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Many Low-Income Families Can’t Use Mainstream Banking Even If They Wanted

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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.

Photo: Flickr

Updated September 24, 2015 and originally published August 1, 2013.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar 1 qixx

How do online only banks compare? Are they as likely to turn away an applicant? Are they as restrictive as a brick and mortor operation? I know they don’t usually place the common restictions like income requirements and physical locations do.

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avatar 2 Luke Landes

Online banks rely on ChexSystems just as much as non-online banks.

And the online banking industry has matured so much in the past decade. Years ago, online banks were more likely to be “fringe” themselves (although many were still funded by traditional banks). Now the big online banks are just more branches of large national and international banks. NetBank is no more. VirtualBank is owned by a large bank based in Spain. ING Direct, which was originally part of a large financial institution anyway, is now Capital One, an even bigger financial institution (in the U.S.).

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avatar 3 Anonymous

Its unfortunate that some people get caught in this trap. But its based on them bouncing a check to begin with. What are banks to do? Theres risk in accepting people who bounce checks so it makes sense to deny those people accounts. I’m not really sue what the solution should be here. Maybe some form of secured checking account? But even then the problem is people can bounce checks.

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avatar 4 Anonymous

I guess educating those folks will help some, but really it all comes down to being responsible. Many do not have their priorities straight and would rather bounce a check here, keep the checking account with 1 dollar, and pay check cashing companies for a free service.

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avatar 5 Anonymous

Wow! This got m’e thinking about how long it’s been since I opened an actual brick & mortar bank account, and it’s been pretty close to 25 years ago. No computerized checking of credit standing was required, and I don’t even recall being asked for photo ID. Took about 15 minutes.

I would think, these days, that banks could avoid the potential losses from bounced checks on a checking account by not issuing checks, just debit cards which are immediately processed for sufficient funds. Of course, that would change a business model based on profits from overdraft fees, wouldn’t it? There’s got to be a NGO/nonprofit solution to this problem somewhere, perhaps based in financial literacy classes.

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avatar 6 Anonymous

Moving to an electronic debiting system seems like a natural way to help curb this problem.

But the elephant in the room, like you said, is the need for better financial literacy. And that initiative needs to start, like, yesterday!

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avatar 7 Anonymous

I love you final point on better financial literacy! We rarely teach it to children, or adults for that matter, and we see the results. If it’s not taught in the home and it’s not taught in schools, what can we expect?

I worked in a bank for about a year soon after college and saw how many would get caught in the crosshairs of living paycheck to paycheck and it was a shame to see. There are some out there really trying to game the system and doing things like check kiting, but there are many more that are just living life that run into banking issues.

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avatar 8 Anonymous

People can bounce checks through no fault of their own. When a disability check is delayed by floods, for example, and automatic payments of such trivial expenses as health insurance premiums come out, what are they supposed to do?

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avatar 9 Anonymous

One other choice might be prepaid debit cards. I know one person who does all her financial transactions using one. She went through a messy divorce where she was left with horrible credit and was legally liable for debts her ex owed to the point that she was afraid her bank account would be seized. So, she has a debit card account from some institution online. I can’t remember the name. Her paycheck gets direct deposited to it and she can use it to pay bills like a credit card and/or get cash from an ATM. But, there is no actual checking account. As far as I know she has been doing this for more than 3 years now. I don’t know what fees are involved, but it is an alternate way for some to manage their money even if they do live paycheck to paycheck.

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avatar 10 Anonymous

What is the cost to our economy when low-wage workers cannot effectively participate in it? Forget about the pain that is unnecessarily caused by these blanket, and not particularly finely tuned, policies. There are many people who have adopted an almost know-nothing self-righteousness about the virtues of thrift, when thrift is made impossible by these policies. Arguing from personal anecdotes is really trivial when confronted with larger systemic problems in finance.

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avatar 11 Anonymous

So what would be your solution? How would you let them participate without overhauling the system?

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avatar 12 Donna Freedman

Some people aren’t irresponsible, but rather products of their environments. I interviewed a young woman who, upon receiving her first paycheck at age 15, went straight to the neighborhood check-cashing place because that’s how everyone she knew “banked.”
The next year a credit union started a program in her high school aimed at educating the students about money, banking, credit et al. She got involved, got a lot smarter and started spreading the word among family and friends. When I talked with her she was in college, paying as she went after taking advantage of an individual development account at the credit union that had matched her savings.
Sometimes, you don’t know what you don’t know.

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avatar 13 Anonymous

I have been personally affected financially, some times, somebody cashes your check when your account is low. So now we get money orders, (prices vary, i.e. Post office, Walmart, 7/11) It’s worth doing (the peace of mind, knowing something is paid for…not the “oh my God, when is that check going to clear…hope there’s money in there that day…or oh jeez they cashed it sooner than I thought they would, it’s there fault..LOL) but seriously paying some bills with money orders gives me peace, just keep the carbon copy or you have no proof if you lose it or someone else.

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