Finance on the Fringe: America's check cashers don't exploit the poor; they serve them

Reason, April, 2002 by Michael W. Lynch

But when less myopic researchers actually talk to the people who don't purchase any financial services from banks, they find that the unbanked spend very little to turn their checks into cash. Constance R. Dunham, a senior economist at the Office of the Comptroller of the Currency, the federal bank regulator, conducted two massive field studies of New York City and Los Angeles. To her surprise, Dunham found that two out of three unbanked individuals paid nothing to get cash. They either had no income, were paid in cash, cashed their checks for free at a supermarket or at the bank that issued the check, or had a friend or relative cash their checks. A mere 11 percent of the unbanked spent more than $100 a year to cash checks. Add in costs for money orders and bill payments--the other service a checking account provides--and a whopping 17 percent of the unbanked spend more than $100 a year on financial services.

Given that the break-even point for banks is roughly $100 a year per account, it's hardly a mystery that banks don't aggressively market to the small percentage of Americans who don't already buy their services. "The survey suggests that many people may be unbanked, not because they face barriers to obtaining bank accounts," concludes Dunham, "but because they can better economize on the costs of financial services without having a bank account."

First Bank of Sisyphus

This point hasn't fully sunk in with policy advocates, who work D.C. hours to bring "universal" banking to America. They have wielded a variety of policy tools over the years, none with much success. The big club on the supply side is the 1977 Community Reinvestment Act, which compels federally insured banks to operate in unprofitable low-income neighborhoods. But physical access just isn't a problem.

There are no federal requirements that banks actually offer low-cost accounts, a fact that causes much pain among the advocates. But it wouldn't matter if there were. Most banks already offer low-cost accounts, and so long as an individual hasn't abused a checking account by chronically bouncing checks, he is free to sign up. Seven states regulate where the feds don't, mandating low-cost "lifeline accounts." These laws have had little effect. Many banks voluntarily offer products that are even less expensive than the government-designed accounts.

In the latter years of the Clinton administration, Congress gave the Treasury Department $30 million to develop a program called "First Accounts." This effort, still in the works, will funnel taxpayer money to credit unions, community groups, Indian tribes, and even labor unions. In turn, these groups will do such innovative things as provide financial education, engage in advocacy research on why even more money is needed, and offer low-cost accounts and no-fee ATMs.

The most ambitious effort to increase bank use, Electronic Funds Transfer 1999 (EFT '99), came from Robert Rubin's Treasury Department. EFT '99 was prompted by a 1996 law that encouraged the Treasury Department to pay federal wages and benefits by direct deposit.