Two hundred, four hundred … twenty, forty, sixty, eighty, five hundred …
As the young woman behind the glass divider counts out the entirety of my paycheck, I can’t help but think of how measly it looks before I stuff it in my wallet.
Though I’m not in a particularly rough neighborhood, I hope I’m not robbed as I leave the Check ‘n Go Payday Loans on Freeport Boulevard with next month’s rent, bill payments, grocery and gas money in my jacket pocket.
I have been banking since high school but am living this month as nearly 17 million Americans do every day: without a bank account. A recent Federal Deposit Insurance Corp. survey found that one in 12 households in the United States are unbanked — meaning they have no bank accounts whatsoever — and millions more are underbanked, conducting at least some of their financial transactions outside the mainstream banking system.
With increased reliance on plastic cards and the explosion in popularity of products like the prepaid debit card, which blur the lines between mainstream and alternative banking, more financial institutions are now finding ways to reach out and engage the “unbanked.”
This population has long been on the financial services industry’s radar.
But despite the number of options available even for those with rocky financial history, many simply do not trust mainstream banking institutions. And in the wake of the 2008 recession to which the financial services industry contributed, banks are finding it hard to shake the distrust prevalent among America’s unbanked.
“It’s been one of those constant challenges to try to appeal to people who don’t have bank accounts,” says Nyssa Feddis, American Bankers Association senior vice president and deputy chief counsel for Consumer Protection and Payments. “The issue has been around a long time, and it’s not as simple as people might expect.”
For these individuals, the costs of relying on cash alone to conduct day-to-day transactions add up very quickly.
Check cashing and payday loan stores take a percentage fee out of each check, which in my case at the Check ‘n Go is two and a half percent for payroll and just under 6 percent for personal checks, plus a $3 annual membership fee. During the month I live without an account, I cash three checks and rack up almost $70 in fees just to procure my wages.
When it comes to paying my SMUD and PG&E bills, I am able to do so free of charge at various payment centers around the Sacramento area and across the state, including a number of retailers in town like Raley’s and Kmart. But when I go to make my rent payment, it costs a dollar to obtain a money order from the Bel Air down the street.
Though a seemingly insignificant amount, for low-income individuals — including recent college graduates and young writers like myself — every dollar in fees has a big impact on the monthly bottom line.
“There are so many problems associated with not having a bank account and even not having the right or enough bank accounts to fully serve your needs,” says David Galasso, Wells Fargo Northern and Central California regional president.
“The expense becomes overwhelming: Time is money, gas is money and having to go to all of the various places to take care of the same needs that you could otherwise take care of from the comfort of your home is like a second job. People that are un- or underbanked end up spending a lot more for the same services than those who are banked.”
When I factor in the time and gas spent driving all over Sacramento to carry out the same transactions I would normally manage on my home computer, the cost becomes significant, and it is immediately more appealing to stash my money back in a bank rather than in the tin tie box I have hidden in my T-shirt drawer.
Still, there are myriad reasons why people don’t have bank accounts, Feddis points out: Some people simply do not have enough money to justify opening a checking account, many of which require minimum balances; some are reluctant to create records of their financial transactions; others have mismanaged an account in the past and are no longer eligible for one.
But perhaps the biggest reason is that banks are often viewed as profit-oriented corporations looking out for shareholders, not customers.
“At a bank, their top priority is to use their customer base to generate profits for their investors; at a credit union, they are all about serving the membership itself,” says Credit Union National Association senior vice president Mark Wolff.
“In many cases, as these large megabanks started to take over the local banks in their community, [people] felt like these institutions were taking a more cookie-cutter approach to their customer service.”
The banks’ role in the 2008 fiscal crisis furthered the notion that banks value their bottom line over their customers’ financial well-being, as many lenders offloaded subprime mortgages en route to a massive collapse of the housing industry across the country.
“In the banking industry during that period, there was a diminution of the old time-tested standards of proven banking in order to make loans,” says Jim Thomas, a professional speaker and author on the subject of integrity. “There was a lot of encouragement to do that from the presidents on down. Banking standards which had stood the tests of time were diminished and helped lead up to the financial crisis.
The publicity surrounding the Wall Street meltdown “has been a major factor in yielding the distrust that we see today,” he adds.
Dissatisfaction with the financial services industry — particularly with the “Big Five” megabanks of JP Morgan, Bank of America, Goldman Sachs, Morgan Stanley and Citigroup – came to a head on Nov. 5, 2011 on Bank Transfer Day, a national consumer activism initiative born online via social media during which tens of thousands of people voluntary switched from banks to not-for-profit credit unions in response to banks’ new proposed debit card fees — the proverbial “straw that broke the camel’s back,” Wolff says.
Since 2011, National Credit Union Administration industry figures show that credit union membership has continued to increase with more than 2 million new accounts added by the end of 2012, with many of the new accountholders being young people.
“There was a general feeling coming out of the financial crisis that people had a general antipathy toward big banks,” Wolff says. “They were looking for an alternative that was close to home, that was ‘Main Street,’ not Wall Street.
“Bank transfer day seems to have had a tail because this general aggravation and unhappiness with big banks persists, people are still upset about the financial crisis, and they are still looking for alternatives.”
There are distinct upsides to financial alternatives, and cash is not without its advantages: More gas stations, like the 76 station on Freeport Boulevard and the One Stop Gas on 16th Street, offer two different gas prices: one for card payments and one for cash, the latter of which is about 10 cents per gallon cheaper. Many local restaurants and watering holes like R15 on 15th Street do not tax drink orders at the bar when paid in cash, saving the average patron about 35 cents a drink.
But the fees and hassles accrued through other everyday transactions dwarf these miniscule cash savings. Consequently, banks and other financial institutions are finding ways to appeal to the untapped economic potential of this population.
