I’ve written previously about many different reasons households, particularly those in locations where families typically have low incomes and those in areas where certain minorities constitute a majority of households, are more likely to take advantage of the high-cost alternative banking system including payday loans and check-cashing storefronts. For example, traditional banks find it difficult to move into these areas because the local clientele is not as profitable. I’ve even discussed how some may not trust the traditional banking system.
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The basic checking account is not a great tool for someone living paycheck to paycheck or a family living in poverty because it assumes there will always be some kind of surplus, even if a few dollars, in the account. That’s achievable even in poverty, but it isn’t easy. Unfortunately, even with the motivation to save a tiny portion of each paycheck when those paychecks are coming in, many low-income families are simply barred from taking advantage of traditional banking tools.
As a recent article in the New York Times points out, almost all mainstream banking institutions use past history to determine qualification for a bank account. A family living paycheck to paycheck is more likely to bounce a check, and a family with low income is more likely to be living paycheck to paycheck without any savings.
One negative mark like a bounced check or an overdraft can be enough for a bank to determine that offering an account to a particular household is too risky, and a pattern of poor money management guarantees a lack of access to traditional banking. If a community contains too many of these households for whom a bank account is too risky, banks have no incentive to enter the neighborhood in the first place.
The ranks of those without bank accounts have swelled — up more than 10 percent since 2009, according to the Federal Deposit Insurance Corporation — as banks have sharpened their focus on more affluent customers who typically generate twice the revenue of their lower-income counterparts. Many banks are closing branches in poor areas and expanding in wealthier ones, according to an analysis of federal data. (New York Times)
Several years ago, some might have seen a solution to this problem in credit unions. Credit unions are often based in local communities and have been seen as a way to reach customers who might not be profitable for banks. Credit unions are increasingly relying on ChexSystems, the biggest private database of consumer banking history. Like the companies that track your history dealing with credit, Experian, Equifax, and Transunion, ChexSystems tracks how consumers handle their bank accounts. And banks and credit unions alike tap into ChexSystems before offering accounts to new customers.
All it takes is one overdraft or one bounced check, and ChexSystems history can prevent an individual from opening a new bank account in any mainstream financial institution for seven years. The intent of this massive database to prevent fraud and to protect banks, but innocent people get caught in the net.
Unfortunately, many of the solutions for getting out of poverty or circumventing an a systemic drop in employment require traditional banking.
- Are you stuck working two or more jobs at fast food restaurants just to pay the bills? Many would suggest taking the time to get training or education in a more lucrative field. That training and education comes at the expense of time, which is time that must be spent earning money to continue to feed a family, and at the expense of money, that must be stored somewhere.
- Are you affected by recession in employment and out of work? It may be time to start your own business, according to the typical entrepreneurial motivational seminar salesperson. If your lack of employment has caused you to make some unavoidable mistakes with managing your bank account, you may not be able to go down this path. Have you ever tried starting a business without a bank account?
The only change the financial industry has made to address the “needs” of low-income households and communities has been to begin offering more expensive fringe products like payday loans, although the products are usually called something without the negative connotation of “payday loans,” like “direct deposit advance.” There is no incentive for banks to offer free accounts to the people who need them the most.
Credit unions, generally non-profit organizations that at one time filled the gaps in communities ignored or abandoned by traditional banks, have swayed more towards the traditional banking system. It’s hard to fault them — any organization, even a non-profit, has to spend less than it earns or otherwise collects to stay in business.
When the existing industry can’t or won’t cater to a certain population, responsibility falls either to a new industry willing to determine a solution or to the government to regulate the solution into existence. With ChexSystems bearing down on families whose circumstances made it much more likely for them to be locked out of the traditional banking system, and with financial institutions clinging onto this database for their own protection, there’s not much families in this situation can do other than pay more money for alternative methods of banking.
Until this point in the article, I haven’t addressed the need for better financial literacy. Better, not more. Financial literacy programs, particularly those in schools, fail. Living paycheck to paycheck put the family’s focus on basic survival, and concepts like compound interest, how to balance a checkbook, saving for retirement, and budgeting for vacations are less important when the concerns each day are to avoid eviction and hunger. You don’t need to balance a checkbook when no bank will offer you a checking account. It’s no surprise financial literacy is a joke to those who need its lessons the most.