The Unbanking of America: How the New Middle Class Survives
By Lisa Servon
Houghton Mifflin Harcourt
This article appears in the Winter 2017 issue of The American Prospect magazine. Subscribe here.
Unbanked. The term has an ominous undercurrent if you assume, as most of us do, that being “banked” is essential to quality of life. An unbanked person does not have a checking or savings account and lacks access to mainstream credit cards or loans. In 2015, according to the Federal Deposit Insurance Corporation (FDIC), 7 percent of U.S. households, or about 15.6 million adults and 7.6 million children, qualified for this label. Another 19.9 percent, or about 51.1 million adults and 16.3 million children, were “underbanked,” meaning that they had an account at an insured financial institution but also used “services and products outside of the banking system.” What’s available out in the cold? Payday loans that must be repaid by the next salary check, check-cashing storefronts that charge substantial fees for instant funds, and installment debt available at off-market and sky-high interest rates.
The mainstream media outlets that have focused on this phenomenon—most notably The New York Times, The Atlantic, The New Yorker, NPR, and The Wall Street Journal—consider it a sad predicament at best and an egregious rip-off at worst. Few have delved into the economic circumstances that make payday lenders and check-cashing storefronts essential for the growing number of people living paycheck to paycheck, one unexpected medical bill away from financial meltdown. Commentators pity the un- and underbanked, despise these predatory, subprime businesses, and rarely mention the unpleasant fact that the mega-banks serving the rest of us have no interest in assuming the burden of serving 29 percent of the population.
Professor Lisa Servon’s new book, The Unbanking of America, is the exceptional piece of academic research that not only masters the statistics and the implications of an important social problem, but informs that cool account with frontline observations in the great tradition of Barbara Ehrenreich. A professor of city and regional planning at the University of Pennsylvania, Servon spent four months as a check casher in the South Bronx, two weeks as a teller and collections agent at a subprime lender in California, and one month staffing the Predatory Loan Help Hotline at the Virginia Poverty Law Center.
Unlike Ehrenreich, Servon was not fully underground during these assignments. Her co-workers knew who she was and what she was doing, although her customers did not. In the tradition of Nickel and Dimed, she fully internalized the texture and the weight of the tough times that drove people through the door at enterprises that charged them too much for immediate access to money. Also in the Ehrenreich tradition, Servon firmly dismisses the undercurrent of noblesse oblige and righteous outrage that plagues other reporting.
The realization that an unexpected expenditure of only a few hundred dollars would push almost half of American households into emergency borrowing or selling a possession is slowly but surely dawning on those among us who are more fortunate, accelerated by post-election soul-searching. A large proportion of this middle-class group is unbanked. When an unexpected car repair or medical bill becomes urgent, they avoid banks because they do not have an account, can’t qualify for credit, or harbor profound distrust of those institutions.
Take, for example, the true and ironic story of a 22-year-old single mother named Ariane (her name was changed in the book) who worked with Servon as a check casher in Oakland. One inauspicious day, the car she needs to bring her daughter to daycare and herself to work broke down. With no savings, no credit card, no bank account, and no family members who could give or lend her money, Ariane took out payday loans from five different lenders, paying an interest rate of 15 percent per $100. Ariane lives in the state that not only encompasses the sixth-largest economy in the world but has adopted the aggressive approach of prohibiting payday lenders from rolling over, or refinancing, their loans. She understood at the outset that she would not be able to pay the loans back by the next payday because her income just barely covered rent, food, daycare, and other necessities. So she repeated the process, opening a second round of loans and paying the fees all over again. At some point in the process, she closed her bank account because of the high overdraft fees she was charged when creditors tried to access the small amounts in her account. Ariane found herself in a debt cycle that seemed never-ending, owing much more than she borrowed. A second job at night helped her get a small distance ahead of the curve, but real relief came only when she managed to find a higher-paying job. Servon explains that some experts would prescribe “financial literacy” courses for people like Ariane, but that this remedy is as patronizing as it would prove ineffective because the source of her financial crisis was lack of money, as opposed to lack of common sense. Ariane fully comprehended all of the ramifications of stepping on the payday-loan treadmill.
Servon persuasively challenges the premise that members of the lower and middle classes patronize payday lenders out of ignorance. She demonstrates that they are acting rationally, given limited resources and alternatives. She freely acknowledges that payday lenders and check-cashing businesses charge exorbitant rates. In fact, according to the federal Consumer Financial Protection Bureau (CFPB), payday loans typically have an annual percentage rate (APR) as high as 390 percent. Yet Servon doesn’t buy the politically expedient answer that focusing exclusively on punishing this admittedly predatory industry will bring any real relief to their victims. People who have little or no money simply do not have anywhere else to go.
Two other unexpected conclusions of Servon’s work are revelatory. First, as Ariane’s story indicates, storefronts are staffed with people from the community, as opposed to functionaries at the other end of a computer connection. At the “unbank,” customers are greeted by name and received with empathy, whether or not they conform to the corporate creditor’s demand for a new payment. Tellers do not humiliate customers for their indebtedness.
Second, unlike too many other commentators, Servon does not let mainstream banks off the hook in her rigorous analysis of the dynamics of lower- and middle-class debt. The financial industry is highly concentrated, with just four banks—Chase, Bank of America, Wells Fargo, and Citigroup—holding about half of U.S. banking assets and 6,395 far smaller banks dividing the rest. The giants take full advantage of their position by charging large overdraft fees, requiring minimum checking account balances, and engaging in the hidden practice of “debit resequencing” to drive up negative charges and slow down crediting of deposits. These abuses and endless hassles make payday lenders the more rational choice for millions of low-income Americans.
According to the Economic Policy Institute, working-class wages have “barely budged” over the past 35 years. Men in the private sector who do not belong to a union and lack a college degree earn substantially less than they brought home in 1970. The National Employment Law Project reports that the largest hits were visited on the lowest earners: restaurant workers, janitors, home health aides, retail salespersons, and maids have all experienced deeper wage cuts than average, with some dropping as much as 8 percent as of 2014. Teaching this group that FDIC-insured banks are better bets than storefront lenders would be meaningless anywhere, but especially in areas of “financial exclusion” where banks have abandoned the population physically as well as theoretically. In the South Bronx, for example, one bank is available for every 20,000 people; in Manhattan, the ratio is one bank for every 3,000 people.
Instead, to protect people without cutting off their access to desperately needed money, the CFPB proposed rules in June that would require payday and other small loan lenders to inquire into whether applicants have the ability to repay and to cap installment loans at 36 percent APR. Of course, following our nightmarish election, these rules, and perhaps the institution that generated them, may be eliminated. Regardless, like all the other deeply seated problems that plague economically vulnerable people, unbanking will proceed apace.
The bottom line is that Servon has written a readable, informative, thorough, and even gut-wrenching account of an under-reported problem that causes much misery. Viewed as a piece of muckraking journalism, her book is a significant contribution to the progressive narrative regarding the biggest problems we confront. The one flaw, common to many other good books about the plight of low-income people, is the thinness of her solutions. The fact that big banks refuse to do much for the un- and underbanked leads in a straight line to the need for government intervention. Servon chooses federal subsidies and additional CFPB-like regulation. Given the timing of the book’s release, these solutions seem sadly out of reach.