On the way into work one morning, I caught an NPR FRESH AIR interview with Lisa Servon, author of “The Unbanking of America: How the New Middle Class Survives.” Lisa was describing her experiences behind the counter of a check cashing store, with amazing insight into the value drivers of those businesses.
It was a compelling story.
So much so that I sat in the NJCUL parking lot for twenty minutes to hear the rest of the interview.
The timing was fortuitous, because the planning meeting to discuss options for our 83rd Annual Meeting and Convention Keynote Speaker was scheduled for later that week—just enough time to order Lisa’s book and read it. As a result, it turned out to be a much shorter meeting and far less consensus-based process than anticipated—like about two minutes, with a pre-determined outcome from my perspective.
A Professor of City Planning at the University of Pennsylvania, Lisa will help us all understand why alternative banking systems have emerged as a central feature of our economy for the unbanked. Get ready to be surprised, and to have some of your basic assumptions not just challenged but debunked.
And we are fortunate to have Lisa join us in Atlantic City as our Keynote Speaker, thanks to the generosity of CUNA Mutual Group, who sponsored our keynote session speaker.
I had a chance to visit with Lisa for a brief interview to preview her presentation. Read on to get a sneak peek of what we—the “white hats” of the financial industry—can learn from a very unexpected place …the “underworld” of the industry: check cashers and payday lenders.
It is probably not what you think it is—to quote Lisa directly from the interview below: “There is a fundamental truth here—a lot of people do know what their options are, and they are making smarter choices than we give them credit for.”
Frankil: How did you get interested in this topic in the first place?
Servon: All of my work has been around community development and urban poverty, and I was teaching a course on gender development and finance. A credit union CEO came to talk to my class, and she asked if she could bring a friend of hers that ran a chain of check-cashing stores. I always thought of them as predatory and sleazy, and frankly thought it would make for an entertaining class session. Instead, a gentleman named Joe Coleman came in and made a compelling case that his businesses were serving his communities in a valuable way. It opened my eyes and those of my students, and then I did some research and saw how fast they were growing, and wanted to investigate further.
When you do research, you figure out what method best fits the problem. In this case, I wanted to get as close as possible to the business, which meant working at one of those places as a teller. I asked Joe Coleman, and he was open to it, and that’s how it all got started.
Frankil: Let’s start with a common terminology – most of us probably have an intuitive understanding of who falls into the category of ‘the unbanked.’ For me, I’d say it would be predominately low income consumers, and perhaps undocumented workers. That’s my cultural bias at work, thinking of who doesn’t have an account somewhere.
Servon: It is an accurate assumption that they are often low-income and undocumented, or informal workers. But I would challenge the way you’re using the term ‘unbanked.’ That implies that having a bank account is always the best solution, in the same sense that you would call someone without a higher degree uneducated. It is more appropriate to focus on choices and situations.
Poor people are not ignorant and stupid, and it is not that they don’t know any better- it is a much more complex story. In fact, from my experience, lower income consumers know far more than middle or upper income consumers where every dime goes.
Many just can’t afford a bank account, so it’s not the best option - or they haven’t been served well by banks or credit unions. Some were pushed out, for various reasons – others would say they don’t get well-served, that banks and credit unions don’t want them as a customer. For some, they can’t afford a three-day waiting period to have their checks cashed.
Many of the unbanked have very rational reasons for what they do.
Frankil: The other issue that we would tend to imagine is a causal factor is financial education – as in, if only we could reach those consumers and educate them, they would take advantage of the better deals at a credit union. Did you find that lack of financial literacy was an issue?
Servon: There is a difference between financial literacy and consumers knowing about credit unions as cooperatives and not-for-profit – one is an education issue, one is marketing.
Financial literacy in general is an issue in the country, and when we look at typical financial literacy programs there is not a whole lot of evidence that they make a real difference.
We do know that one-on-one coaching appears to be more effective than a big class, and that financial education is most effective when it comes at the point of making a decision, like buying a home or taking out student loans. Both of which represent specific knowledge they can use immediately. More research needs to be done to find out what works best.
But there is a fundamental truth here - a lot of people do know what their options are, and they are making smarter choices than we give them credit for.
Frankil: So let’s talk about the phrase ‘alternative financial services’ - we tend to think of check-cashers, pawn shops, and pay day lenders interchangeably. Is that fair?
Servon: There are some differences. Payday lenders are the most problematic in terms of the fees they charge, and the fact that they often know pretty well that the people who take the loans out are not likely to be able to pay them back when they are due, which increases the total amount they need to pay back. On the other hand, check cashers are all very transparent – consumers know the fees, and are often paying a price for liquidity to get their money immediately because they are facing an emergency or have other needs and can’t wait around to see whether they were accepted or rejected for a loan.
Frankil: Let me drill down on that issue of transparency. If you polled 100 credit union executives and asked them whether they were transparent, or at least more transparent than a payday lender, I’d hazard a guess that 100% would say yes, absolutely, But the reality is more complicated, isn’t it?
Servon: It’s sometimes hard to see yourself through the eyes of others, but no, in reality, credit unions aren’t more transparent. Think of check cashers as being like a fast food restaurant with a big, lit-up menu of list prices. If you imagine someone undocumented, or someone who didn’t grow up in this country using a bank or a credit union, a typical lobby environment doesn’t have a lot of signage telling you what is on offer. What are the products and services, and what are the costs. I can certainly see how from your perspective, offering many options is intended to meet member needs – for at least this demographic, it has the opposite effect. Whereas $1.50 to pay a bill at a check casher is both easily communicated and predictable.
Frankil: We tend to think of credit unions as being hyper-local, and focused on our surrounding communities and fields of membership. But I was surprised to see that there are more payday lenders in America than McDonald’s and Starbuck’s combined. That number is staggering, in terms of the ability to focus on the needs of a neighborhood – especially when you consider that payday lending is illegal in 13 States.
Servon: The businesses I worked in were very community oriented, the people that worked there really knew their customers. I know that credit unions use that same familiarity with members as an example of how they are different from banks, so the good news is that it can be very effective.
In this case, though, the sheer number of payday lenders is clearly a competitive issue. But this can still be a competitive advantage for a credit union if leveraged well. For example, a credit union may be more likely to make a small business loan than a bank based on a relationship, as opposed to just the numbers.
Frankil: What advice would you give to a credit union CEO that is looking to help unbanked consumers in their local community?
Servon: Focus on cost transparency and service issues. Show consumers why your credit union is a much less costly option than a check casher, and make sure that your products are transparent and that it is easy to understand the trade-offs between products and services. In particular, make sure that the front line has to be really service-oriented customer service training.
Consider whether there are other things that check cashers are doing that you can, too. For example, have lower monthly minimums, lower overdraft fees, and offer faster access to money – all things that are impactful to people living paycheck-to-paycheck.
To learn more about the unbanked, how lessons from Lisa’s experience can be applied in your credit union, and to get a signed copy of her book, join us at the NJCUL Annual Convention, October 22-24, 2017 at the Golden Nugget in Atlantic City. Visit www.njcuconvention.com for more information and to register.