Professor Lisa Servon wanted to research Americans who don’t use or have access to the traditional banking system.
In order to get closer to the community, she took a job at a check-cashing service. The result was a powerful book about the financial system and how it serves, or doesn’t, at-risk communities. When she thinks What the Future, she’s wondering how people can participate in an increasingly digital financial world.
WTF: To what degree is being unbanked or underbanked a problem both for individual people and for society?
Lisa Servon: To start with, I don’t like those terms even though I use them, too. I think they imply a deficit on the part of the person who we’re talking about and because they tend to lead to a policy solution that involves moving people to bank accounts. “Unbanked” or “uneducated” means you need more education; you need more bank. Banks are not necessarily serving this population well.
WTF: From your research, what isn’t working?
Servon: People who [took part] in my research told me that banks were too expensive, they lacked transparency, and that they weren’t getting good service from banks. When they compared banks to the local check casher, the check cashers scored higher on those things. So, I think it’s a problem. The assumption that banks are providing safe and affordable financial services for everyone is wrong. Low income people are paying 90 percent of the $32 billion in overdraft fees that are levied on bank customers.
WTF: What are people doing as an alternative?
Servon: When people make the choices to use alternative financial services, they’re choosing the best of imperfect options. At the bottom of this unbanked/underbanked/banked debate is that people don’t have enough money, which is probably beyond the scope of this conversation. There isn’t a good, consistent source of safe, affordable financial services that enable people of all socioeconomic groups to achieve financial health.
WTF: The subhead of your book calls out that we’re talking about the new middle class, which is a bit of a counternarrative that this is now a middle-class issue as well.
Servon: Absolutely. I think that was one of the biggest surprises for me in doing the research. I started out working at a check-cashing store in one of the poorest zip codes in the country in the South Bronx. Most of my customers there were low income, but particularly once I started working on the payday side of the industry —as a teller, as a loan collector, as someone manning a hotline—and then doing hundreds of interviews with payday borrowers, I realized it was a lot of people who had done “the right thing.” They had gone to college. They had a stable job, but things happened that really destabilized them financially.
WTF: To borrow a question from your book, can the free market solve these problems? For instance, banks and credit unions – they want more customers, right?
Servon: Yes and no. I think it’s possible for the private sector to make money and do well and do good, but I don’t really see that happening, except in the case of some banks that really have a more mission-driven strategy and model.
WTF: What role do nonprofits and governments have in this? What does the public nonprofit sector need to do?
Servon: The requirements of the Community Reinvestment Act should be rethought. It should really be more specific about how banks need to serve the people in the communities in which they’re located. I also think there is a role for fintech here. Some are helping people with economic instability. There are apps that help people get paid by the hour instead of every two weeks. It doesn’t necessarily give people more money, but sometimes having access to all the money you’re owed whenever you can get it can be useful. Credit scoring is also a place where government and the private sector could be looking. Your mortgage payments are factored into your credit score, but not on-time rent payments. And so, there are some simple fixes that would at least do things like make more people eligible for less expensive credit.
WTF: Are you seeing that you don’t necessarily need to be tied to a traditional financial institution, that you can start using some of these fintech payment and loan services instead?
Servon: Things have become more driven by technology, and people do feel like they have less of a need for brick-and-mortar financial institutions. We’ve also seen an increase in the need for what Fred Wherry, a Princeton sociologist, called “financial citizenship”—things like having a credit score. Now, obviously, you don’t have to have your bank account to get a credit score, but you need to be able to build credit. There’s a bank behind Credit Karma. There’s a bank behind Venmo. So, I don’t know that we can say we’re able to consider being in a cashless society or a bankless society.
WTF: Do you think that the rise of digital currencies and cryptocurrencies and blockchain will impact the unbanked population?
Servon: Some of the technology that underlies those cryptocurrencies has some really interesting potential usage. One of the companies that I profiled in my book was called Repl.it, which is a company that uses blockchain technology and is working on a system where payments from one entity to another could be free and immediate. That has potential to help people who are living on the edge in terms of having a check and not having to wait three or four days to cash it. That’s a huge reason why people go to check cashers and pay two percent of their paycheck in order to get the money right away.
WTF: Millennials and iGen are coming of age with different relationships to banks and traditional financial institutions. The iGen, for instance, doesn’t even see that there’s much of a difference between a checking and savings account, because, at the moment, there really isn’t, in terms of interest rates.
Servon: There’s a generational shift in terms of the comfort with technology, for sure. The other thing that really has an effect on people’s behavior is going back to employment stability and the changing nature of a middle class. I grew up in a world in which, if you work hard and you go to college, you can get a job that will allow you to have children, be able to afford them, buy a house and save for retirement. Now I see people trading those things off, thinking, “Well, I can do one of those things, but not the other.”