Penn’s Lisa Servon discusses her new book, ‘The Unbanking Of America, How the New Middle Class Survives.’
The check-cashing and payday lending industries have long been marked for reforms because of the high interest rates they charge the working poor. But now even the middle class — college graduates who work and own homes — have trouble making ends meet and thus are taking out high-interest loans as well, writes Lisa Servon, University of Pennsylvania professor of city and regional planning, in her new book, The Unbanking Of America: How the New Middle Class Survives.
The American Dream that has worked for baby boomers seems to be slipping away from millennials. Meanwhile, big banks continue to charge consumers high fees. This broken banking and credit system is making people turn to alternatives, such as personal loan startups. Servon discussed insights from her book on the [email protected] show, part of Wharton Business Radio that airs on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
An edited transcript of the conversation follows.
[email protected]: How much of an impact has the 2008 recession had on the U.S. banking regulation?
Lisa Servon: Banks were subject to a lot of new regulation following the recession, such as the 2009 creation of the Consumer Financial Protection Bureau, and the  Dodd-Frank Act. Some of that is having a surprising effect in that banks feel like they got slapped so much for engaging in subprime loans and selling subprime credit cards that they’re actually retreating even more from that market because they fear they’ll get slapped again. That’s creating a problem for lower-income and moderate-income people who need affordable bank [loans].
[email protected]: Even with the higher levels of regulation, banks feel they can get away with a lot, Wells Fargo being a perfect example.
Servon: We see hundreds of millions of dollars levied in fines on [banks] — Wells Fargo in recent years, on Citibank for selling identity protection on accounts that didn’t exist — you name it. All four of the biggest banks and a lot of the other ones are continuing to engage in consumer practices that are simply not good for people, and sometimes are illegal.
[email protected]: A lot of times the fines are just a drop in the bucket because of their massive size.
Servon: I liken it to FedEx. It’s part of FedEx’s business model to account for the parking tickets they pay for double parking. I think it’s the same for banks. It sounds like a lot of money to us, but it’s a very small percentage of their operating budget.
“American workers, even if they have full time jobs, are in a much more tenuous position than they used to be.”
[email protected]: For this book, you did the deep dive into the banking industry’s problems by actually going to work at some of these locations, such as payday lenders and check cashing facilities, to get an idea of the impact on the consumer.
Servon: I was looking at reports from the FDIC (Federal Deposit Insurance Corporation) going back six years that were starting to count the number of people with bank accounts. People were classified as banked, unbanked and under-banked. Eight percent of Americans have no bank account at all. Another 20% are under-banked, which means they have a bank account, but we have no idea whether they use it. They’re also using alternative financial services like check cashers.
The implication, if you read what the policy makers and consumer advocates say, is that something’s wrong. People are making the wrong decisions by making the choices that they do and not having a bank account. Check cashing and payday lending industries have skyrocketed in size. People who live in neighborhoods with low incomes know where every penny goes. So why are they making this choice? I felt like I needed to go as close as I could to the problem, or to the question, in order to answer it.
[email protected]: With some of these facilities, especially for check cashing, you’re paying for the right to cash your check. If you have a bank account you don’t pay anything to deposit your check into your account.
Servon: That’s right. But one of the primary reasons people pay [check cashing facilities] to get their own money is that they can get it immediately. If you don’t have a lot of money in your bank account, time is money, right? If I get that paycheck on a Friday and put it in my bank account, it’s not going to clear until Wednesday. In the meantime, I need to pay bills, I need to buy food for my kids. If I write a check that goes through before my check clears, I’m going to get hit with an overdraft fee of more than $30 that’s definitely more costly than using the check casher.
[email protected]: It could also be businesspeople that have to pay employees in cash because maybe they’re undocumented workers, or something like that. So there are many reasons why people go this route instead of traditional banking.
Servon: That’s right. I really wanted to shine a light on the situations that people are in. What I learned is that a bank account doesn’t work best for everyone. Given the situations that people are in, they’re actually making logical, rational decisions, a lot of the time. This isn’t necessarily to defend or advocate for alternative financial services providers, but rather to show that we lack good options. And those options — safe, affordable services are harder and harder to come by.
[email protected]: Are the big banks even thinking along the lines of being able to provide these other options for consumers so they could grow their base?
Servon: That’s a great question. I had the same one. In order to figure that out I had to go to Washington and talk to many people working in banking policy — talk to bankers. After deregulation in the 1980s, banks could get bigger. They could merge [with other banks] or with insurance companies and other types of financial services firms, and create different products. Their income from accounts like yours and mine has become a smaller part of their overall income after they discovered [more opportunities for] fee income. Banks are shifting from a model based on interest income that fluctuated and was undependable, to one of fee income.
That combination of moving farther away from the customer, making money in other ways, and then figuring out how to get as much fee income as possible created a model in which banks were working not so much in the public interest, but solely for profitability and often, as you mentioned, using deceptive practices to do it.
[email protected]: The other piece to this is the shift towards online banking in general.
Servon: That’s right. I open the book with a story of going to the bank when I was a kid with my dad and getting a passbook and having it stamped. It’s like a relic now. You could put my passbook in a museum.
That’s certainly not the kind of banking my kids have experienced. We go to the ATM and there’s