Finance on the Fringe

America's check cashers don't exploit the poor; they serve them.

Michael W. Lynch from the April 2002 issue

(Page 4 of 4)

There are no federal requirements that banks actually offer low-cost accounts, a fact that causes much pain among the advocates. But it wouldn't matter if there were. Most banks already offer low-cost accounts, and so long as an individual hasn't abused a checking account by chronically bouncing checks, he is free to sign up. Seven states regulate where the feds don't, mandating low-cost "lifeline accounts." These laws have had little effect. Many banks voluntarily offer products that are even less expensive than the government-designed accounts.

In the latter years of the Clinton administration, Congress gave the Treasury Department $30 million to develop a program called "First Accounts." This effort, still in the works, will funnel taxpayer money to credit unions, community groups, Indian tribes, and even labor unions. In turn, these groups will do such innovative things as provide financial education, engage in advocacy research on why even more money is needed, and offer low-cost accounts and no-fee ATMs.

The most ambitious effort to increase bank use, Electronic Funds Transfer 1999 (EFT '99), came from Robert Rubin's Treasury Department. EFT '99 was prompted by a 1996 law that encouraged the Treasury Department to pay federal wages and benefits by direct deposit.

"Millions of low-income, 'bankless' Americans may soon become part of the financial mainstream, thanks to the recent amendment of an obscure law, advances in banking technology, and proposals to use supplemental savings programs to strengthen social security," predicted UNC's Michael Stegman, who wrote a book on the effort. Rubin said the accounts "could have significant economic and social effects."

Then again, maybe not. In fact, the accounts have had no economic or social effects, something Rubin should have foreseen. Here's how the product designed by the Treasury Department works: The federal government sends banks a one-time setup subsidy of $12.60 for every account they open. Banks can charge customers up to $3 a month and must provide at least four withdrawals and four balance inquiries per month, either at ATMs or at teller windows. These accounts don't offer checking services, which means that bill paying must be done with cash or money orders. Given that most banks charge between $3 and $6 each for money orders, the total could really add up.

Such accounts are really good for only two groups: people who can't get a traditional bank account due to a history of bounced checks, balance problems, and the like; and suckers willing to overpay for minimal services. There appears to be little interest among either group. By last spring, just over 11,000 people nationwide had purchased these accounts.

Market Response

While federal efforts to meet the needs of low-income Americans continue to fail, entrepreneurs continue to experiment with services that people may actually use. 7-Eleven is trying out automated check cashing machines in a few of its stores. Other companies offer payroll debit cards for people who don't purchase financial services from banks. The highest-profile entry into this market is Visa, which rolled out a payroll card last July in a joint effort with some of the nation's largest banks.

A few banks and credit unions are dipping their toes into the check cashing business. Liberty Bank has operated a check cashing store in Middletown, Connecticut, since 1994. In New York City, Bethex Federal Credit Union, a small operation designed for low-income customers, partnered with RiteCheck Cashing in 2001. A bigger experiment is under way in Southern California, where Union Bank of California is operating 12 of its own check cashing outlets, known as Cash & Save, and partnering with Nix Check Cashing to offer banking products in Nix's 47 branches. At least for the time being, these new, hybrid models are the cutting edge of innovative financial services geared to low-income Americans. Which also explains why they've proven controversial among consumer advocates, who retreat to their check-cashers-exist-because-banks-abandoned-the-poor fantasy and decry the new hybrids.

"The need for check cashers arose when banks left inner-city neighborhoods," says Shelley Curran, a policy analyst at the West Coast regional office of Consumers Union. "It's a little ironic that this market was created because banks fled -- and now they are coming back in an entirely different fashion."

The California Reinvestment Committee opposed the Union Bank of California and Nix Check Cashing partnership. "If a bank is coming into a low-income community, it should come in as a bank, not a check casher, which often provides substandard services in terms of getting into mainstream banking, building assets, building wealth, those types of things," says the committee's Arthi Varma. She is especially concerned that Nix's customers won't be able to figure out the difference between banking and check cashing services. Says Varma: "People go to check cashers to conduct their financial transactions. At a typical check cashing store there's not a banking window. People are not going to have the propensity to walk toward that window and ask the questions and find out what's going on."

Tennessee Valley Banking Authority

Here's a question with a definite answer: What do consumer advocates really want? The fundamental reality is that financial services, for rich and poor alike, cost money. What activists really want is for banks to make their wealthier customers subsidize the poor even more than they already do under the Community Reinvestment Act. "The point is that banks don't offer services at low enough prices, and we are trying to encourage them to do so," says U.S. PIRG's Mierzwinski. "I think banks should be treated somewhat as if they are public utilities, because banks are in fact recipients of tremendous government benefits."

That's not going to happen. Banks operate in a world of diverse choices, and their customers will quit buying their services if they are priced too high for some consumers in order to subsidize others. Indeed, this has already happened, as the massive flow of money from traditional bank accounts into money markets and mutual funds attests. As important, banks are not seen as public utilities, and it's unlikely they ever will be viewed as such. Most of all, though, consumers, even low-income ones, are not idiots. All evidence suggests that people do know what's good for them and seek out the financial services that best meet their needs. That entrepreneurs like Check King's Jim Consiglio earn a living from meeting those needs is a sign that markets are working -- not just for the Consiglios of the world but for the low-income folks who fill his store every week.

Yet even as markets become more sophisticated and entrepreneurs develop more-nuanced products to meet the financial service needs of the poor, there will be plenty of people in Washington wanting to do something about it. That is something you can take to the bank.

Just don't expect to see Anna, the 56-year-old temp worker in New Haven, waiting in line. Like thousands of other people of very modest means, she prefers to spend her financial service dollars at check cashers. I ask her why.

"To save us from the agony of going to a bank, we go to cash and check," she says. "It's cheaper. It saves us aggravation. I'd rather go to cash and check and keep steppin'."

Comments

nfl jerseys|11.13.10 @ 2:51AM|#

mchj

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Fred Djanko|5.11.11 @ 4:37AM|#

As long as banks carry on charging people with no money to spare for their services they will not have that customer inside their doors. If you haven't got it you can't spend it. People on low incomes find ways around this problem. There are also a great number of people who simply disagrre with banking practices and refuse to use them for this reason.

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the top finance|6.14.11 @ 9:38AM|#

Robert has found the truth. If you are given a trillion bucks for nothing, why would you risk lending good for nuthin middle class idiots money?

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