In discussing unbanked and underbanked American consumers, we tend to focus on low socioeconomic status communities. The mainstream opinion is that building wealth and long-term financial stability relies on the use of traditional banking and investing products and the knowledge to use these products effectively. The financial industry tends to avoid low socioeconomic status communities for a variety of reasons, but the bottom line is that these customers have not been proven to be profitable. Taking the place of these mainstream institutions are check-cashing facilities and payday loan outfits, designed to be very profitable while providing the immediate services required in these communities.

These “low-class” financial product purveyors are part of a growing industry. As with any burgeoning industry, there is beginning to be more research into its consumers. The unbanked and underbanked consumer is becoming better defined, and traditional banks see this as an opportunity to create products that directly compete with the successful check-cashing and payday loan market.

With this new research comes some interesting findings. Prepaid debit cards are products designed for consumers with low or no credit scores, a condition that is more common among low-income households, though there are many reasons anyone in any income bracket could have damaged or undefined credit. Think Finance has determined that the use of prepaid debit cards is the same regardless of income level. Among the consumers surveyed, a representative sample of the Millennial generation, someone earning up to $74,999 a year is just as likely to use a prepaid debit card as someone earning less than $25,000 a year.

The statistics pertaining the check-cashing services show a similar trend. For a fee of usually 1 to 4 percent, a check-cashing storefront can immediately give you cash. So can any bank branch, but you often need to open an account first, and that requires patience, the willingness to share your personal information and submit to a ChexSystems verification, and the openness to endless marketing. In many cases, it’s just easier to just pay the fee. 34 percent of Millennials with the lowest income make use of check-cashing services outside of traditional banks, only 5 percentage points higher than those with the highest income.

An article in USA Today addresses what might representative of the fact that the status of unbanked or underbanked is pervasive in this age group regardless of income:

Ammy Orozco, 30, who works as an executive assistant at a Check Cashing USA branch in Miami, has a checking and savings account with Bank of America but often chooses to cash checks at work instead. She says she’d rather pay to cash a check immediately than pay for gas to drive to the bank. She has also taken out payday loans in emergencies. She’s tried to get a loan from the bank, but it was “stressful.”

“They wouldn’t confirm right away… You’re there sitting and you need the money, and you’re like, is this going to happen or not?”

Millennials expect instant gratification and are willing to look past fees and unnecessary expenses in order to feed this desire, regardless of income. For a generation whose defining economic moment has been the Great Recession, the credit crunch, and high unemployment, as well as the media environment dominated by stories about bank executives behaving badly, poor use of taxpayers’ money, and class-action lawsuits pertaining to anti-consumer practices, it’s understandable that a mistrust of the mainstream financial industry keeps people away from banks regardless of income. Half of Americans are not saving for retirement, and while unemployment certainly plays a role, lack of trust in the industry and in markets in general is an important factor.

With the proliferation of services targeted to the unbanked and underbanked reaching a wider set of customers — that is, popularity and use has moved beyond low socioeconomic status communities — regulators have begun to take notice. (In other words, these products and their negative effects were acceptable when they took advantage of only the poor and whoever you might assume is more likely to live in poor neighborhoods, but now that the middle class is targeted, it’s an issue worthy of consideration.) The Consumer Financial Protection Bureau is looking into designing regulations for these products. Meanwhile, traditional financial institutions are taking advantage of this regulatory grey area to create products that compete with check-cashing storefronts and payday loan issuers, and to use these products as profit centers with the intent of eventually mainstreaming these customers into other profitable services.

Are you a Millennial who prefers immediate services like check cashing, payday loans, and prepaid debit cards instead of checking accounts, bank loans, and credit cards? This is not the primary audience of this website, but I’d love to hear some feedback from the millions of Americans who fit this description.

Photo: Daquella manera
USA Today

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