General distrust for the banking industry has been spreading like a disease across all income brackets. I’ve always suspected that this had to do with banks’ indifference toward the individual customer; and a PEW Health Group study backs me up.
Focused on the unbanked in Los Angeles, this study has revealed that the banking industry is actually losing more customers than it gains. The number one cited reason to leave the banking system was hidden or unexpected fees.
Partly in response to the recent creation of the program Bank on LA, this study was conducted in two phases among 2,000 low-income families to understand how they manage their money and the relationship between them and their financial servicers.
High minimums, low confidence
One of the most poignant findings of the study was that half of the respondents who did not have bank accounts cited that they could not afford the minimum balance as their primary reason. They instead use check cashiers to get their money.
What’s most scary is that this number grew from just 29 percent during the first phase of the study (July – September 2009) to 50 percent in the second phase (May – September 2010).
Banks even struggle to provide necessary services to their existing customers. Check cashiers are preferable not because of location or customer service, but rather because of liquidity and product offerings. Some said that check cashiers deliver money faster (30 percent), while others use them to pay bills faster (37 percent).
And these are the banked customers.
The underbanked have a whole different set of problems, which often extends to remittances, or wiring money to foreign countries, as a lot of them are immigrants supporting families in a different country.Let’s not forget that dollars simply disappear from the country at a staggering rate as immigrants send it abroad often without paying taxes.
So why don’t banks cater to this consumer?
Banks, especially the giant ones, are often criticized for their tendencies to group consumers together and treat them like numbers. Extensive market research tells them that they’ll make more money if they focus only on a certain spectrum of customers.
Then the rest get slammed with fees for not keeping a minimum balance or performing direct deposit.
In the conclusion of the study, the authors offered a few good recommendations to deal with this growing problem, including government workforce placement programs introducing bank accounts to newly employed and policy makers requiring fair and transparent fees.
We’ve all seen this before though. Many studies on the unbanked and underbanked recommend fee reduction and transparency. But none of them suggest a different service altogether within the banking system, causing other services to pop up all over.
My mom always tells me, “You get what you pay for.”
If someone is clearly living from paycheck to paycheck, as most in this study are since they have little to no savings (obviously investments are out of the question) and a staggering 91 percent of their income comes from employment, he needs a separate system altogether.
In order to introduce low-income families into the mainstream banking system should start with an introductory system.
A bank card, a linked savings account, direct deposit. Done.
You will be granted access to this type of account for up to one year. There will certainly be minimums to maintain gradually over the year and fees to pay. The fees can vary, but they must be transparent and not subject to change for the entire year they are holding the account.
If you reach a certain amount in savings, you must convert to a regular checking account.
Regardless, after one year you must convert or close the account.
The problem is not that people hate the idea of banks; they like it. They just want an institution that will treat them like people. An introductory account will help them understand banking and protect them from unfair fees that were the problem to begin with.
In any case, banks should not be trying to avoid this demographic. On the contrary, they should be doing all they can to grow their wealth. The unbanked has risen to 17 million Americans, approximately the same amount as the unemployed, and collectively they have hundreds of millions of dollars.
We need people to entertain the idea that their bank cares for them and is not just trying to screw them.