Our banking system seems fantastic if you’re living in a middle-class bubble.
We get a safe place to store our money with instant access whenever needed. We also get paid in interest for safely storing our cash.
But these systems don’t work for everyone. Millions of the unbanked poor know that the system won’t help them.
Banks keep people poor.
Millions of Unbanked
Approximately 6% of American adults (close to 20 million people) are “unbanked,” that is, they don’t have a bank account.
Although some admit they avoid banking because they don’t trust the system, most simply can’t afford it.
Banks may help you and me, but they do so at a cost. They harm poor people to make money.
How Banks Keep People Poor
Our financial institutions are complicit in America’s poverty trap. Banks keep disadvantaged people trapped in poverty.
They charge overdraft and account maintenance fees to those who can least afford them. They refuse to issue loans to those with a poor credit history and refuse to cash your check unless you’re a customer.
But they’re happy to offer prepaid cards with outrageous fees and blacklist the poorest customers.
The Privilege of No-Cost Checking Accounts
Most banks offer free checking – but these accounts come with a giant asterisk.
As long as you have a job that offers direct deposit and make enough money to spend a few bucks each month, you’ll never have to worry about paying an account maintenance fee.
But the second you lose your job, you’ll discover that free checking isn’t free. Each bank has different requirements for access to “free” checking, but most require either/or direct deposit, maintaining a certain balance, and making an arbitrary amount of transactions each month.
If you fail to meet those requirements, they will charge you.
People living in poverty struggle to meet these arbitrary requirements. They don’t have the privilege of a no-cost checking account.
Many work for cash or tips, so they don’t get direct deposit. They barely make enough money to survive, so they can’t maintain a minimum balance. They can’t even save because the bank requires them to use their card to avoid fees.
People remain unbanked because they can’t afford to pay for bank accounts – the same accounts people with money get for free.
Banks Harm Poor People with Overdraft Fees
Banks charge outrageous overdraft fees, and they’re often sneaky about calculating overdrafts to siphon as much money out of people’s pockets as possible.
Many financial institutions charge up to $35 for a single overdraft, but they don’t stop there. They will also count the largest transaction first to charge the maximum fees.
Let’s say Joe has fifty bucks in his account. He buys a pop for a dollar, then some five-dollar snacks. Next, he puts 40 bucks worth of gas in his car. Finally, he goes and picks up dinner for his family for 20 bucks.
The bank won’t process those transactions in order and only charge one overdraft fee. Instead, They will process the forty-dollar transaction first, then charge an overdraft fee on the twenty-dollar transaction, the five-dollar transaction, and the one-dollar transaction.
What should have been a single overdraft fee ballooned into three. Now Joe has to pay over $100 to get out of the red. It’s hard to come up with $35 for a single fee when living paycheck to paycheck, so $100 seems impossible.
But it doesn’t stop there—some banks will charge another overdraft fee if the original fees aren’t paid within a few days, making it impossible to recover.
Banks Blacklist Poor Costumers
If you get into financial trouble with the banks, you risk losing access to their services. Joe couldn’t pay his overdraft fees, so the bank canceled his account. But he still owes them money, so he can’t open a new account.
He’s effectively blacklisted from the bank.
If the bank reports the delinquency to the credit reporting agencies and it appears on his credit report, he may be denied access to banking at every financial institution.
He’s now blacklisted from banking.
If you’re blocked, you no longer have access to a checking account, and getting ahead will be even more challenging.
You can’t work anywhere requiring direct deposit, and you must rely on check-cashing services to access your hard-earned money.
The Problem with Check-Cashing Services
Check-cashing services allow the unbanked to cash checks but charge outrageous fees for the pleasure. People without access to checking accounts must pay to access their own money.
Walmart is probably the best option for check cashing if you don’t have a bank account, as they only charge three dollars for checks up to $1000. But even at that, three dollars is a lot for the poorest amongst us. And the poorer still may not even have access to a Walmart in their neighborhoods.
Some people’s only option is to cash a check at those notorious payday lending stores or fly by night check-cashing stores. These establishments can charge up to 5% to cash a check – that’s 50 bucks on a $1000 check!
Can you imagine paying close to fifty dollars just to access your money? The poorest amongst us get caught up in this cycle, making it even harder for them to get ahead.
Pre-Paid Cards
Companies and financial institutions have recently started offering pre-paid cards to unbanked customers. Some workplaces offer to pay employees with a card, while some banks will allow blacklisted customers to put their paychecks on a card rather than in an account.
Pre-paid cards work like debit cards but aren’t tied to accounts. They’re more like gift cards, where you put money on them and then can use them to pay for things until the money is gone.
Although pre-paid cards offer the unbanked flexibility, they come with massive fees. Most charge a monthly fee, like checking accounts (which some waive if you opt for direct deposit), while others charge a fee for each transaction.
Imagine paying up to $4 every time you buy something! Now, imagine paying that much when you live paycheck to paycheck.
MORE:
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