May 22, 2019
In The Unbanking of America, author Lisa Servon offers a fresh perspective on alternative financial institutions such as check cashers, currency exchanges, and payday lenders. As part of her research, Servon—a professor of city and regional planning at the University of Pennsylvania—went to work at a check casher in the South Bronx, NY and at a payday lender in Oakland, CA. Through her conversational style and the inclusion of personal stories of those who operate, are employed by, or are customers of alternative financial institutions, Servon provides a fascinating, insightful look at the consumer financial industry.
Servon claims that “the American banking system is broken” and no longer serves the needs of an increasing number of Americans. According to Servon, this breakdown has two major causes. First, over the past 50 years, banks have become exponentially bigger and have shifted away from a focus on consumers. Second, an increasing number of Americans are facing ongoing financial instability. The author devotes an entire chapter of the book to describing economic and legislative factors that have contributed to the current state of consumer financial services.
Servon contends that alternative financial institutions fill a gap—providing needed services for the large number of Americans who are no longer well served by mainstream financial institutions such as banks and credit unions. Despite being subject to high fees and other practices that are frequently termed “predatory," customers may be making perfectly rational decisions in using check cashers. So, for example, while the fees for services at check cashers are often quite high, they are clearly posted and easily understood by customers prior to making transactions. On the other hand, consumers are often unaware of or confused by the fee structures at banks, and may be shocked and harmed financially by being charged unexpected fees, which can build up quickly for those living paycheck to paycheck.
Servon explains that uncertainty about when deposited funds will become available is another drawback of mainstream financial institutions for low-income consumers, who often need immediate access to funds in order to cover living expenses. While at an alternative financial service, customers must pay a relatively high percentage of their paychecks in order to gain access to their money—a service provided free at many banks and credit unions. This access to funds is immediate, whereas at a bank it may take a few days for the check to clear. For people who need the money right away to pay bills, buy groceries, and cover other immediate expenses and who do not have a financial “cushion” to fall back on, the fee they are charged upfront at a check casher may be a necessary trade-off for a needed service.
Additional barriers to using mainstream financial institutions involve access. For some people, a barrier may be the lack of physical branches in their communities—known as banking “deserts." Others may have negative banking histories, precluding their use of banks. Information about customers of mainstream financial institutions who have incurred numerous fees, have unpaid fees, or have had an account closed is reported to an organization called the ChexSystem, which may result in people being unable to open an account at a traditional financial institution for years. This disproportionately impacts people with low incomes.
Lisa Servon’s compassion and nuanced exploration of the complexities of mainstream and alternative consumer financial services makes for a highly readable and thought-provoking analysis of the modern American banking system. The Unbanking of America is a worthwhile read that provides insight into the widespread use of alternative financial institutions.