To Bank Or Not To Bank
ALLISON KEYES, Host:
I'm Allison Keyes and this is TELL ME MORE from NPR News. Michel Martin is away.
In a just a few minutes, we'll look back at the life of an icon for Latino civil rights, Mario Obledo, who's died at the age of 78.
But first to matters of personal finance. A growing number of people of color, especially those with low incomes, live in a cash economy. They don't use credit cards, and much less a bank. They're what some might call the unbanked. The Wall Street Journal reports that 17 million people rely on alternative financial services such as cash checking services, payday lenders and prepaid debit cards that charge for each transaction.
A P: A Look at How Low-Income Los Angeles Households Manage the Money They Earn." She's the director of the financial security portfolio within the Pew Health Group.
Also joining us from our New York studio is our Money Coach and someone who knows a bit about the topic at hand: Alvin Hall. Welcome to the show.
ALVIN HALL: Thank you, glad to be here.
ELENI CONSTANTINE: Thank you.
KEYES: Eleni, let me start with you. Everyone says that these entities are really negative for building financial reserves. I mean, the check cashing stores, the payday lenders, this is really where the trend is going now?
CONSTANTINE: Well, we see a large number of people in the unbanked bracket. And those of us who don't have a bank account have risks and lack of opportunities that people who have a bank account don't even think about. So the trend is dangerous. If you have a stash of cash under your mattress or in your pocket, you're obviously vulnerable to loss and attack.
Plus if you don't have a bank account and you use a check casher or bill payment service, you're exposed to fraud, abusive practices and price gouging because these entities aren't regulated the way a bank is. The Pew study found that the unbanked spend as much as $700 a year just to cash checks. That is, just to get their paycheck money.
KEYES: And I just want to be clear. Do the unbanked not use banking services at all? Or do they use some banking services?
CONSTANTINE: When we talk about the unbanked, we're talking about people who don't have a bank account. Some people live in a pure cash economy. Many people use non-bank transactional services like check cashers or bill payment and these are the unregulated and potentially abusive providers.
KEYES: Alvin, how significant is the cash economy for people of color and what does it mean to people that don't do banks and therefore aren't building any credit?
HALL: It's huge for people of color. I know so many people here in New York and in Washington, D.C., as well as Florida, who never ever pay for anything with credit cards or check. They always walk around with cash in their pockets. These people don't build much financial security for themselves. They typically don't save very much. They don't have good credit ratings or good credit reports, which of course today will affect your ability to get a job, since many employers will check that now.
It also affects your ability to think of yourself as someone who can build something for yourself because you're used to managing your money day-to-day. Among people of color, in particular, a lot of this arrives I think from a historic distrust of the banks. In preparation for today's show, I talked to some friends of mine, family members who don't have bank accounts.
And they all talked about all of the nasty fees that they used to get hit with and they weren't aware of. How they didn't trust the people at the banks to tell them the truth - a lot of the same issues that came up in the Pew report. So I think for minority people and recent immigrants who don't have a knowledge of or access to a trustworthy person at a bank, this is a significant issue.
KEYES: Eleni, talk to us about some of the disadvantages of not working through the mainstream banking system.
CONSTANTINE: As Alvin said, if you don't have a bank account, not only are you exposed to all the risks that we just - that I just mentioned but, also, you're not saving and you're not building credit. So you're not getting out of what I would call the subsistence farming mode of managing your money. That is, you may be getting by day to day, but you're not saving for your retirement, you're not saving to put your child through college.
And not only that, it's bad for the greater community because these people can't manage an emergency or, you know, get over a small financial bump. They become immediately dependent on the social support system.
KEYES: And if there's an emergency or something, they have no wherewithal.
CONSTANTINE: They have no savings. They have no credit card. You know, they manage day to day on their cash. And that's a tenuous existence.
KEYES: Alvin, isn't this the way our grandparents used to do it? I mean, you didn't owe money, you paid your bills on time. You paid them with cash and this was the right thing. But now it's not.
HALL: Now it's not because the world is far more complicated and we have different financial tools available to us. And also, the world is moving more and more toward credit cards and debit cards, to reduce the criminal aspect of money. But I want to talk about something Eleni just mentioned, and that is the effect of when people are really outside of the economy. And this is something that I promised myself I was going to talk about today.
My brother died recently, my youngest brother.