The prepaid debit card, also known as a general-purpose reloadable or GPR card, is one product that has become increasingly popular with customers in the past four years. All types of financial institutions — including banks, credit card companies, retail and payday loan stores — offer GPR cards that can be used like a debit card with a pre-determined balance loaded by the user. Consumers generally pay a monthly, yearly or per-transaction rate in order to maintain the card.
For many customers without bank accounts, cards like Chase’s eponymous Liquid card, one of the more popular options that costs $4.95 a month to maintain, are a worthwhile investment because they permit online banking and shopping, direct deposit and the security of not having to carry cash all the time.
“Chase Liquid is a low-cost alternative to traditional checking accounts, (and) customers don’t have to have a Chase checking or savings account,” said Northern California Chase spokesperson Eileen Levekis in an e-mail. “Customers have full control over their spending because they generally can spend only what they deposited, [and] it helps to bring people into the fold with all of its advantages.”
A 2012 Pew Charitable Trusts research study projects customers will load an estimated $202 billion onto prepaid debit cards in 2013 — more than seven times the amount in 2009. The recent success of this service is enabling financial institutions to make inroads with those who otherwise may not be interested.
“The number of unbanked has gone down, (and) we would hope to see that trend continue,” Feddis says. “I suspect that the prepaid will be part of that, but it’s not the answer for all of the people who don’t have a checking account.”
Curious to see what the big deal was, I got a NetSpend MasterCard Prepaid Card from the Check ‘n Go where I cashed my last check. With my temporary card, every time I make a purchase it costs $2 per transaction, and when I take cash out of an ATM it costs me another $3, plus the additional couple dollars the ATM charges non-account holders.
Needless to say, my balance is soon long gone, and even if I upgrade to a monthly rate, at $9.95 it is still one of the pricier options.
The Pew study notes that these cards — particularly ones that are not issued through an established banking institution — come with a fair amount of risk. There is virtually no federal supervision regarding prepaid cards, and it is not required that their funds be FDIC-insured, though about 90 percent of them are; however, temporary cards such as those commonly issued through retail stores are not.
In addition, laws that require full fee and terms disclosure do not apply to prepaid cards, increasing liability to customers, the study says.
Still, more and more Americans are accepting the risks of this rapidly growing service.
“It seems everybody’s getting in that (prepaid card) game now, which concerns me a little bit,” Galasso says. “Some organizations, some of which are large retailers, feel that they have access to a lot of those customers because they shop there and don’t necessarily have bank accounts, so they feel they have a large captive audience.”
A Different Approach
As financial institutions continue their ongoing endeavors to engage the unbanked, it is extremely important to get to the root of why people don’t associate with banks.
“It’s not just one reason,” Feddis says. “And I don’t know that we’ll ever have 100 percent (of people banking). “The key is to identify the reasons people have chosen not to have a bank account, what works for them, (and) their needs and interests.”
While many of the ranks of the unbanked are ineligible for checking accounts because of past banking history — losing one’s job, too many overdrafts — the vast majority of the unbanked are so despite being completely eligible for accounts.
“The vast majority of folks qualify for our regular products and services, they just don’t know it,” Galasso says. “So many of the underbanked and unbanked don’t reach out because, whether it be culturally or their upbringing or perhaps an experience in their life, they fear the banking system (and) don’t have the comfort level to just walk into a bank.”
For this very reason, a major part of Wells Fargo’s strategy in engaging people like me is through fiscal literacy education and outreach, whether by supporting groups like the United Way or through their own workshops, training and programs.
Other services banks offer along those lines include limited accounts for individuals with bad banking or credit history, called opportunity checking accounts, and low-cost or free accounts that come with just about every service.
But ultimately, no amount of education, outreach or new services can change the fundamental negative perception of mainstream banking that is so prevalent among the ranks of America’s unbanked today.
Ever-escalating fees, questionable practices and recent history have turned off so many to mainstream banking and contributed to the growth of institutions like credit unions and other alternative financial services like never before.
“People don’t want to be treated like just a number on an account statement, they want to be treated like a person and be respected,” Wolff says.
“You even see it in banks’ advertising today in that banks try to distinguish themselves and say, ‘Hey, we’re different from other banks: you’ll actually like us.’ And that’s just more evidence of this recognition in the banking industry that people are dissatisfied, that they are looking for a solution that is right in their community.”
While I have a functional trust with the industry built over years of exposure to the system, a great majority of unbanked will never choose to go that route until banks prove they are fully serving the needs of their customers, not their shareholders, and are conducting their business practices with integrity, which Thomas says is the single most important factor for any successful enterprise to bring about any tangible change.
“This endless stream of high-profile scandals where breaches of integrity have occurred right and left is raising the importance of trustworthiness and reputations, and those are priceless assets on the part of any organization,” Thomas says. “There is absolutely no substitute for adhering to the truth in all dealings. Fabrication, even of the slightest kind, undermines the trust of people who deal with the organization.
“A major factor for people who want to conduct their enterprises with integrity is standing by the right ideas and making the right choice even when it is inconvenient, when it is difficult or even when it is unprofitable.”
On a hot, sunny morning last fall, 69-year-old retiree Pamela Chappell of Citrus Heights hit rock bottom. She was scraping by on Social Security checks and a tiny pension while paying for medication to treat her lymphedema, a painful swelling in her legs. Then she got a letter from the IRS warning her that it was about to empty her savings account of $8,000 — every dollar she had — for back taxes.
A 2010 Federal Reserve rule requires banks to ask customers if they want to sign up for overdraft protection programs, which often come with steep penalties for making purchases that exceed the account balance. A Consumer Finance Protection Board report released in June suggests the change may not be enough to protect consumers.