“The Unbanking of America,” Book Release and Talk with Professor Servon
January 30, 2017
On Monday, January 23rd, Faculty Affiliate Lisa Servon debuted her new book “The Unbanking of America: How the New Middle Class Survives” at the University of Pennsylvania bookstore. She began her talk by reflecting on her upbringing in the mid 1960s and 1970s. Every Saturday morning, Servon had a special ritual with her father: she would go to the post office, to Mike the butcher’s, and finally, to Pulaski Savings and Loan. She recounted how the bank teller always knew her father and they would make small talk about the high school football team, before the teller would ruffle her hair and give her a lollipop as her dad deposited his checks. “It felt like a community space, like a rite of passage to get [your own] account. And once you did that, you felt like part of the community.”
Compare those times to the present: now, we hardly ever go to a teller, and they don’t know us anymore either. But, Servon says this community experience is what is still available at check cashers and payday lenders today.
7 to 8% of Americans have no bank account, and 20% of the population is underbanked – it is unclear if they use their bank account or not. Instead, they use pawn shops, payday lenders, and other similar services. Policy makers became concerned when seeing the numbers of the unbanked and underbanked, because it was thought essential to have a bank account. The solution? Move the unbanked into bank accounts. Unfortunately, Servon argued, this policy shift propagated the “not so subliminal message” that if you didn’t have a bank account, you were mis-educated and financially illiterate was frightening. It is actually the opposite: the people who have the least amount of money know where every single penny goes, so why would they pay for banking services they found unhelpful?
When teaching her course on Gender Development and Finance, Servon had her students read texts concluding that payday lending was predatory. But when the owner of several payday loan providers came to speak to her class, she heard a different story: this business served the community. She thought these two messages didn’t square, and sought to investigate why there is such a large number of people using these services without bank accounts.
A payday loan is a small loan, between $50 and $300 lump sum that is due on the next payday in 2-4 weeks after it is taken out. The lender makes $15 per $100 borrowed, but since most people can’t pay back the $100, it rolls over into the next period. Another $100 loan is made 2-4 weeks from the original, but the interest from the first rolls over too – the customer is paying $30 to the lender on top of the face value of the loan. So, why is this an attractive service? To better match the method to the question, Servon applied for a job as a teller at a payday lender. She worked one shift a week for 4 months, and learned “more doing that than just by interviewing people.”
As a teller, Servon developed a better understanding of the kinds of people who used these services. She read several passages from her book, explaining the stories of small business owners, contractors, and other customers alike. In the case of the contractor, Carlos, he used the check cashing service because he had to pay his workers the day after the check was written or had to buy supplies immediately. He couldn’t wait for the check to settle in his bank account.
Servon then explained the three main reasons individuals use a check casher: cost, transparency, and service. When customers went to the check casher, the fees were very clear. A one-time missed payment at the bank could invoke an overdraft fee, and for people like Carlos, that time is money. Many people can’t wait for checks to clear when it involves their business.
Secondly, individuals saw check cashers as more transparent than banks. The clear signage above the teller’s head let customers know exactly what’s on offer and how much everything cost. When there are multiple bills to be paid, customers needed to make sure that no mistakes were being made with their finances.
Finally, Servon realized the importance of service at centers like the one she worked at – as part of her job, every teller was required to treat everyone with respect, know the customer’s name, and use it three times per transaction. She realized that service was a core part of the business model: check cashers make money with return service. As her supervisor explained, he would rather have one million customers with $1 than one customer with $1,000,000.
Where has community banking gone? Servon attributes this to some critical changes in society, policy, and banking practice. With the passage of the Glass-Steagall Act, banks couldn’t grow as quickly and couldn’t participate in investment banking with customer balances. This led banking to travel overseas, and to the development of new products. Under this new system, the individual consumer wasn’t as important anymore.
Further, these banks discovered fees, a way they could make a lot of money from lower and middle class consumers. With algorithms and services that did debit reordering, banks were able to blur the lines between legal and ethical by always prioritizing their customer’s largest bills first – even if they had enough money in their account to fully pay for another bill. In this way, banks maximized overdraft fees while increasing the cost to the consumer.
Another major change in society has led to the new middle class, as Servon called it in her book. The old American Dream was to save money for a home, pay for the education of children, and save for retirement. Through anecdotes from her book, Servon illustrated why this was no longer the case. Today, Americans pursue a more modest set of dreams: of rising above the gig economy, of paying off student debts, of renting – not owning – a home. Unfortunately, today’s millennial dreams are products of past regulation and social change that was out of their control. “No wonder there is widespread distrust of the financial system,” Servon mused.
Despite these changes, there is hope. Innovators disrupting the financial services industry with companies like Venmo and Ripple are making money more accessible to move with less friction and less cost. Alternative credit scoring systems using a broader set of data are being more widely accepted to get a more accurate picture of an individual’s financial history. In the public sector, there is greater room for transparency. Servon believes every consumer should be able to compare financial products the way they compare nutrition labels on food in order to determine who is a good actor and a bad actor. The Consumer Financial Protection Bureau, an agency that came out of the Dodd-Frank legislation and the only agency that regulate these things for consumers, needs to be protected.
Ultimately, the “Banked, Unbanked, Underbanked” framework is fundamentally flawed. “We need to shift the conversation to talk more about financial health and financial justice,” Servon said, before asserting that everyone deserves control over their finances, the capacity to absorb shock, goals that they can achieve, and enjoyment of their lives.