What Is Driving The ‘Unbanking Of America’?

In 2011, she notes, Americans paid $38 billion just in overdraft fees.

.. But what people told me was that they could predict those costs. The costs were obvious to them. And if they made one mistake at their bank, that resulted in an overdraft, it would easily be more than that – those costs. And those kinds of things, when you’re living very close to the margin, they happen all the time – right? – overdrafting your account. Or, for example, what people found was that if they wanted to deposit a check on Thursday or Friday because they needed the money over the weekend, they wouldn’t get it till Tuesday or Wednesday. And the benefit of having the money immediately far outweighed the cost of depositing it into the account for perhaps lesser fees but not getting it for several days. So cost was one of the reasons.

.. Transparency was the second. People, those costs that I just listed, they knew what they were. They were posted.

.. You had one guy who was a contractor come in with – I think the check was for $5,000 he’d gotten on a job. And he paid the almost 2 percent charge, so it cost him $97.50…


DAVIES: …To get that check cashed. It would have been free from his bank…

SERVON: That’s right.

DAVIES: …If he’d had a banking account. Why would he come to a check-cashing place?

SERVON: Well, it’s interesting that you ask because I asked the same question, and that really – experiences like that really showed me why I needed to be behind that window because even though I was working there and dealing with people every single day, I still, with my own biases and having grown up using mainstream financial services, didn’t get that. And so it was one of my tellers who helped me understand it, and she said, you know, Carlos (ph) has this small construction firm. It’s Thursday today when we’re counting the check. He probably has to pay his guys tomorrow on Friday, and they’re probably not documented or they don’t have bank accounts, and he’s got to pay him in cash. So if he deposits that $5,000 check at his account, he can’t pay his guys tomorrow.

.. DAVIES: And some people look at that and say that’s predatory.

SERVON: Right.

DAVIES: How did the customers regard the check-cashing agency?

SERVON: The people who came, our customers, really liked it. They were loyal. They felt like they got treated better than they got treated at the banks. And they often tipped us actually, which was really interesting.

.. So here you had mostly lower income folks who were actually saying, you know what? You gave me really good service and you treated me right, and so I’m going to give you a little bit something back. And for most of the tellers, they were maybe – most of the tellers that I knew actually had bank accounts. But there was this sense of community. You know, you help me out, I’ll help you out. And so I didn’t hear a single person at the check casher say they charge too much.

.. Let’s talk a little bit about how banks have changed. Compare how they used to make money from how they’ve come to make money.

SERVON: So, you know, in the ’50s, ’60s, ’70s, banks were mostly making their money from interest, from small loans and things like that, and from their depositors, from people who held accounts like my parents did and like I did. And they didn’t make a ton of money.

.. So there wasn’t this sense of huge income inequality between people in the finance sector and everybody else like there is now. And that was known as the 363 era of banking, which I think is super funny. So you would get 3 percent on your savings account, you’d pay 6 percent on a loan and bankers were allowed to leave at 3 to go to the golf course, right?

.. And one of the things that they did was discover fees. And bankers never liked giving overdraft protection. It was something that they would do for their more well-heeled customers, but they saw it as an inconvenience.

DAVIES: Well, back then, if you had an overdraft, what would happen to you?

SERVON: You know, they would tell you about it. You’d go to the banker and tell them what happened. And they would just, you know, deal with it. But you wouldn’t get charged $30 every time it happened or another $30 if you hadn’t rectified the situation in five days. So it was a very different story. It had to do with that relationship that we talked about.

.. And so banks realized, with the help of some interesting consultants who kind of walked around and said, look, if you just tweak these numbers in your computer system, you can actually make a whole lot of money.

.. a lot of these kinds of things that consumers have been, quote, unquote, “offered” as part of their bank accounts in the last 20 years or so, maybe even initially, they seemed like a good idea. But they were kind of twisted in a way that resulted in banks essentially tricking people. And I had lots of people who I talked to in D.C., where I did a lot of research, say, yeah, banking became about tricking people and figuring out how to manipulate and deceive them.

And, you know, the fact is that that’s what the free market is set up for.

.. they’re very dependent on those fees, now. And they make most of them, also, from lower-income customers who can’t afford to keep a minimum balance in their account. So it’s the overdraft fees, it’s also monthly service fees.

.. talk about something called debt resequencing.

.. Yeah, so this is a really amazing practice. What banks will do – and I think – and many, many of them still do this even though the light’s been shined on it and shown to be a rather unethical practice – is that if you have, say, $100 in your account and you have a few checks that you’ve written – one for $75 and one for $125 and one for $25, the bank will look at those three charges that are going to hit your account, and it will order them in a way to maximize the overdraft fees.

.. So if they put the 25 one first, that would clear. And then you’d be paying two overdraft fees, right? Because the other two checks would put you over the limit. But if they want to maximize their overdraft fees, they’ll put that 125 one first. And then they’ll get three overdraft fees instead.


.. You know, even if I hit rock bottom, I’d have family and friends who would loan me a couple hundred dollars. But more than half the people in this country could not come up with $2,000 in the event of an emergency. And that’s not just from their own pockets or assets. It’s from their extended network. So this is a big problem, and it’s not just affecting low-income people.

.. I think that’s the crux of the issue is that people are not necessarily using the loans the way that they’re sold. Right? If it’s sold as a two-week loan, but you’re keeping it out for three months or four months, then there’s a difference between, you know, what the product is being sold to do and how people are using it. And that’s obviously a problem. The real question is if you don’t have any other options or choices, is it better to take out that loan even at the high cost that it is or not take it out at all? And so many of the people that I talked to and interviewed said I’m glad that that money was there for me.

.. credit unions are a great option for people if you have access to one. Credit unions are cooperatives. Their first goal is not about maximizing profit for shareholders because as an account holder, you are an owner of the cooperative.

.. I also think that government could rate every financial services provider. You know, in some cities – I live in New York – there are big, blue letters in the window of every restaurant. If you get an A, it means your kitchen…

DAVIES: From the Health Department.

SERVON: …From the Health Department – your kitchen passed inspection with flying colors. I don’t order Thai food from the restaurants that have B’s and C’s in my neighborhood because I don’t know what’s going on in those kitchens, and I don’t have to check the Department of Health’s website anymore. That letter grade is right in the window.