Tales from the Teller Window Reframing the Debate

Tales from the Teller Window: Reframing the Debate About Financial Inclusion Lisa Servon 29 August 2016

Banking Status of US Households Source: 2013 FDIC National Survey of Unbanked and Underbanked Households

Banking Status of US Households by Race Source: 2013 FDIC National Survey of Unbanked and Underbanked Households

Alternative Financial Services Source: Stephens, Inc.

Policy makers’ view of financial services GOOD Banks n Credit unions BAD Everything else n

If alternative financial services are so bad, why do so many people use them?

AFS use is large and growing • Check cashing transactions have grown from $45 billion in 1990 to $58 billion in 2010 • Payday lending transactions have grown from $10 billion in 2000 to $30 billion in 2010 11

The consumer financial services industry is broken and consumers are misunderstood

So what? • • Individual financial health is necessary for community health and economic development Important group patterns are emerging that argue for a conversation about financial justice

• • • And in the military. . . 80% of navy security clearance denials or revocations are caused by financial issues Military personnel and spouses are heavier users of credit cards than civilians, and are more indebted to credit card issuers More than one-third of military respondents to a FINRA survey said they had trouble keeping up with monthly expenses and bills

A More Accurate Picture of Consumer Financial Services

The Four Things AFS Customers Value • • Lower Cost/Greater Liquidity Greater Transparency Better Service Availability of Credit

“I’d like to go back [to the bank], but I can’t afford the monthly charges. ” Zeke, janitor “It was like I just kept paying more and more. ” Maria, home health aide

Bank Fees are Increasing Source: Stephens / FISCA

Why has banking become more expensive? • • • Bank consolidation—too big to serve Deregulation Nature of bank/gov’t social contract changes (Baradaran 2015) Fee income is “goldmine of checking” Haberfeld “It’s like a drug. Once you get this, it’s like a drug. ” Banker

Change in number of banks with more than $10 billion in assets 120 100 80 60 40 20 0 1985 1990 1995 2000 2005 2010 2015

Bank/Government Social Contract Has Changed • Jefferson, Adams, Brandeis worry about banks’ power • Deregulation enables banks to grow and make money in new ways • Definition of public interest shifts from accessibility to efficiency/profitability 23

The Bank Business Model Changed • Nonbanks enter the picture • Shift to greater reliance on fee income. . . and pernicious practices • Financial services becomes more complex “Banks want one customer with a million dollars. Check cashers want a million customers with one dollar. ” Joe Coleman 24

The Four Things AFS Customers Value • • Lower Cost/Greater Liquidity Greater Transparency Better Service Availability of Credit

Greater Transparency

The Four Things AFS Customers Value • • Lower Cost/Greater Liquidity Greater Transparency Better Service Availability of Credit

Better Service

How customers show their appreciation • • • Loyalty Loan repayment (probably) Tips, coffee, baby gifts “It’s like we’re family… we know all of them. ” Nina

The Four Things AFS Customers Value • • Lower Cost/Greater Liquidity Greater Transparency Better Service Availability of (Fast) Credit

Changes in Credit Markets • • • Definitions of “good” and “bad” debt, and “creditworthiness” shift 1970 s/80 s states repeal interest rate caps Availability and use of credit expands… …and then contracts, post crisis (Black and Morgan 1999; Ross 2013) 34

Steep Drop in Supply of Consumer Credit Source: Stephens, Inc.

Source: Center for Responsible Lending.

Comparing Overdraft to Payday • • Average APR of a payday loan = approx. 400% Average “APR” of an overdraft = 5, 000%

Meanwhile, the context has changed

• • The “Underserved” demographic is expanding Declining real wages since the mid-1970 s (Garcia, 2007) Income volatility has doubled (Hacker and Jacobs 2008; Morduch and Schneider 2013) $1. 2 trillion in student loan debt Payday borrowers • • • 20% make over $50 k/year One third are homeowners 43% have a college degree

“I actually managed to make my mortgage even when I was unemployed because I had renters in [my house] and I was managing to come up with the extra. . My credit score was the last thing I let go of. I lost everything else, but I had a 780. That was the very last thing that I let go of. Then when I let go of that, I was like, I don't have kids. I never plan on getting married. I never want to buy [another] house. I'm buying my next car with cash. So yeah, my parents had the American dream. Good for them. Never going to be for me, and I don't want it anymore. ” Kendra, army vet and grad student

Dramatic increase in subprime population

“So many things happened. But there’s just very limited options. I had to do it because of situations that came up. . . The problem is, if you have to go through nonstandard ways of getting the money, you pay such an exorbitant amount and you’ve probably made it more difficult for yourself to get caught back up. ” Bob, governmentt contractor

• • Recommendations Reframe the debate • From financial inclusion to financial health and financial justice Transparency is an easy fix Innovation will be key… but smart regulation is needed Address the macro problems

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Are payday loans helpful or harmful? • Research is inconclusive – Payday loans exacerbate hardship (Meltzer 2011) – Check bouncing, customer complaints and bankruptcy increased after payday lending banned in Georgia (Skiba 2012), Oregon (Zinman 2010) and Hawaii (Morgan and Strain 2007) – 81% of borrowers said they would have to cut back on food w/o access to payday loans (Pew 2012) – No research has provided an answer (Caskey 2010) 48