?" And, you know, then I'm doing it, and I would be saying: "On your way to work, Jana? What's going on? What are you doing the rest of the day? Thank you so much. We really appreciate your business."
My hypothesis is that people who are lower-income don't get as much of that kind of respect in their lives. I get it at work. In other places, even at higher-end stores and things, you get more of that kind of respect. But if your day is: go to the housing authority and the welfare office and a crappy minimum-wage job, you don't actually get treated like a full human being very much. So if these businesses can do that, I think they got it. Some of them understand that it's a competitive advantage.
Tell me more about payday lending.
It's certainly a big part of this alternate financial services industry and I wanted to understand it. It's more controversial than check-cashing, for sure. I was thinking about how I would get the access, since I live in New York and it's not legal [here]. So last spring, I went to Virginia. There is a place called Virginia Poverty Law Center and they run a hotline for people who are having trouble paying back their loans or feel like they have been treated illegally. And I went down and I got trained on the hotline. I actually kept the hotline phone for about the month, and I brought it back here, but I was the person answering all the calls. So I really heard people's stories and was able to counsel them and tell them what their rights were and what they could do. There's a lot that people can do that they don't realize. You know, you can get people to stop calling you at work - or calling you at all.
What we did in California was that we got people's work phone. You didn't call their work phone right away, but if they didn't respond, you kind of escalate. And that's OK, but if someone tells you you can't call their work, you have to listen to that. There is the whole Fair Debt Collections Practices Act, but obviously it's abused a lot. It was not abused by the place I worked at in California.
Once again I think the real issue is people need these really small amounts of credit. And from what I could tell, both from working on the hotline and then working at the store, I think most people - and other studies like the first Pew Study from 2012 substantiate this - most people are paying for basic living expenses or kind of small emergencies that come up.
If you go back to that notion of people living paycheck to paycheck and not having any slack in their budget, they are going to have experiences like we all do where something comes up that costs more money than we thought we needed. Because they don't have that buffer.
You know, the financial experts would say you should have six months of bills [saved up]. [She laughs] That's a great idea, right?
If you were to ask 40 of my friends, maybe four of them have saved enough maybe for two months. I think it's a stigma to say that only low-income people don't have a safety net. A lot of middle-class people don't have a safety net.
That's right. So, what happens is they are going along, making it paycheck to paycheck and then their car breaks down. This happened to a woman I worked with at the payday lender. She was a single mom, she had to drop her daughter at daycare and get to work. She tried doing it on the bus for a while and she just couldn't make it work and be everywhere she needed to be. So she took a payday loan to get her car fixed. But what happens is there is never that kind of commensurate bump in the income to catch you up to the [increase] in the expenses. So, the loan comes due - usually they are anywhere from eight days to 30 days, depending on your paycheck - and you have to say, "OK, I can pay this one back but I need another one right away." And so you end up paying a lot more in interest.
Is it a vicious cycle?
It's hard to get out. The woman I talked to, she ended up working out a payment plan where she would just pay back $5 a week or something. And frankly, [the loan companies] aren't taking collateral and they aren't reporting to the credit bureaus so they don't have much leverage at all. The only leverage they have is you won't be able to come back. But frankly, if you wanted to go from payday lender to payday lender and get $300 and default, you could. And it doesn't show up on your credit score, because they don't report. And they can't take you to the court, even, they have to - anything they would do would be an arbitration and they don't really do that.
I don't know if people really realize that. Given that situation, it's remarkable such companies get repaid as often as they do.
When you came in contact with the people at the check cashers or payday lenders, did you see customers become embarrassed about their situations?
In lower-income neighborhoods, there is not much a of a stigma. I couldn't really tell whether people who were taking out the payday loans felt a stigma. Sometimes, there were people who kind of offered up a reason. Almost as if they had to explain: "I work at Restoration Hardware and the store had a fire last week and we are supposed to get paid but we weren't." There's tons of stuff like that. I was in the San Francisco Bay area and there was a strike of the transportation system.
Right, the Bart strike.
I was in the Berkeley store and this guy comes in and he needs a loan to pay his rent because he couldn't physically get to his paycheck. If you look at the individual situations, it's hard to imagine you wouldn't do the same thing. It's not like: "How are these people thinking or operating?" It's kind of like, if I needed to pay my rent and my paycheck was on the other side of the bay and I couldn't get there - that makes sense.