August 13, 2018

Inequality and the Cashless Economy

Headshot 3.13 cropcompressBy Karen Sternheimer

What if you had money, maybe not a lot of money, but you couldn’t use the money you did have to buy some things you need or pay your bills? And what if you had to pay in order to access your money?

For some people, this is a day-to-day reality if they are unbanked or underbanked; people who either don’t have a bank account or a credit or debit card. Think about all of the things that you buy without cash, whether online or in person, and would not be able to because you don’t have a card. This lack of access is an important measure of inequality in an increasingly cashless economy.

Why wouldn’t someone have a debit card or credit card?

Most banks have a minimum balance required, meaning there is a monthly fee if you don’t keep a certain amount in your account. There are ways around having to maintain a minimum balance; some banks will waive the fee if you are a full-time student, have your paycheck directly deposited to the account, or have a mortgage with the bank. But these aren’t always available to people who are low earners.

A recent Los Angeles Times article details the challenges of being unbanked. As part of a Connecting to the Consumer Experience (FinX) workshop run by Center for Financial Services Information (CFSI), the Times reporter participated in a sort of financial scavenger hunt to understand the experiences of being unbanked. In the story, he details the challenges of trying to cash a personal check (which many check-cashing businesses would not do), and buying a pre-paid credit card and trying to use it immediately (he could not).

In these exercises, participants found how exorbitant interest rates and other service fees make shopping much more expensive for lower-income people without access to banks. Citing CFSI data, the Los Angeles Times story notes:

CFSI estimated Americans spend more than $100 billion every year for products or services such as payday loans and check cashing, as well as overdraft fees, effectively a penalty for being short on cash.

Buying things and paying bills are not optional activities, nor is accessing money from one’s paycheck. Thus, people without enough resources to maintain a bank account have no choice but to pay these fees. And because this sector of the financial services market is so profitable, there is little incentive to offer alternatives. Ironically, the lower your income, the more you must pay just to access your money, making it all the more difficult to get out from behind a financial setback.

Lower-income people not only have to spend money to get their money if they need to cash a check or take out a short-term "payday loan," purchase a money order (often sold at the post office to convert cash into a check) to pay a bill, but it is very time consuming to do all of these things that most of us don’t need to worry about.

Participants in the FinX workshop found out through the tasks they were assigned that they couldn’t come close to finishing within the time limit. For people who might work multiple jobs, have families to care for, and live in communities without banking services, the time they must allocate to pay their bills is far greater than most people realize.

If you live in a neighborhood with multiple bank branches, it might seem easy to get to a bank, or an ATM after hours, but as The Atlantic reported in 2016, many low-income communities are essentially bank deserts:

Lower-income communities and communities of color have historically and disproportionately limited access to mainstream banking services. These trends have implications for households’ and communities’ opportunities to leverage financial products and services to their advantage.

Even someone who has the money to maintain a minimum balance in a bank account might not be able to do so if there are no banks nearby. What about an online bank account? Typically, in order to open an account you need to transfer money from another bank account, or send a check, a chicken and egg dilemma for the unbanked.

By contrast, those with bank accounts can typically pay their bills online, 24 hours a day from the comforts of home, and spend minimal amounts of their day having to appear during business hours to pay their electric bill or their water bill. While they might have some fees to pay, it is unlikely that they will pay the basic check-cashing fees or money order fees. And if you have a credit card that you pay off at the end of each billing cycle, you essentially have an interest-free loan, rather than a payday loan with a triple-digit interest rate.

The Atlantic article concludes:

In the same way that convenient access to grocery stores that sell affordable and nutritious food helps us maintain a healthy diet, convenient access to safe and affordable financial products and services helps us establish and maintain good financial health. When this is not the case for lower-income communities and communities of color, economic growth suffers and households are left to struggle financially.

The CFSI seeks to raise awareness and encourages the development of banking services for those currently unbanked or underbanked. What might changes might help lower-income people have easier access to their own money? How might these changes promote upward mobility in the future?

Comments

As an answer to the question posed, and an employee of a major bank;
A suggestion would be for the banks to find a model of a branch that would support these communities that need services.
I understand it takes quite a bit for a bank branch to run so maybe a modified version of a full service branch for these areas would benefit those who are underbanked while not causing a strain on the company.
I would also suggest those modified branches offer products for that specific community as well as company wide. (i.e Free Checking Accounts, no requirements)

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