Tuesday, December 08, 2009

The Unbanked: Xenophobia and Elite Paternalism

Sometimes a comment on a CD post is so good that it deserves its own post.  Milton Recht's comment below on this CD post about the "nonproblem" of "the unbanked" is one such example:

If one receives a check and wants to use it to pay a bill, it is difficult at a bank to accomplish the goal. If the check is deposited into a checking account without sufficient funds in the account to cover the check, it can be several days before the check clears. You cannot pay the bank to have the cash immediately. However, you can go to a check casher, pay a fee, have the cash immediately, and get a money order to pay the bill or pay your utility bill right there at the check casher with the funds from the check. Additionally, many hard working people cannot get to a bank during their working day and check cashers and other non-bank service providers are open at more convenient times, speak the foreign languages of their customers, and if necessary, easily remit the funds to another country.

The reason there are unbanked is that banks either do not provide the needed service within the necessary time frame of people who need to live from check to check, or the total cost, including things like getting your electric turned off, are higher at banks than at the alternatives that the unbanked use.

The FDIC fails to understand it is a rational economic decision that the unbanked are making. Unless there are unmet needs of the unbanked, it should leave well enough alone. If banks could provide the needed services at a lower price and more conveniently, the banks will increase their market share of this clientele. Otherwise, the unbanked population will remain. The non-bank providers (check cashing and payday-loan companies) are filling a market need that traditional banks are not meeting.

To me it is a subtle form of xenophobia and elite paternalism. The regulatory class of people (e.g. FDIC) determines that its way of doing things is the only way and the uneducated and minority ethnic groups are too ill informed and irrational to know what they are doing and what is best for them. The groups must be converted for their own good. The regulators justify their concern and actions by doing some partial and incorrect analysis that shows the group in question is overpaying and therefore it is necessary for the government to step in and protect people against their will and voluntary actions.


At 12/08/2009 9:36 AM, Anonymous Lyle said...

Note that there is a huge motivator for those on social security to get a bank account, direct deposit is the only way to get your money. Note that this did solve another problem, theft of checks and attacks on the elderly on the way to the bank.
Now in one sense this is part of the goal to kill the underground economy, and make those folks pay taxes, making it harder to go off the books.
Interestingly apparently it is cheaper for an employeer to do direct deposit than a pay check at a lot of banks (no human need be involved) and of course direct deposit does yield instant credit.
But the main reason is to kill off the underground economy which used to be called the black market

At 12/08/2009 9:51 AM, Anonymous Anonymous said...

two problems with your remark.
First, direct deposit is not a regulation, it is an opition adopted by employer sot reduce the cost of printing, distributing, replacing paychecks. For most/many employees it is a handy simplification. Some spouses insist their ner-do-well partner have their checks deposted that way. If you don't like, some employers will give the hard copy option.
second, you talk as though the underground economy is something we should shelter and protect.
Screw that. I pay taxes because 1) it is clearly reported to the IRS by others and 2) I'm honest.

I expect everyone to pay their fair share and the underground economy erodes that condition.

You see, we are at, maybe over, the tipping point of participation in the tax process. In theory, once >50% of the voters have no taxes to pay, they vote for the politician that continues to tax those that do.

If you can't see this is the road to annihilation, please don't vote.

At 12/08/2009 9:53 AM, Blogger W.E. Heasley said...

Milton Recht makes excellent points. Consumers generally make rational economic decisions given the options presented to them. If a collection of consumer decisions create a trend such as the “unbanked“, then the unbanked fits a perceived consumer utility and satisfaction.

Without examining the economics of the unbanked, as has Mr. Recht, then the Elitist mentality immediately perceives “unbanked” as some kind of economic problem. The next step of the Elitist is to leap to Government Intervention without examining the economics.

At 12/08/2009 9:55 AM, Anonymous LoneSnark said...

A bank can offer that service, thanks to overdraft protection. But I doubt it is legal for banks to charge the kind of interest that would be necessary to offer such accounts to such individuals.

