Besides ads for food, college and the occasional “If you see something, say something” poster, I’ve noticed a subtle series of advertisements on the New York subway system that targets people low on cash. “Need a facelift?” they ask. “We’ve got a layaway plan that can get you looking hot now and paying for it later.” And others invite, “Sell your gold jewelry for a quick buck!” or “Get your payday loan at the convenience store.” I’ve been filing these away in my head as I ride to work or to the market.
It goes beyond the subway too. Up and down the blocks of lower-income neighborhoods (and you’ll see this in any city, I guarantee it) are payday loan shops, instant check-cashers and other economic ventures that cater to people living paycheck to paycheck. Their “good deals” attract people, but their fees and interest rates ensure months of debt—ultimately a substantial loss to those who participate. It’s because of this that I’m disappointed at the frequency with which I see instant check cashing places in my neighborhood rather than banks. It’s because of this that the subway ads promising to squander your money make me angry.
Or at least, that’s how I used to feel. Last week, however, I read an article in The Atlantic Cities by an urban policy professor at the New School who has thoroughly studied “alternative financial services,” and it changed my mind. First, the author, Lisa Servon, did away with the idea that people who use these services lack a bank account. In fact, although “17 million nationwide are unbanked […] 43 million have a bank account but also continue to use alternative financial services providers.”
Why would someone choose to spend extra money to cash a check when he could just take it to the bank? The Atlantic article continues by pointing out that, for one thing, banks aren’t easily accessible in many neighborhoods. For example, in Manhattan there’s about one bank for every 3,000 residents. The South Bronx, however, has only one bank per 20,000 residents. This gap in banking services for lower income people is the result of decades of redlining, and it is one reason that alternative financial services appear in such neighborhoods.
Without banks to serve them (and with the trending depersonalization of banking nationwide), Lisa Servon notes that people use check cashers because they are friendly, trustworthy faces in a local business—not unlike the woman who sells you bread in the morning or the man who works at the library down the block. When a big money bank has deemed you unreliable or unworthy, chances are you’ll seek service closer to home with employees who actually value your patronage.
Beyond the case for familiarity with your check casher though, the most eye-opening piece of the Atlantic story comes in the revelation that over the long term, alternative financial services are probably not more expensive than traditional banking for the people that use them. Servon writes, “The rapidly increasing cost of bounced checked fees and late payment penalties has driven many customers away from banks, particularly those who live close to the edge.” Suddenly, paying $2.50 to get your paycheck cashed at the end of the month doesn’t seem so unwise.
Without a doubt, pay day loan providers and check cashers are capitalizing on their customers’ lack of sound banking options, but they’re also making up for an honest lack of banks. So, do these alternative financial options benefit our cities at large? Lisa Servon thinks the effect may be both positive and negative. On the one hand, alternative financial services perpetuate a paycheck-to-paycheck lifestyle for many residents in our cities because they don’t offer the option to save money. I tend to agree. As long as an instant check cashing business exists in my neighborhood, I’ll know that poverty maintains its hold. Alternative financial operations do nothing to change this.
On the other hand, they indicate a persistent need for options beyond traditional banking. Some people will always choose to keep their money outside of a bank because they mistrust the institution. Others are excluded from banking due to their immigration status, their income, or their family situation. As long as banks keep their storefronts and their power in our cities, they should strive to serve a greater swath of people and we, as citizens, should hold them to that standard.