June 30, 2007

• I've Got Friends in Low Places

  Dr Tiff asked how it's possible that there are costs associated with having no bank account when it seems that the reverse is the more likely situation for a working poor person.  Bounced checks, fees for low balances, etc. 

  The cost of having no bank account begins on payday when you try to cash your check.  For a basic "check cashing service" the average fee in this country is 5%.  Then when you go to pay bills, there's another charge per money order.  Some goods and services are simply not available (opportunity cost) to you if you don't have a "card" - visa/mastercard.  (Try renting a movie at Blockbuster with cash, much less rent a car or purchase a plane ticket.)  And the list goes on from there.

  For someone without a bank account there is a cost associated with having to physically go and pick up your check, take it to the check cashing place, then pay your bills.  Transportation, postage, and the time involved may seem minimal but they all add up quickly.

  It's also dangerous to carry cash.  The criminally minded don't have to think too hard to realize that if you are going to the check-cash/pawn shop/payday lender every other Friday, you're gonna be coming out the door with a big wad of cash. 

  The FDIC calculates that the low end direct cost of living without a bank account is about $800 a year.  Some subgroups of working poor have direct costs closer to $3000.  For example most recent immigrants routinely send money to support their family.  There is a cost associated with wiring that money.  A man I interviewed this week told me that he pays $49.95 to wire $250.00.  Then when the money arrives on the other end, there are additional fees charged by the bank to cash the wire.  And there is often a hidden "charge" because the bank there doesn't offer a clean exchange rate. 

  I know that having a bank account is not always a good thing.  There is a particular bank with branches in at least five states using a software program to "sort" items presented (checks).  This software is smart enough to identify patterns on accounts that maintain a very low balance and thus are most likely to be overdrawn.  With this software the bank "holds" checks and runs everything through about ten days after the person was paid in the order of largest check first.  That way, if there is an overdraft they will "maximize revenue" by assessing not one, but usually three or four overdraft fees. 

  This same institution places a three-to-four-business-days hold on ANY paper check deposited into the account on the often correct assumption that customers will be tempted to kite checks.  Very few poor people can wait another three or four days before they have to go to the grocery, gas station, etc and so they are most likely to write a check and hope that it won't clear before their money is credited to their account.  But federal clearinghouse processes are so streamlined with electronic data transfer that depending on where you wrote that check (Walmart for example) it has cleared your account before you get back home.

  Why you ask is it possible to clear your checks so quickly but not your deposits?  It is possible.  It's just not in the bank's best interest to do so. Oh, and the particular bank that I'm using in my example markets heavily to low income people with incentives to open accounts like iPods, and drawings for game systems. 

  How do I know they do this?  When I worked as a payday lender, I saw people all the time with bank statements showing that they owed hundreds of dollars to this bank due to these overdraft fees.  Anyone who understood what they were looking at and had a calculator could quickly figure out what happened.  In addition to the evidence of my own eyes, I'm now working with the CFO of a multi-billion dollar credit union. She came to me in shock last November after the vendor of this software approached her institution and demonstrated how a Credit Union's revenue could be increased using their product.  This vendor named the bank that I already knew was using it as their best customer and pointed to the bank's bottom line and growth as evidence of their product's value.

  I'm happy to report that M J, who is a wonderful character, threw this guy out of her office so fast that he is probably still bouncing in the gutter.

  The system we are looking at offers anyone who has their pay directly deposited to their debit card access to the services most needed by poor people either for free or for extremely low rates compared to what they are paying.  ($2.00 versus $49.95 for the wire transfer.)  Because it's not a bank account with paper checks, there is zero kiting capability.  It can't be overdrawn.  If a person tries to use the card to pay a transaction that exceeds the balance, the transaction is denied.  Potentially embarrassing, but saves the $35 overdraft fee.

  We make it extremely difficult in this country for a poor person to get out of poverty.  The average cost of goods and services purchased by a poor person is between double and triple the cost that a person with a bank account, access to money, and reliable transportation pays for those same goods and services.  For example, if I wake up at 3:00 in the morning and have a hankering for a banana, I could hop in my car, drive to Walmart and pay 49 cents a pound for my banana.  Someone without a car who lives in a poor neighborhood wakes up with the same hankering has the "convenience" of the 7-11 or the bodega where the same banana costs 85 cents per banana or approximately $1.60/pound.

  The banana is an example I happen to know because I just looked at a six different convenience stores within walking distance of poor neighborhoods in Colorado Springs and that's what they are charging this week.  But there are really good comprehensive studies comparing prices of a broad range of products (at least as broad as these convenience markets carry) and the banana is not an isolated example. 

  Even larger grocery stores located in poor neighborhoods inflate their prices.  Even the Walmarts that are located closer to poor neighborhoods charge more.  Don't believe me?  Take a drive around your town and compare the price of a tomato, a gallon of milk, toilet paper, and bologna at five different Walmarts.  I've given that challenge a dozen times over the past three to four months and I've never had anyone call me back and say, "You were wrong, they charged the exact same price for tomatoes at every Walmart in town."  It may sound like I'm picking on Walmart, I'm not.  I just know that there is more likely to be a number of Walmarts close by than any other large grocery chain because those tend to be regional. 

  In my work, I literally spend equal parts of my day with very poor people and with millionaires.  The poor people are buying the 85 cent bananas and the rich people are going to Sam's Club or Costco (or they send the help ...) and paying 29 cents a pound.  Because of the nature of my organization and their commitment to help, I don't hear the wealthy people I hang around with saying stupid things like "Well, if they would just try a little harder they could do so much better."  But I do hear that ALL the time from people who don't know what it's like. 

  Oh and the importance of that transportation?  The Ways to Work program has done studies of people without a car coming off public assistance.  When those people are able to get a car, fewer than 13% of them EVER go back for any kind of additional assistance.  There are additional comprehensive studies by the Brookings Institute and others that demonstrate the same statistics.  So we know that it is vital that poor people get access to cars.  But again, they have that barrier because they have poor or no credit and no chance of being approved for traditional financing.  Their options are usually limited to the "Buy here/Pay here" places who sell cars inflated to as much as 200% of their book value and charge 21% interest. 

  Our program, Ways to Work, BONNIE CLAC, and others around the country work with these people to help get them car loans at reasonable rates.  And that's another thing our system can be used for.  Once the person has established a track record using the electronic account for a period of time, that person is eligible to apply for a car loan with us that may be granted regardless of their credit score and can be used both to get them reliable transportation and improve that score so they can transition to conventional services.

  This is America where we believe in the myth that any person with a job can rise above poverty and have a "good" life.  But the myth simply isn't true anymore if it ever was.  There are millions of people in this country who are employed full time and don't make enough money to put themselves and their families above the poverty threshold.  The direct cost to you the taxpayer of those people being in poverty was $360,000,000,000 in direct public assistance last year.  That's over $4000 per taxpayer or $31,000 per poor person.  I'm not even going to ask if you're happy about paying that bill.

  There are some people who don't work, don't want to work, and will never make the choices necessary to try to do better.  We can't help them.  But the other 27,000,000 of them are a different story.  And maybe it starts with helping them get access to financial services and bananas for 49 cents a pound.

   

  • 6:49 am
  • 22 Comments