According to the most recent statistics from the U.S. Census Bureau, more than 28 percent of U.S. households are "un-banked" (no one has a bank account through an insured institution) or are “under-banked,” meaning banking is done through non-traditional services such as payday lenders or check cashing services. When broken out by race or economic status, the numbers are even more glaring: 40 percent of low-income households are under-banked or don’t have an account at all. In Hispanic households, that stat bumps up to 50 percent and in African American households, it’s 55 percent.
Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, called access to better banking options an essential issue in terms of helping lower-income families manage their finances.
“The issue of jobs, I think, is a critical economic challenge but complementary to that is giving … individuals, as they gain employment, the ability to manage their finances in an effective way,” he said at an event held this month in Washington, D.C., and sponsored by the Local Initiatives Support Corporation (LISC). “So [then] they can meet the needs of their family, build some economic security and that in turn gives them access to credit products, and that in turn helps them to sustain their employment as well.”
So, other than the fact that April is financial literacy month, why should local governments care about the financial education of their lower income population? For one, they’re paying for the social services that many of these low income families rely upon. And while these services are great, they often tend to be singularly focused. As Gruenberg notes, getting someone a job won’t guarantee that they will automatically become self supporting. And it certainly won’t guarantee that a family will be able to start saving enough money to, say, move out of Section 8 housing and put a deposit down on a market rate apartment.
“Financial stability starts with having more money coming in than going out,” said Kevin Jordan, LISC’s senior vice president for national programs. “Financial stability starts there, asset building starts there, a good job starts there.”
LISC works with nonprofits in communities to run Financial Opportunity Centers that help lower income families move out of poverty. Key to that formula is helping families get access to credit when the heads of households have no credit history or a poor one. For many of these families, traditional banking just doesn’t make sense – they don’t have enough money to meet the minimum balance requirement or the prospect of checking account fees or overdraft fees scares them away.
Enter nontraditional banking like payday lenders: they will more freely loan you money in advance of your paycheck but it’ll cost more in the long run – typical APR yield with fees of about $10 per $100 borrowed is 304 percent, according to the Consumer Financial Protection Bureau. Additionally, most borrowers with more than $3,000 in advances are indebted for nearly half the year – roughly 149 days or more, according to the bureau.
“The reason it’s so hard for low income families to really get ahead is access to credit, to the banking system -- these people don’t have enough money,” Jordan said. “It’s an income problem and an expense problem.”
The feds are stepping up regulation of payday lenders and, last week, the FDIC and the Office of the Comptroller of the Currency (OCC) each released guidance to banks imposing strict limits on “short-term small-dollar payday loan-like products” (payday lending), including a requirement that banks evaluate consumers’ ability to repay the loans and limits on how often banks can lend to the same customer. Also last week, the Federal Reserve issued its own written statement on deposit advance products emphasizing the significant risks associated with such loans, including potential consumer harm and the potential for elevated compliance risk.
Gruenberg said the traditional banking system was lacking an option for lower-income users to borrow at more reasonable rates. Payday lending, he said has “really proven to be not a satisfactory response to what I think is a real need in the financial system.”
Governments, meanwhile, would do well to integrate financial planning with their other services as much as possible, said Jordan. After all, it saves everybody in the long run.
“By adding these [services] together, it’s greater than doing them separately,” he said. “The traditional way has been a la carte -- walk in, get a job. They may or may not tell you that down the hall there’s someone who can help you file your taxes. The counselors’ [objective] is, did you get the job and what was the wage? Versus what is the financial stability of the client when he started and what is it after 90 days.”