At 12/08/2009 12:25 PM, Anonymous Anonymous said...

I went from 2003 to 2008 without a checking, savings or bank account of any kind. I was in a battle with the Franchise Tax Board of California and they had a tendancy to take all my money out of my account if I lost my job and told them I couldn't pay them anymore.

So, I would cash paychecks and checks from clients either at the bank it was drawn on or at a check cashing place. Wal-Mart cashed checks for up $1000 for a $3 fee.

Please note, this was NOT to avoid paying taxes. Payroll checks still had all the withholding taken out BEFORE I received the check and clients still filed 1099 income reports for the work I did for them. So all the income was reported and the taxes on that income were paid.

At 12/09/2009 8:10 AM, Anonymous Lyle said...

As I understand it for social security it is still an option although the default one, at 83%. If I were an employer if legal I would make it mandatory and share a part of my savings with the employee to make them happier.
I agree that if you get a paycheck you pay your taxes every 2 weeks. I was thinking of rather the cash economy ranging from some tips to the day laborer who gets paid cash at the end of the day.
If you thought I was saying to shelter the underground I did not mean that the opposite was my intent to make it harder to operate.
Of course the article does raise the question how many of the unbanked folks have payment (stored value) cards such as most food stamps come with now. These sort of walk like and talk like checking accounts, except that they can't be overdrawn.
This raises an idea, for credit unions to offer. Create a checking account without checks. You offer a bill pay service instead. No overdraft is allowed. Since the stored value concept is real time unlike other accounts, when a bill payment is requested, the amount is compared with the balance and if ok deducted immediatly. Since overdrafts are not possible, this prevents them from happening.

At 12/09/2009 12:39 PM, Blogger sethstorm said...

Additionally, many hard working people cannot get to a bank during their working day and check cashers and other non-bank service providers are open at more convenient times, speak the foreign languages of their customers, and if necessary, easily remit the funds to another country.

Direct deposit to a bank. While it is a problem for a ignorable minority, it cuts out the need for teller interaction. Secondly, you don't have 25-300% cut out of your check over and above any withholdings.

That, and payments can be scheduled for a minimum of fuss.

There are plenty of banks that will serve a large enough non-English speaking community. You're just asking for them to support them wherever they go.

There is no obligation to serve illegal immigrants or support the criminals who bring them in.

There are plenty of advantages by working with a more honest bank than a career criminal/loan shark/usurer. Unfortunately, you seem to conflate the two terms - and beyond just a outside case of Goldman Sachs.

Screw that. I pay taxes because 1) it is clearly reported to the IRS by others and 2) I'm honest.

Unfortunately there are plenty who wish to price out honesty and clarity with undocumented/untracked economic practices.

At 12/10/2009 10:13 PM, Anonymous Mueslix said...

All right, maybe it's paternalistic and a stretch to suggest every adult ought to have a bank account, but it makes good sense. To suggest the FDIC has some insidious agenda is absurd.

To claim that the "unbanked" are largely "rational" is also absurd. These people are some of the dumbest, most irresponsible people in the world.

Instead of banks, they use check cashing facilities which charge high interest rates for their advances. Ok, perhaps there's some subset of these people who need liquidity between biweekly or monthly paychecks. But the vast majority of them end up, at some point, defaulting on their loans. The check cashers consider this a cost of doing business. They seem to be doing ok - there are more check cashing locations than McDonalds restaurants.

Getting people to trust and use banks is a good thing. It helps them establish a history of managing cash flow. It enables them to get a debit card which will later help them get a credit card.

It puts the cart before the horse to suggest that getting them bank accounts will make them more responsible. That's like saying making someone a homeowner will make them more stable and help them build wealth.

What bank accounts will do is reduce the amount of irresponsible decisions they will make. An account is a mechanism of self-control. Reforming your behavior starts with a well-positioned first step.


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