HALL: And - no, he died completely destitute, completely and totally destitute. He had no money at all. And as a result, none of his brothers and sisters also had any money or credit cards. So I'm in New York City, they had to call me to get money to pay for the funeral. They had to get money to pay for the flowers, the transportation, everything, and I had to put it all on a credit card. They had no access to any finances when they really needed them. Imagine if somebody got sick. Would I get that call too? Probably.
KEYES: Alvin, was this issue the same as yours? He just didn't trust the banks? He didn't feel like he needed them?
HALL: No. I actually trust the banks, but in general I don't trust banks when it comes to fees because I think they're dishonest about that.
HALL: No, my brother just was one of these people who didn't use banks. He just did not think that having money in the bank gave him control of his money. If he got a paycheck, he went to an alternative financial service facility. And what did he do? He cashed his check and he carried all of the money in his pocket. Supposedly he had just been paid when he died. When my sister arrived there, his wallet and all the money in it was gone.
KEYES: Wow. Eleni, in your study you found that a significant number of the unbanked were immigrants that are living below the poverty line. But they're sending a lot of money overseas to their families, are they not?
CONSTANTINE: That's correct. We found that people who live in the cash economy, even though they are in this very low-moderate income bracket, are remitting, sending money overseas, more than people who are using alternative financial services. So that is, it appears that there's a choice: either you spend that $700 a year to get your paycheck or you can send them to you family.
KEYES: If you're just joining us, you're listening to TELL ME MORE from NPR News. I'm Allison Keyes. Michel Martin is away. We're talking about the record number of unbanked Americans estranged from mainstream banks with the Pew Health Group's Eleni Constantine. And joining us from our New York studios is our money coach, Alvin Hall. And I should emphasize, neither of our guests has ties to the banking or credit industries.
Alvin, I want to come back to you. There's a pilot program that's out there right now that is set to encourage banks to create simple accounts with a - like a $1 minimum balance and no overdraft fees. Is this the kind of thing that's going to attract the people we've been talking about?
HALL: I think it is something they can deal with, if the banks keep it simple. But, Allison, I don't trust the banks to keep it simple for one reason: I think in today's world everything turns on shareholder value.
HALL: What kind of value am I delivering to the people who own the bank who have shares in the bank? And they look at small and low income people as people who they can use as sources of income. So it may start out simple initially, but over time it will grow more complicated.
KEYES: And haven't the banks not traditionally promoted these kind of accounts because it doesn't make enough money for them?
HALL: That's right. About a decade ago the U.S. Treasury started a whole campaign designed to get people - low income people and poor people - to open bank accounts, to become part of the larger financial system. But the banks dragged their feet about it. They said it was too difficult, people weren't interested. I think the banks need to be incentivized more to do something with that, but I'm not sure what those incentives would be. Clearly, profits would be an incentive. But you're not going to make a lot of money from poor or low income people. So what about doing something for the good of the community?
KEYES: Eleni, in your study have you run across any ways that might help entice the unbanked to try a little trust in banking and see if it works for them?
CONSTANTINE: Well, we looked at the reasons that people don't have a bank account, and the reason is very simple. The reason is they need to manage their money. They can't afford to have hidden fees, they can't afford surprises, they can't afford what most of us who have bank accounts live with every day, which is not knowing exactly how much money you have in your hand or in your bank account.
KEYES: Which is maddening, maddening.
CONSTANTINE: Right. Banks could do a much better job of making that transparent. They could show you when you've made a purchase how much you had in your account at the point of sale. They could sequence your transactions chronologically so that you know, if you keep track of your transactions yourself, what's going in, what's coming out, just to see what - if you had cash, but they don't. If you have a more simple account, perhaps that could be part of the structure of the account so that people could understand their accounts better.
KEYES: Alvin, is there any way that you can think of to address the trust issue, because if you have it, what does that say to the people that don't have your level of financial savvy?
HALL: I think that for low income and poor people and recent immigrants, having someone in the bank that they can talk to is really the key. That person should be sitting there explaining things to them, the person, when they have a problem, to actually have a face. It's hard to trust a bank when all you have standing in front of you is an ATM machine with buttons on it.
KEYES: Alvin Hall is our regular contributor on Money Coach. He joined us from our bureau in New York. Eleni Constantine is the director of the Pew Health Group's Financial Security Portfolio. She joined us here in our Washington, D.C. studios.
Thank you both for an insightful conversation.
HALL: You're welcome.
CONSTANTINE: Thank you.