Why Customers Like Check Cashers and Payday Lenders
18th February 2017
Why do so many Americans shun the institutions traditionally devoted to saving and loaning money? The answer, many people tell Servon, is that banks don’t seem to want their business and make it too difficult and expensive to get anything done.
“Banks want one customer with a million dollars,” the owner of one check-cashing chain tells her. “Check cashers like us want a million customers with one dollar.”
…
“Customers can find it difficult to predict when banks will charge them a fee (they sometimes change the timing) and what the amount of the fee will be; this lack of clarity can be costly,” Servon writes. “Now imagine the interior of a check casher—or visit one. It resembles a fast food restaurant more than a bank. Posters tell you what products are sold, and large signs above the teller windows list every product, along with its price.”
I’d like to have a doctor’s office like that, please.
Alternative services come with clear costs—and they move fast. Somebody facing bills needs a paycheck cashed now, not after an arbitrary delay while the check clears. Unpaid rent or unpurchased groceries are bigger concerns than a few dollars in fees.
And that’s what competition — when it’s allowed — delivers. Unfortunately, legislators, academics, and other government employees are too fond of telling other people how they ought to live their lives.
Financially sophisticated young Americans are also turning away from traditional banking. Peer-to-peer lending through online services such as Prosper and Lending Club “requires far less paperwork than other loans and is perceived to be more transparent than payday loans,” writes Servon. Loans through these platforms tend to be relatively inexpensive, too. Online-only banks such as Simple and Walmart’s GoBank cater to customers seeking greater transparency and lower costs, and some offer financial advice that millennials in particular find helpful.
Paperwork that is mandated by government regulation, ‘just standard clauses for your protection’, as the Phantom of the Paradise likes to say.
“The regulators are causing the opposite of the desired effect by making it so dangerous now to serve a lower-income segment,” JoAnn Barefoot tells the author. A former official with the U.S. Department of Housing and Urban Development, the Federal Housing Administration, and the Federal Home Loan Bank Board, and a deputy controller of the currency, Barefoot points to a web of red tape—much of it intended to battle discrimination—that makes serving many potential customers a legal minefield.
…
Traditional banks have meanwhile gained a reputation for working hand-in-hand with government. That relationship certainly doesn’t serve the needs of the many customers, from illegal immigrants to established businesses, who want to avoid official scrutiny of their transactions. When Servon asks a successful building contractor why he uses check-cashing services, he answers, “The insurance, the taxes, the workers comp—it’s killing us. Some guys try to hide as much of their income as they can—they got two-million-dollar businesses and they report half a mil. I’m telling you—it’s impossible to stay afloat if you don’t do some of that.”