In an increasingly cashless world, it is difficult to imagine why someone would live without a bank account. Banking is typically viewed as the safe, stable, and proper way to manage one’s finances, while alternative financial services are construed as exploitative and vulturine. Yet, in 2017, a survey conducted by the FDIC found that the number of unbanked households in the United States was 8.4 million, with an additional 24.2 million underbanked households, households that are not participating or have limited participation in traditional financial institutions. As policymakers continue to stress the role of financial institutions in alleviating poverty, it is important to question why people are avoiding banks in favor of riskier and less convenient alternatives.
One issue is that the banking system is not designed with low and middle class households in mind. At major banks, such as Wells Fargo, Chase, and Bank of America, 25 to 40% of checking accounts are simply not profitable and are described as “money losing.” To combat this, overdraft fees, debit card swipe fees, ATM withdrawal fees, wire transfer charges, among other charges and fees are imposed. These charges that appear around every corner of the banking system create a significant burden and barrier of entry for low and middle income individuals. To make matters worse, these costs for low to moderate income individuals are difficult to avoid. Overdraft fees are particularly unavoidable for people who live hand to mouth. While banks will deposit funds into accounts only on business days, withdrawals can be made anytime of the week. Banks will also often take time to show the true balance of someone’s checking account leading to monthly overdraft fees of up to $34. Banks can make up to three monthly overdraft charges, which places an incredible cost on people who live paycheck to paycheck. As a result, while banks hunt for ways to maximize their profits, low income families are burdened with an excess of fees.
With all of this in mind, it is still important to offer low income individuals a viable door into the financial mainstream. Banks currently offer many services and conveniences that, if implemented and designed to serve the poor, could help low income individuals plan for the future and build financial stability. However, in the status quo, that is simply not the case. Until financial institutions reform their practices and services and offer the transparency, lower costs, and personalized service to low income individuals, alternative financial services will continue to be increasingly popular. These services can be predatory and do not offer opportunities for low and moderate income individuals and households to save money, develop their credit, or create financial stability for themselves, which is something that banks could do if designed to serve these individuals and households better.
Analysis: This article has helped me problematize how low and middle-class households are often left out in banking. Because of a surplus of fees, like uncapped prepaid credit card fees, lower to middle class individuals do not benefit as much from bank services, and often feel exploited by the bank. This causes people to utilize financial alternatives outside the bank, such as payday loans. What if banks started shifting, or expanding their business to better serve the poor? It seems more transparency, lower costs and more personalized services might do the trick, but what specific solutions will benefit both the bank and lower income households? In other words, how can banks utilize design to expand on their customer and benefit lower class individuals, while still increasing their profit from the business. I believe the power of empathy, studying innovative technology and new banking business models, along with working from both the point of view of the bank and the lower income customer will help offer up insights and solutions in this process.
Citation:
Banking and poverty: Why the poor turn to alternative financial services. (n.d.). https://econreview.berkeley.edu/banking-and-poverty-why-the-poor-turn-to-alternative-financial-services/
