Nearly 28 million Americans live without a bank account. As a kid, I used to think people without bank accounts were like Scrooge McDuck from Duck Tales, who literally would go swimming in his money bin. But this is far from the truth.
Almost all of the unbanked will struggle to pass the credit check in order to rent an apartment, subscribe to a cell phone plan, or get a car loan. If having a bank account is critical in today's world, why doesn't everyone have one?
So who exactly are the people who stand in long lines at Western Unions on Fridays for the privilege of paying huge fees to cash their paychecks? Many assume that they're conspiracy theorists who hide cash under their mattress or criminals avoiding a paper trail.
That would be way more interesting than the reality. Most of those millions are the working poor, who are disproportionately young or new to the country. The costs of not having a bank account are stark: $40 per paycheck in fees alone and $360,000 of wealth destroyed over a lifetime. This doesn't even begin to count the lost benefits of tax-advantaged retirement, health, and college savings accounts. Nor does it count the money wiped away by astronomical interests rates, often about 1,000% APR charged by payday lenders.
What's troubling is that the problem is not due to traditional banks ignoring poor communities. Nearly 90% of these check-cashing services and payday lenders are located within one mile of a regular bank.
Some blame the banks. They believe that consumers have bad experiences with big fees from overdrafts or minimum balance requirements, so they would rather pay a fee upfront than deal with a surprise later.
Others point to culture. According to the Appleseed Foundation, 63% of immigrants from Latin America do not have a bank account and 60% of that same group sends money to relatives abroad. Many of these immigrants never used banking products and are not aware that there are even options apart from the neighborhood check casher. Unfortunately, many of their children will also be unbanked well into adulthood, continuing a vicious cycle.
There have been mild improvements -- many employers now pay their minimum wage employees with prepaid debit cards. But those two are full of fees for using the card, and it doesn't help build a credit history. Walmart is entering this $8 billion business by offering low-cost check-cashing and money orders, potentially saving low-income families thousands of dollars per year, but this still won't solve the problem.
So what can we do to stop the endless cycle of a predatory industry holding back the working poor from getting ahead? And how can we get children to learn some of the basics of personal finance when their parents can't teach them?
Require employers to offer a direct deposit option. The National Federation of Independent Business estimates that it's cheaper for employers to pay their employees through direct deposit than through paper checks. With more direct deposit, workers can easily open checking accounts, since many banks waive minimum balance requirements with direct deposit.
Offer newborn babies bank accounts. The federal government should work with banks to offer a no-fee product to all children. The accounts should allow tax-advantaged contributions for college savings and allow families to monitor their accounts online so kids can be better prepared as an adult to understand financial matters. They'll be prepared to accept checks or direct deposit at their first jobs without foregoing part of their pay to fees.
Regulate payday lenders and check-cashing establishments. The proposed Consumer Financial Protection Agency could help bring better fee disclosure practices and fairness to the largely unregulated industry of nontraditional financial services. 1,000% APR is not financial innovation -- it's exploitation.
Until we get more of the unbanked into the financial system, we risk keeping millions of Americans living paycheck to paycheck unable to get ahead and build a better life. As easy as it is to hate banks, the truth is that we need them and we must do more to restore trust in the industry.