Last week's news that Congress and state officials are working to crack down on the payday loan industry was welcome--and overdue. For too long, America has been facing a crisis hiding in plain sight: Nearly 1/3 of the U.S. population is unbanked or underbanked. These are men and women who either don't use banks at all, or rely on check cashing services, payday loans, money orders and pawn shops for most of their financial needs.
The unbanked and underbanked -- who are mainly low-to-moderate income earners -- face tremendous obstacles as a result. Some of the most important pathways to middle class American life become out of reach when one has little or no credit history. Buying a car or house, or sending a child to college can become close to impossible.
Those outside the mainstream financial system incur outsized expenses for basic financial services. Though they are least able to afford it, the underbanked have to pay far more than most Americans for basic transactions.
Take turning a paycheck into money you can actually use, for instance. For Americans with a bank account, depositing a paycheck is usually free and often automatic via direct deposit. The unbanked, however, often have to pay 4 -- 5 percent of the check's value in fees just to get the cash. And check-cashing services don't offer options like savings accounts that make it easier for their customers to put money away for the future.
Getting a loan is even worse. Many unbanked or underbanked people in need of cash before their next paycheck turn to payday lenders, which can charge annual interest rates of 400 percent or higher. As a result, those who are already struggling to make ends meet often end up in a cycle of debt that is nearly impossible to break.
The unbanked and underbanked are more likely to be minorities, immigrants or young people -- all groups whose prosperity is closely tied to our future. If we are going to expand the middle class, strengthen our economy and address damaging income inequality, more people have to be able to participate in our financial system. Everyone needs to do their part: educational institutions, nonprofits, community groups, governments and banks alike.
Education is paramount when it comes to understanding financial services costs. A 2012 study found 61 percent of American adults couldn't correctly answer more than three out of five questions on a basic financial literacy test. Ariva, Coalition for Debtor Education, and Neighborhood Trust Financial Partners are examples of organizations in New York City that have made inroads into educating vulnerable populations about how to improve their financial affairs. But these types of organizations alone will not solve the problem.
Government entities also need to protect consumers against predatory lending and provide low-cost and readily available options for the unbanked and underbanked.
In 2012, a government-sponsored program out of Manitoba, Canada, was launched to reduce predatory lending. The program, Recognition Counts, provides micro loans to immigrants to help pay for training and certification necessary to obtain better-paying jobs. In 2013, the NYC Economic Development Corporation launched a similar pilot program, which partially guarantees loans to immigrants. A partnership among four local organizations and Amalgamated Bank, this program offers qualified immigrant borrowers access to $1,000 -- $10,000 loans with an interest rate of 9.99 percent.
Other promising city initiatives have emerged in recent years to lower the barriers to opening a bank account. In 2006, for instance, San Francisco worked with the Federal Reserve, local financial institutions and community groups to enable banks to accept city-issued and some foreign-issued identification cards, charge lower fees and eliminate minimum balance requirements. More than 11,000 accounts were created in the first year alone among an estimated 50,000 previously unbanked households. By 2011, more than 70 cities and six states had started or were planning similar initiatives.
Many community banks and credit unions already have programs in place to help reach underserved populations, sometimes by offering alternative financial products as a way to introduce people to more traditional banking services. In June, 2012, for instance, Carver Federal Savings Bank started piloting ATM-like kiosks featuring services like check cashing in low-income New York City neighborhoods -- offering convenience as well as a path toward mainstream banking products. Deborah Wright, CEO of Carver, reported that 40 percent of kiosk users in one area have gone on to open bank accounts.
Recently the New York City Council introduced legislation to provide New Yorkers with municipal identification cards. Once the cards have been developed and made accessible, banks and credit unions will be able to launch new products and initiatives if they accept this form of identification.
These are exactly the kind of win-win situations we should be seeing more of across the country -- with populations able to enter the banking system and therefore become more active participants in the economy, at the same time that banks are able to reap the benefits of an expanded client base and more economically vibrant communities.
There is a lot that must be done to ensure everyone -- not just those with means -- has the chance to be a full participant in our economy. While that goal may seem insurmountable, the fact is that access to our financial system is an important step toward reaching it.