Life in the cash economy for “underbanked” Americans

December 15, 2013 at 12:00 AM EDT
Nearly 20% of low income US households are "underbanked," according to the FDIC. But is providing access to traditional, mainstream financial services the best solution for everyone? A professor does double duty as a New York City check casher and discovers that banks might not be the best choice for everyone.

KARLA MURTHY:  For most of us, going to the local bank to deposit a check is second nature, but for many poor people in the New York neighborhood of the South Bronx, it’s not.

More than half the residents there don’t have a bank account, so on a Friday afternoon customers trickle into Ritecheck, a check cashing store. They are paying bills, buying money orders and cashing checks at a type of business often criticized for seeming to exploit the poor – by charging high fees.

But on this day, one of these tellers is not like the others.

Lisa Servon is actually a professor of urban policy at the New School in Manhattan, and her job at this check cashing store is part of a research project to find out why people choose to come here, despite the fees, rather than going to a bank.

KARLA MURTHY to SERVON:  What were your impressions of check cashing places?–

I thought the same thing that you see in the press. I would cite the literature that called check cashers abusive and predatory and– you know, being businesses that were really taking advantage of the poor.  So I believed that.

KARLA MURTHY: But that belief was challenged when a man who runs one of these businesses visited Lisa Servon’s class as guest lecturer five years ago.

JOE COLEMAN: Lisa’s like, “You know, I’ll get my graduate students and they’ll really lay this guy to waste, you know?”

KARLA MURTHY: Joe Coleman is the president of Ritecheck, a chain of 12 check-cashing stores in Harlem and the Bronx.

JOE COLEMAN: She just had that usual kind of, you know, idea like everybody else that check cashers are evil.  So you know, I took my horn and my tail off and I showed up at The New School.

KARLA MURTHY:  After Coleman appeared in her class that day; Servon started rethinking the role that check cashers were playing in poor communities.

LISA SERVON:  The– kind of the underlying assumption if they’re bad businesses is that the people who use them are not very smart, right. And I knew that wasn’t true. I knew from my other work that when you’re low income or working poor, you’re really good at managing your money because you don’t have very much of it. So it didn’t make sense to me that people would willingly pay more for something that they could let less– for less. And the only way of figuring that out was to get as close to the problem as I could get. So I couldn’t really– you know, go undercover as a poor person, it wouldn’t have really worked.  But I called Joe five years after he came to my class and I asked if he’d hire me as a teller.

KARLA MURTHY:  For four months last fall, the professor commuted to the South Bronx and worked weekly as a teller in one of Coleman’s stores. She soon discovered that just getting quick access to their money, as opposed to waiting for a check to clear in a bank is a big reason poor customers use check cashing services, despite fees that nationally average about 4%.

KARLA MURTHY to SERVON:  They’re having to pay fees to cash a check.  I mean, isn’t it better to do that at a bank where it costs almost nothing?

LISA SERVON: In fact a lot of people did have bank accounts and a lot of others had had bank accounts and didn’t any longer.

banking fees

KARLA MURTHY:  Servon interviewed customers for her research. And she says, one reason banks are seen as more expensive is a lack of transparency about fees.  Many customers didn’t know what the fees were and when they were going to hit.

LISA SERVON:  When you walk into a check casher, you see the fees for every service is posted in huge font. You walk into a bank and there’s no signage at all.

KARLA MURTHY:  People with bank accounts are given disclosure agreements laying out when you’ll pay a bank fee and for how much. But those agreements typically run nearly 70 pages.

KARLA MURTHY to PATRON: Would you rather use a bank if you could?

KARLA MURTHY:  We spent time at some check cashing stores in the South Bronx and heard a great deal of distrust about banks and complaints about their services.

The time it took for checks to clear, there not being enough branches in poor neighborhoods, the high penalties for bouncing a check, and hidden fees.

FRANCIS DARKO: I would rather cash my money and then have the whole money that I need instead of putting it in a bank where by the time I realize it they would have taken half my money out.

KARLA MURTHY:  Average fees just to maintain a noninterest-bearing checking account have tripled in the past four years according to consumer surveys. Meanwhile the percentage of free checking accounts being offered by banks is only half of what it was in 2009.and free often means needing to maintain a minimum balance or using direct deposit.

JONATHAN MINTZ: Financial security is everybody’s problem.

