The January 10th Episode of Fresh Air, “Why More Americans Are Giving Up On Banks” featured Lisa Servon, Professor of Urban Policy and author of “The Unbanking of America.” During the show, Servon discusses the phenomenon of a growing number of Americans finding alternatives to traditional banks, including prepaid debit cards, check-cashing centers, and payday lenders.
I was fascinated by this episode.
As a holder of a Masters Degree in Urban and Environmental Policy and Planning from Tufts University, I spent a few years on the learning end of many courses akin to those Servon teaches. We learned many of the same principles that Servon cites as foundational to the discourse of urban policy and income inequality; namely, that institutions like check cashing centers and payday lenders were predatory toward the poor, and further exacerbate their economic hardship. An underlying assumption here is that if the poor would simply get set up in a traditional banking system, they would avoid these predatory practices and be financially better off.
While I was never presented with specific data to back this up, calling these companies predatory seems fairly intuitive given the high fees and ‘nickel and diming’ on already small checks.
Servon found very interesting data by working at check cashing and payday lending centers, and blew up a number of traditional assumptions floating around many Urban Policy schools. For example, the vast majority of patrons did not find the fees associated with check cashing centers to be predatory. In fact, the transparency and consistency of what was going to be charged for which activities was paramount to people who need to account for every last dollar they make.
Traditional banks, on the other hand, had exorbitant fees for overdrawing accounts, took several days to convert checks to cash, and engaged in predatory practices of their own. Patrons of check cashing centers were making entirely rational decisions in procuring these services, found that it was a better, more predictable use of their money, and had their needs better met.
There are, of course, ways in which these services can really gouge the poor. In the case of payday loans, interest can roll over and compound, resulting in users paying as much as the equivalent of 500 percent APR on a small loan. For those already living close to the economic edge, this is an excessive burden. It should be noted, however, that many patrons interviewed for Servon’s book contended that, given the alternative being weighed (e.g., feed one’s family, pay a medical bill, or repair a car to get to work), it still made the most sense to take out the loan albeit the interest.
Servon wrapped up with recommendations for traditional banks to better serve low-income clients, as well as ideas for how the government can better ensure check cashing centers, payday lenders, and traditional banks better meet the needs of low-income and poor people.
I highly recommend listening to this episode to challenge the assumptions you may hold about low-income and poor people, and the economic choices and systemic challenges they face everyday.