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Wednesday, December 17, 2014

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Cascade: No. 84, Winter 2014

Why Do the Unbanked Use Alternative Financial Services?*

Lisa Servon lectures and conducts research on urban poverty, community development, economic development, and issues of gender and race. As part of her research, she worked for four months last year as a teller at RiteCheck, a check cashing business in the South Bronx; worked for two weeks in October 2013 as a teller and collections agent at Check Center, a check casher and payday lender in Oakland, CA; and staffed a hotline in Virginia for people having difficulties with payday loans.1 She shares what she learned in these positions in the following interview.

What are the trends regarding the use of alternative financial services (AFS) by the unbanked (people without bank accounts) and underbanked (those who have bank accounts but rely on AFS such as check cashing and payday lending)?

Lisa J. Servon at RiteCheckLisa J. Servon at RiteCheck

Servon: A Federal Deposit Insurance Corporation (FDIC) survey conducted in 2011 found that one-quarter of all households — including 65 percent of unbanked households — reported using at least one AFS product between June 2010 and June 2011.2 The survey found that transaction AFS, such as nonbank money orders, nonbank check cashing, and nonbank remittances, have been used by 39.1 percent of all U.S. households.3

Policymakers, consumer advocates, and researchers have expanded their efforts to encourage the unbanked to open bank accounts and the underbanked to increase their use of such accounts. One such effort is the Bank On initiative, in which local governments work with banks and credit unions to try to remove barriers to financial access.4

The efforts are based on several assumptions, such as banks are a better choice for people than AFS providers, people choose which institutions to use based on financial criteria alone, and low-income people must lack basic financial literacy skills if they choose AFS providers over banks.

What did you learn from your work at the check cashing businesses and the hotline?

Servon: Most of the customers I worked with and interviewed at RiteCheck made informed choices about how and where they got their financial needs met. I found that banks were not the best choice for most check casher customers, many of whom either currently had a bank account or had one in the past.

At check cashers, fees are more transparent than they are at banks, the hours and locations are convenient, the services provided are what customers need, and customer service is excellent. It’s true that the fees on individual transactions at check cashers are high; this is one way in which it’s expensive to be poor. But most of the RiteCheck customers I interviewed had done the math and found that it was less expensive to use RiteCheck than to use a bank. In their experience, required minimum balances and fees for everything from ATM usage to account maintenance were going up.

The customers I spoke with preferred to pay predictable flat fees that they understand rather than incur unexpected charges and overdraft fees. Customers found overdraft fees particularly hard to manage. The people who frequent check cashers tend to live from check to check and could not always predict when the checks they deposited would clear and when the checks they wrote would be cashed.

What were the typical financial needs of the customers who frequently visited check cashers?

Servon: At RiteCheck, a one-stop shop open 24/7, customers typically came in on paydays with a paycheck and a stack of bills. They cashed their paychecks and then divided up the cash among the bills they had to pay (sometimes not paying them all in full) and either purchased money orders in the amount of the payments or had us pay the bills electronically. They knew exactly what they had paid and how much money they had left until they received their next check.

The highest volume of transactions occurred at the beginning and end of the month when customers cashed their government benefit checks. Many customers paid $30 a year to have Supplemental Security Income checks sent electronically to the store, rather than by mail to their home address, to get access to the funds one or two days earlier.

How would you describe interactions between employees and customers?

Servon: When I asked customers what they got at the check casher that they did not get at a bank, the words “service,” “trust,” and “respect” came up repeatedly. At Check Center, I participated in an all-day customer service training session in which I was coached on how to learn customers’ names and how to use the names at least three times during any transaction.

Tellers treated the customers as individuals and went the extra mile to assist them. They sometimes made policy exceptions for regular customers. We regularly got tips at RiteCheck, and frequent customers noticed if one of us was sick and asked about us.

Do you have any concluding thoughts based on your experience?

Servon: There’s a large gap between the rhetoric of policymakers and the lived reality of the low-income people using check cashers. If we really want to help low-income people have better access to financial services, we have to listen to what they need instead of assuming that what we do is best for them.

Lisa Servon may be contacted at 212-229-5400, ext. 3905 or servonL@newschool.edu; E-Mail Address http://ow.ly/tL6FX. External Link