KARLA MURTHY:  Despite all the complaints about banks, Jonathan Mintz, the Commissioner of the New York City Department of Consumer Affairs says banks still play a vital role helping the poor get ahead.

JONATHAN MINTZ: Banking is really the key on-ramp to whether or not you’re involved in a productive step forward or whether or not you’re just treading water or drowning .

The problem is, is that when people are having to pay for each and every one of their financial transactions, it’s just this cycle of unproductive banking activity.  People aren’t connecting into the financial mainstream, which means that their ability to become financially stable and grow and open businesses and save for their kids to go to college, all of that pathway that you and I take for granted– is being denied to millions and millions of Americans.

KARLA MURTHY:   But critics say it’s very hard for the poor to save in the first place and the little money they do set aside gets a minuscule return in a bank.

And Joe Coleman of Ritecheck argues that his business model works perfectly well for low income customers.

JOE COLEMAN: Our customers are really what’s called low balance, high volume customers, and banks don’t– aren’t very cost-effective at serving that population. If you’re a low-income consumer that’s working on a very small budget, and you don’t have any money to keep on deposit in the bank, we’re faster, cheaper and better than banks. Look, sure, if you’ve got $100,000 check, it doesn’t make sense to pay 1.95% to cash it; if you’ve got a $300 check and you’re going to pay $5 or $6 to get $294 back for your– to have immediately, it makes sense.

KARLA MURTHY:  In New York, check cashing stores can charge 1.95% to cash a check. But the estimated national average is more than 4%. And all those fees add up: a study from the Brookings Institution shows that over a lifetime, relying on check cashers instead of a low-cost checking account could potentially add up to more than $40,000 for a low income worker.

KARLA MURTHY: It’s estimated that New York residents spend about $225 million in fees for cashing checks at businesses like yours, I mean, that’s a lot of money, wouldn’t that be better for people to be putting that into a saving s account or something else to build, you know, assets and– credit?

JOE COLEMAN: Right, right.  Well, I think, first of all, if you look at the number of transactions, it’s– per transaction is a very small amount.  And if you are using a bank, I mean, the banks are p– profit-making organizations and they’re getting fees. The problem is that people can’t keep money– asset building’s good, if you can afford to build an asset, but what about the people that can’t?

KARLA MURTHY: But just as Coleman criticizes banks, many criticize check cashing businesses for other services some provide, particularly what are known as payday loans, short-term advances with extraordinarily high interest rates. Something allowed in 36 states, but not New York.

payday lending map

KARLA MURTHY: Coleman does acknowledge his industry has its problems.

JOE COLEMAN: Well, I mean, look I won’t say that everybody in my industry is angelic and pure. You know, we have bad actors, too, like every industry. What I’m hearing is that kind of, almost, you know, unconscious presumption that somehow this industry tends to be more evil or something or we tend to be taking more advantage  and there’s this sort of intrinsic almost unconscious connection that If we’re down here making money– I must be ripping off the poor.

JONATHAN MINTZ: Check cashers are addressing this market gap, not by solving the problem, but by profiting off that problem.

KARLA MURTHY:  Commissioner Mintz acknowledges that traditional banks have not done a great job serving the poor either, but he’s working on how cities can convince banks to serve this population:

JONATHAN MINTZ: When a city says to banks and credit unions, “This is our product need, and we are offering you tens of thousands of people who are going to receive this product,” banks will respond. And banks will come up with the best product that they have, the more appropriate product than the one that you and I might get off the shelf or that somebody might get off the shelf walking into a branch.

KARLA MURTHY:  He says banks are already making more of an effort to reach this community.

Dozens of cities have launched a program called bank on, which does offer free or low cost bank accounts for low income residents. This fall, Mintz announced the start of bank on 2.0 to expand on these efforts.

But for Lisa Servon, how best to serve low income consumers is no longer as simple as advocating for bank accounts.

KARLA MURTHY to SERVON:  In general are you saying that check cashing places right now are the– are necessary to serve this population?  Or are they kind of a necessary evil?  How do you view it?

LISA SERVON: It’s really hard to understand why people would pay those prices if they– if there’s a bank nearby, right, because you don’t see the on the ground kind of decision people– decision making people are doing.  So it’s a leap– from looking at the facts of the fees to saying, “It must be bad and it must be abusive.”  And it’s a logical leap, right.  I think unless you go down there and you really talk to people, it’s not obvious.

Additional funding from Citi Foundation.