Banking Relationships of Lower-Income Families and the Governmental Trend toward Electronic Payment - includes related articles - Statistical Data Included

Federal Reserve Bulletin, July, 1999 by Jeanne M. Hogarth, Kevin H. O'Donnell

A second study, employing an updated version of the database and covering 1993-97, looked at the effect of consolidation on home-purchase lending to minority and lower-income borrowers and neighborhoods. It found that, after consolidation, banking organizations decreased home-purchase lending in some areas and increased it in others; independent mortgage companies and credit unions also increased their activity in some areas. The net effect was that consolidation caused no significant change in such lending to minority and lower-income borrowers and neighborhoods, but at the end of the period, more than half of all home-purchase loans were being made by offices outside the borrower's local community.(13) Although the potential ease of obtaining a mortgage from an institution located outside one's neighborhood would seem to be greater than that of cashing a check outside one's neighborhood, the data suggest that conclusions about the effects of bank consolidation are not obvious or straightforward.

Another theory is that the mix and fee structure of products and services offered by banking organizations have become less attractive to lower-income families than the offerings of the alternative financial sector. For example, small short-term loans are a popular product in the alternative financial sector, where check cashers make funds immediately available to customers via the cashing of post-dated checks (also known as "payday loans" or "deferred presentment"). Except for cash advances on credit cards, such loans are generally not found in the mainstream financial sector (see box "Where Can I Cash This Check?"). Others contend that the factor bringing users to alternative service providers is not convenience but comfort; that is, users find that the alternative sector provides more person-to-person contact than mainstream institutions (a consideration sometimes called "high touch versus high tech").(14)

The informal financial market--that is, family, friends, and social organizations--is also a significant source of credit and financial services to lower-income families, especially in the face of financial shocks, although the dollars transacted are likely to be relatively small.(15) Three-fourths of families facing emergency expenses related to illness and three-fifths of families facing them because of unemployment have reported using some type of informal financing arrangement. Information that helps both borrowers and lenders in the informal market is often inexpensive to obtain relative to other markets.

ALTERNATIVE AND MAINSTREAM FINANCIAL SERVICES: A COMPARISON OF COSTS

Check cashing outlets generally charge a percentage of the amount of the check being cashed, often up to some maximum fee. Some states limit these fees; for example, at the 1.4 percent limit imposed in New York, the fee for cashing a $340 check would be about $4.75, which is nearly equal to the average monthly fee charged by banks and savings associations in 1998 for a noninterest "fee-only" checking account.(16)