BI: Why check-cashing stores are a good deal, according to a UPenn professor
The prevailing wisdom from bankers and policy makers went like this: People who used alternative financial services — like check cashers and payday lenders — were making expensive and unwise decisions. If we could just educate the “unbanked” and “underbanked” and usher them into the modern financial system with a bank account, their fortunes would surely improve.
But Servon, a professor of city and regional planning at the University of Pennsylvania and a former dean at the New School, spent 20 years studying low-income communities, and to her, that picture didn’t add up. Most of the unbanked (the roughly 7% of US households without checking or savings accounts) and the underbanked (the nearly 20% that had such accounts but still used alternative financial services) that she encountered were neither naive nor irresponsible about money.
“The implication of that” — the biennial surveys of the “unbanked and underbanked” by the Federal Deposit Insurance Corporation — “was these people were making poor decisions,” Servon recently told Business Insider. “I knew that the people I had worked with closely who don’t have very much money know where every penny goes. They budget things. They know where to get the best deals on things. And so it struck me that if they were using check cashers, there must be a good reason for that.”
From: Why check-cashing stores are a good deal, according to a UPenn professor – Business Insider
I browsed this piece last week, and the most interesting observation to me was that the fees for some services like money orders is lower at check-cashers than conventional banks. It does seem like conventional banks have moved increasingly towards fees in a low-interest, low-savings environment.
Otherwise, the benefits of check-cashing services were mainly for people whose income needs to be spent upon receipt. Traditional banks have fee structures based upon minimum balances and overdraft charges that are not very transparent and predictable; if one writes a check before the previous deposit has cleared, the total charges can be higher than at a traditional bank. Still, this is mostly the ‘short and simple annals of the poor,’ not necessarily a fair state of things, but outlawing their service providers wouldn’t solve the underlying problems.Report
Daniel (Dsquared) Davies had some posts about this a few years back. The very short answer is that there is an irreducible minimum cost for a “bank” (ie, a legally chartered and regulated institution) to open checking accounts, track the existence of those accounts, deposit funds into and take funds out of those accounts, and make short-term loans. Those minimum costs exceed the cost of running a check-cashing operation.
Also, both because (certain) banks are run by not-very-nice people and because of the realities of the enormously different economic power wielded by the range of depositors, the allocation of those irreducible minimum costs is frequently borne by the poorest and least stable depositors. (for example, because Wells Fargo holds my mortgage, they offer me ‘free’ stuff that others don’t get.) So banks can be even worse for the poorest Americans.
Solutions are not obvious. Some under debate include: 1. Require that banks obtaining a state / federal charter provide a certain amount of charity banking services annually. 2. Create free (ie, taxpayer-funded) banking at the post office. 3. So heavily regulate certain non-bank financial institutions that they essentially become public utilities, like the water company.
Because this is an intelligent crowd, I’ll presume that you can all figure out all the ways that each of these proposals is a bad idea. Put simply, charity banking is extremely difficult to do in a way that would compete effectively with check cashers and payday lenders.
My personal take is that it would be far easier to increase the EITC substantially. If there’s good money to be had there, people will be more likely to file taxes, pay their SS, still use check cashing places and still be better off.
Because what we’re really concerned about is the poverty suffered by the working poor. We’re not try to impose our moral judgments on how the working poor live their lives. Right?Report
Yep, I generally agree with this. People can point to the huge interest rates and fees check cashing places and payday lending places charge but the profits that those same businesses turn is not remarkable at all which means the majority of those “excessive” fees goes to ameliorating the risk of the business.Report
Of course, my oft-repeated proposal is that the government provide a revolving-credit account at 0% interest (say, with a $500-$1000 credit limit, but no maximum balance) on the national ID card we should have anyway. Wouldn’t solve everyone’s problems, but it would provide a revolving cushion that might save a lot of people the costs of check-cashing services while also stimulating the economy. Heck, if you then deposited government funds to the linked account (rather than via paper check) you’ve taken a great leap forward in fund-availability and cost-reduction.Report
Why would you have a credit limit but with “no maximum balance”? Or am I (which is quite likely) misunderstanding something?Report
I mean you could carry a positive balance on the card (e.g. from social security payments accessible through it) but could only spend that balance down to negative 500 or 1000 (or whatever else).Report
Thanks for clarifying.Report
The first paragagraph of the quoted section say everything you need to know:
“The prevailing wisdom…..were making expensive and unwise decisions. If we could just educate the “unbanked” and “underbanked” and usher them into the modern financial system with a bank account, their fortunes would surely improve.”
Yeah, those impoverished proles. They are so stupid as to use check cashing services. We have to help them help themselves, the poor fools. You know where else I hear that? In the SOUTH where they talk like that about black folk. That patronizing smug confidence that someone else knows what you simpletons should do to improve their station. Does anyone else not think that’s fundamentally insulting?Report
Damon,
Of course it is. Do you want the math on how we’re fucking the goddamn hell out of poor white folks in the South?
It’s a great racket, you know — come up with something better than payday loans, switch the workers over to it (via laws if necessary), make tons of money — and write the expose in the WashingtonPost.
Nobody gives a fuck about the rural South (including me — some places really ought to dust up and blow away), or someone might be doing something about it.Report
@damon If you read the rest of the article, the point is precisely that the author profiled in the piece (and who has just written a book on the topic) agrees with you (both on the insulting piece and the wrongness of the theory), and has spent a lot of time and energy disproving that fallacious set of theories.
So, uh, you should be pleased, right? I mean, she’s as sick of it as you are….
(As someone who grew up poor, I am also sick of it. I’m just sort of surprised at the level of peevedness in your comment on an article that is in agreement with you.)Report
Check cashing is a non-issue; it’s payday lending and the rates that is a problem.Report
I would tend to agree with you (although I may disagree after reading the author’s book which I’m now planning to do) – the person I knew who worked for a payday lender was both frank about and disgusted by how rapacious his company was.Report
James,
Yeah, I’ma gonna say that you don’t know anyone in the rural south. Payday lending is nice compared to some of the assholery that’s being done.Report
Dave had a pretty good post on payday lending quite a while back (for those who haven’t read it):
https://ordinary-times.com/2013/04/17/payday-lending-some-thoughts/Report