That Anna has a problem becomes clear shortly after I sidle up next to her on the cold stone steps of the First Union Bank in downtown New Haven on a chilly fall afternoon. In fact, the 56-year-old woman has many problems -- including, she's quick to point out, more than a few missing teeth. But the problem I'm interested in today is unrelated to dentistry. It's Anna's supposed lack of access to the insides of the very building on whose steps she sits. She is, you see, one of the "unbanked," a clumsy word that rose to some prominence inside the do-gooder wonk circles that swirled in and around the Clinton administration.
Like many Americans who don't purchase financial services from traditional banks, Anna used to do things the conventional way. "I just stopped putting it in," she says of a former savings account. For the last four years, Anna, who earns her living working temporary jobs, has cashed her paychecks at one of New Haven's 10 check cashing stores, such as X-Bankers, which sits half a block away. She purchases money orders to pay her bills and stashes her savings in a cookie jar. When it comes to large purchases, "I just save up for it," says Anna.
She's not alone in declining to purchase financial services from a bank. Sitting next to Anna on the bank steps is her 34-year-old daughter Alvina, who also chooses not to have a bank account. Anna and Alvina are joined by nearly 10 million American families -- 9.5 percent of households in 1998 -- and millions more in countries as diverse as England, Hungary, and South Africa, all of which have recently been reported to have problems with the unbanked.
Not that Anna thinks it's a problem. If she did, she'd empty her cookie jar and march into First Union and open a no-minimum checking account for $5.50 a month. If she wanted to park $100 in the account indefinitely, the fee would drop to zero.
For $2 a month, she could purchase a savings account, which would pay her 0.5 percent interest. If she left at least $200 in the account, she'd pay nothing. But she prefers to use check cashing joints. "They make it easy," says Anna, "and we don't get no lip from nobody."
Whatever Anna believes, plenty of other people think she has a problem -- and that she's either in denial or isn't sophisticated enough to recognize her real financial interests. Academics, consumer activists, and government officials conduct studies and write books exploring why so many Americans don't frequent banks. They propose ways for the government and nonprofit groups to coax the unbanked into the system. Exactly who and what are to blame for Anna's condition -- and the growth of the industry that serves her -- are common topics. How governments ought to regulate the industry to ensure that it doesn't take advantage of the Annas of the world is never far down the agenda.
At their best, the critics are motivated by a wonkism that earnestly wants to pull a few policy levers and convince poor people to save. At their worst, which is much of the time, they are driven by a do-gooder-knows-best mentality that can't conceive of anyone not longing for the middle-class institutions they themselves cherish. Their worldview is governed by a series of related and reinforcing assumptions: Greedy and powerful corporations systematically take advantage of folks who are incapable of managing their own lives; markets are inherently exploitative; and poor people shouldn't have to pay for the financial services they consume.
Here's the irony: Markets are actually succeeding quite well in serving the financial service needs of Americans with low and moderate incomes. Such people have far more options and choices than they did 20, 30, or 40 years ago. To be sure, the steel bars and Plexiglas that cover the teller windows at check cashing outlets may not be pretty or genteel, especially when compared to the marbled lobbies and high ceilings of conventional banks. They may offend bourgeois sensibilities and notions of what's just. But they also undeniably provide a unique and valuable service to their customers. Contrary to the opinions of critics who would regulate or legislate "fringe banking" out of business, the booming check cashing industry represents a market success worthy of celebration, not a market failure that demands more regulation.
For the critics, the key issue is that saving habits are statistically linked to bank accounts. People who purchase bank accounts are more likely than those who don't to save in ways the government can easily measure. People who save are less likely, over time, to be poor.
"If you go to a check casher instead of opening a bank account, you are never going to get ahead," says Edmund Mierzwinski, a consumer advocate at the U.S. Public Interest Research Group (U.S. PIRG). The Progressive Policy Institute's Anne Kim writes in an August 2001 study of the unbanked, "A bank account is the first step toward giving low-income Americans access to the mainstream tools for wealth creation now taken for granted by the middle-class."
Some of the facts that activists use to build their case are obvious. The unbanked tend to be poor. Eight out of 10 unbanked families earn less than $25,000 a year, one learns from Kim's study. Four out of 10 pull in less than $10,000 in on-the-books income. Yet the study overlooks other equally obvious points. For instance, to a family earning $10,000 a year, where to park their savings might not be a top financial concern.
Consumer activists have created a fantasy world in which greed and racism have conspired to deny the poor traditional banking services. The story line depicts a glorious past when everyone conducted business at community banks, which didn't charge the neediest for the services they provided. Partial banking deregulation in 1980, according to this tale, caused banks to merge, become huge, and pull out of unprofitable areas. Greedy check cashers and payday lenders rushed in to fill the void.
"The reasons check cashers exist in these communities is because banks don't," says Arthi Varma, a policy activist at the California Reinvestment Committee, a consortium of nonprofits that pressures banks to serve low-income communities. Other activists blame bankers for being rotten businessmen, neglecting millions in profits that would come from reaching out to potential customers with moderate and low incomes. "Banks are bad marketers," asserts U.S. PIRG's Mierzwinski. "That's a problem check cashers have taken advantage of."
This story contains some truth. Banking deregulation, for example, did cause banks to rethink, retarget, and reprice products. (The result, however, has been more, not fewer, financial options.) But the critics' larger narrative is flat-out wrong. Check cashers and other low-end financial service providers don't exist because of some market failure, or because poor people suffer from false financial consciousness. Check cashers didn't move en masse into the buildings abandoned by banks. The industry has existed since employers first started paying with checks in the 1930s and owners of stores and bars figured they could make money cashing payroll checks. It is thriving today because it serves people's needs.