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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It may be true that the reason many Americans do not save for retirement is ignorance. There are typical excuses for not saving for retirement, such as the lack of good, seemingly trustworthy information about the options that are available, the lack of knowledge about the benefits of investing in 401(k) plans and IRAs, or the belief that during tight personal economic times, not a cent is available to save for the future. After the recession, however, many people just see the financial industry as unworthy of trust. Organizations like LIMRA, working for the industry and promoting financial products, are unlikely to bring this attitude to the public attention.
Thanks to the Consumerism Commentary Community
This article was written by Flexo in Administration. 13 comments.
In just a short period of time, Consumerism Commentary will be entering its tenth year of existence. The site’s ninth anniversary is approaching, and I’ve been involved with the website longer than I’ve been involved with any other commitment in my life. Jobs and relationships have come and gone, but Consumerism Commentary remains.
I started the website in an effort to track my personal finances at a time when I was struggling financially, though I had already started a new path towards financial independence. Thanks to the readers early on who believed the website offered something unique, the growth of the community has been nothing short of amazing. Consumerism Commentary has changed character a little bit from those early years, when a blog was more about short, quick chronological updates and about sharing links to other interesting things found online. Last year, I solidified the website’s vision, mission, and purpose. While the owner of the site is now different, not much else has changed, and there are no plans to change anything in the near future, except for perhaps a more professional-looking logo and site design.
Thanks to all the readers who have continued to visit this website since 2003, our fans and friends on Facebook, and particularly those who continue to participate in discussions today. Thanks also to all the colleagues who have offered their advice and encouragement, and a big thanks to Jay Frosting (also known as Bryan J Busch) and Tom Dziubek who have held down the podcast fort for several years.
And if you’ve encountered any technical issues with the website recently, please continue to bear with me as the technical team continues to work out the bugs.
Last week, my article about The Rich and the Rest of Us by Dr. Cornel West and Tavis Smiley attracted the attention of the two men, and I’m working on scheduling an interview with the pair later this week. They are crusading across the country to elevate the issue of poverty and potential actions to move the United States is a better direction towards resolution. Do you have any questions for Smiley and West?
There are five types of purchases — well, more than five but these five are big — you should never put on your credit card. Every purchase you make is tracked by your credit card issuers and can be used against you if the companies decide you’re a higher risk than they originally thought. And they can change your risk profile based solely on the types of stores you visit.
The Carnival of Personal Finance hosted by Musings of an Abstract Aucklander last week included my article about Sprint’s $300 million tax fraud lawsuit.
Adrian from 7 Million 7 Years talks about how it may be hard to believe that someone in New York struggles on an income of $350,000 a year, but he understands the perspective. Andrew Schiff, who works for a brokerage firm, earns this salary but “feels stuck” according to an article in the Wall Street Journal.
Mike, the Oblivious Investor, argues that even an individual with a reduced life expectancy should wait as long as possible before collecting payments from Social Security. There are some specific circumstances in which it might be beneficial to claim Social Security benefits early, however. Mike explains within the article.
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