Thursday, March 25, 2010

Up for Discussion: The Unbanked

Today in the Huffington Post, John Hope Bryant (while plugging his books) reviews Matthew Bishops The Road to Ruin and calls for a big push for financial literacy in the U.S. "Financial literacy," he writes, "is the new civil rights."

I was also impressed and inspired to see that the authors boldly go beyond the yawn-inducing traditional definitions of financial literacy "as a math class," which it is not, and deal with financial literacy for what it truly is; emotional, cultural, aspirational, and a direct link to the larger, more over-riding issue of our virtues and our values as a society. Who are we, why are we here, and what are we for? Or as I often say, financial literacy is "the new language of money." To make my own statement of revolutionary thought, not inconsistent with the tenants of the book, "if you don't understand the language of money today, and if you don't have a bank account today, you are nothing more than an economic slave."

I was struck by a figure in the article: 40 million U.S. citizens do not have a bank accout. Bryant notes: "more people don't have a bank account today than didn't have the right to vote in 1963."

While financial literacy is a great step in the right direction, the problem goes beyond that. The fact of the matter is, poorer you are, the more you’re going to pay for financial services. The wealthy are courted with high-interest accounts. The person who can only keep $50 in an account will be socked with fees. The broke individual has financial choices ranging from bad to horrible: check cashing services, title pawn, pay day advance.

This is, of course, simple supply and demand. Why should the bank bother to keep you as a customer, when for the same effort it can cater to multi-millionaire clients?

Such price discrimination happens all the time in a free market. For example, Proctor and Gamble offers Tide laundry detergent for those with money. For the flat broke so-and-so like you they offer Gain.

But as Ronald T. Wilcox, author of Whatever Happened to Thrift, notes “The difference between a savings account and laundry detergent is that it is hard to argue the broad social consequences associated with buying Gain. We don’t lie awake at night worrying about the poor neighborhood kids who had their jeans washed in Gain rather than Tide. But basic access to capital markets takes on a completely different social dimension. We should worry that there is a sizeable group of people whom banks and other financial institutions find it unprofitable to serve. Such a group almost literally cannot save.”

Of course, if you're working a minimum wage job, chances are there are factors besides your banking options that make it nearly impossible to save.

And, in fact, the large banks do find it profitable to serve the broke in their own way. According to a 2007 Time Magazine article Profiting from the Unbanked: "Ironically, banks have long benefited indirectly from the thriving check-cashing industry by supplying the loans and cash that check cashers use to pay these same customers. ACE Cash Express, which has more than 1,700 outlets across the country, works with Wells Fargo, JPMorgan Chase, Union Bank and others. Banks have shied away from serving the unbanked population directly because this slice of the market clashes with their business model."

Anita Hamilton, author of the Time article, suggests that financial education is not the answer at all. Low income folks are making a choice to use check cashing.

Although banks have tried to educate the poor on how to manage an account, they need to do a better job adapting their business to what this population truly needs. For one thing, the overdraft and late fees that banks pile on are an unacceptable risk to the unbanked, who can't afford to lose access to their funds. Check cashers prefer the term self-banked for these customers and say they are wise to steer clear of banks for exactly these reasons. "Check cashing is very popular because even though the costs are very high, there is certainty to it," says Prahalad.

Bryant's article calls for a broad financial literacy that goes beyond banks "trying to educate the poor" about checkbook ledgers, but also our larger view of economics and the role of money in society.

What do you think? Are broke folk unbanked because they want to be or because bank practices force them to be? Or are they lacking in basic financial knowledge? What should we do about it?