Consumers are from Mars. Banks come from Venus

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Jim worked as a technical support provider for a defense contractor until shortly after September 11. He had a house and two cars and easily supported his family. But then he was fired. He struggled for the next 15 years, sometimes working as a car salesman or other job, sometimes collecting unemployment. His wife was diagnosed with cancer and Jim with diabetes, leaving them with big medical bills. Then her stepson lost his job and moved in with them and their three children. “I was the sole breadwinner,” Jim told me. “And it was too much for me to handle.” He applied for a loan from his bank but was refused. So he took out payday loans to make ends meet.

Jim (not her real name) was my client when, as part of a research project, I took a break from my career as a college professor to work for alternative financial service providers. Those like Jim, who depend on high-cost credit, are part of the “new middle class,” a group who, although working hard and playing by the rules, still live in a state of chronic financial uncertainty. Almost half of Americans now live paycheck to paycheck and a third has no savings. Fifty-seven percent couldn’t find $ 500 in the event of an emergency. Instability is the new normal.

To understand why so many people used alternative financial services, I worked as a cashier in a check bank in the South Bronx and as a payday lender and loan collector in Oakland, California. I quickly learned that my clients like Jim couldn’t plan, budget, or save as we are all told.

I’ve also learned that traditional financial service providers like banks haven’t adjusted their business models to accommodate the growing group of financially insecure Americans. There is a disconnect between the financial needs of Americans and what most traditional financial service providers offer.

“I used to walk into my bank and they knew me by name,” Jim says. “If I asked for a loan, they’d say, ‘Oh yeah, you’ve been coming here for 13 years and you’ve got two direct deposits in our bank and everything. It shouldn’t be a problem. Now they say, “Well your FICO is this or the credit bureau says that. We can’t lend you the money. Even though we see you weekly and take your direct deposit. We are happy to make money with your money, but we don’t really want to help you. “This change is in part the result of the virtual disappearance of small banks, which tend to be more willing to work with their customers to offer them loans. They take credit scores into account, but also look at other factors. Large banks tend to rely on a less flexible set of requirements, defined by a central headquarters away from the neighborhood branch. Jim’s experiences are in tune with current banking trends; since 2000, one in four small banks have closed, leaving a lending landscape dominated by large banks less willing to work with clients on a case-by-case basis.

Rising bank account fees also make it harder for consumers to keep accounts. The average charge per overdraft increased from $ 21.57 in 1998 to $ 31.26 in 2012. In addition, the requirement of banks to maintain minimum monthly balances, the speed with which overdraft fees are taken, and the days between depositing a check and accessing the money, all of this. ill-suited to the growing number of Americans who face unpredictable cash flow. A young man wrote to me after reading an article I published. He expressed his frustration, saying, “I have attempted to maintain a bank account with TD Bank over the past year with little success. I currently have two jobs and still struggle to keep a healthy positive balance. I had my account closed three times and practically gave up the idea of ​​maintaining a checking account.

More and more Americans with characteristics we generally associate with the middle class are now feeling the effects. Clarity Services, a subprime credit bureau that assesses the creditworthiness of potential borrowers with less than stellar credit scores, found that a segment of more stable and better paying borrowers in its database had grown by more than 500 % between February 2010 and August 2011. These are the people who formed the core of the banks’ target market. Seven years ago, consumers in the Clarity database experienced a “life-altering event” – such as the loss of a job, a medical problem, or a car breakdown – every 87 days. In 2017, these events occur every 30 days on average.

The four mega-banks that hold half of our deposits are doing little to help financially insecure Americans cope with financial instability. They seem to be content to keep their wealthiest customers happy while figuring out how to maximize the fees the rest of us pay. Banking practices have not changed to accommodate the less predictable nature of work. Lack of access to credit affects people’s ability to invest in their homes and businesses.

The innovation needed comes from small regional banks like KeyBank, which provides check and small loan cashing services to its clients, and fintech startups like Same, an app that helps users deal with unpredictable income. By analyzing data from past paychecks, Even works with a user to arrive at an average paycheck amount and ensures that the user receives that average each month, whether the user’s checks are lower or higher. . For example, if the established average is $ 500 and the user receives a check for $ 450, Even will deposit $ 50 into the user’s bank account. When the user receives a salary of more than $ 500, Even sets aside the excess or uses it to pay off previously “borrowed” money.

Of course, these interventions cannot solve the deeper problems that are at the root of widespread financial instability – decades of declining wages, increased recourse to part-time work and on-demand workers, and rising costs for child care and health care. But they allow some to cope better with this new reality. And as long as the biggest banks fail to fill the void, they are all we have.

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