Photo credit: Flickr.com/Jeremy Brooks
The New York Times ran a piece over the weekend that highlights many of the challenges of the alternative banking sector. As the article explains, low-income consumers may turn to “fringe financial companies — businesses like check cashers, payday lenders and pawnshops that lack conventional checking or savings accounts and frequently charge huge fees and high interest for their services” because they are the only places that these people can get the services they need. As Anne Stuhldreher, a Senior Policy Fellow with New America in California explains in the article, “Without a checking or savings account, you’re basically shut out of most affordable financial services.” Without affordable products, savings opportunities are highly limited and more fundamental opportunities for asset preservation are at risk.
Last week, we released a paper by Research Fellow Rourke O’Brien that looks at this tension. Lower-income consumers are indeed aware of the heavy financial trade-offs of using “fringe financial services.” But for a wide variety of reasons ranging from distrust of mainstream banks to frustration with fee structures to bad experiences dealing with banks and their staff, these consumers have made the active choice to do things differently. Even when that choice comes at a price – consumers know that they will face more costly loan terms or fees on transactions that mainstream banks would offer for free with a basic checking account. But these costs are familiar and that familiarity helps make people comfortable. As Anne Stuhldreher told the Times, “There’s a lot financial institutions can learn from check cashers,” she said. “They’re convenient. Some are open 24 hours. Their fees are too high, but they are transparent.” O’Brien’s interviews corroborate this perspective. As one interviewee, James, shared, bank fees were frustrating: “I didn’t want to have to deal with something like that. Or if I made the mistake of overcharging one dollar, you know, now I gotta pay $30, it didn’t make any sense to me. So I just stopped with the whole credit cards and banking and stuff like that.” James now keeps his cash in a safe, which might allay his concerns about overdrafts but puts him at risk of losing everything in the event of theft or natural disaster and means he stands to lose assets through the different transactional fees associated with fringe products.
As I wrote about last week in a post about payday lending, the existing financial product landscape can be a barrier to savings for low-income people. As Senior Policy Analyst Pamela Chan writes in her 2011 paper, Beyond Barriers, “While some banks recognize the potential benefits of offering small-dollar savings accounts to a new market of lower-income consumers, they are skeptical of the accounts’ profitability. Many banks do not believe there is enough demand for savings products because saving is too challenging for lower-income consumers. Others argue that the cost to service accounts with low balances makes it difficult to offer such accounts.” This is an ongoing challenge – how to meet the financial needs of lower-income consumers when many mainstream banks simply aren’t interested.
As the New York Times article highlights, some of the most promising solutions to this problem are coming about at the city level. As described in the piece, San Francisco has a robust Office of Financial Empowerment who has taken the lead on several initiatives aimed at putting affordable financial services in reach for lower-income residents. Both CurrenC SF and Bank On help to put mainstream financial accounts in the hands of consumers who otherwise haven’t had access to these banking tools. Ultimately, the success of “banking” the unbanked depends on creative thinking from multiple angles, including ensuring that product design reflects the needs of consumers and companies alike.