The cost of using payday lending not only negatively impacts the consumer, but the broader economy as well, and banks can do more to eliminate the harmful effects of nonbanking.
Yet, banks continue to struggle to gain the trust and business of the working class or those living in poverty, many of whom are minorities and more likely to engage in payday lending, according to a Forefront article put out today by Michelle Park about her interview with Bonnie Blankenship, community development advisor at the Federal Reserve Bank of Cleveland.
“Generally, unbanked and underbanked individuals are the working poor or those living in poverty,” Blankenship said. “Many of these individuals have become accustomed to using payday lenders or check-cashing services as their financial institutions.”
Here are some of the disadvantages Blankenship sees to not using a bank:
1. Extra fees:
“It’s typical that somebody will pay higher fees for general banking services such as check cashing or obtaining money orders,” Blankenship said. “A 2008 study by the Brookings Institution found that a worker can pay as much as $40,000 in fees over the course of his career by using check-cashing services rather than having a checking account.”
2. Lack of economic growth:
“Unless you’re already wealthy and you have enough cash to buy a home, without a banking relationship to build wealth, you’re not in a position to establish credit, and you will have a hard time obtaining a loan and purchasing a home,” Blankenship said. “I do believe that homeownership can be one mechanism for wealth building.”
“I think the number of unbanked and underbanked is a challenge for all of society because if you’re not moving up through the economy, you’re not participating in overall economic growth,” she said.
3. Inability to build Credit:
“Individuals without a banking relationship are prone to paying higher interest rates,” Blankenship said. “It’s also difficult for them to establish credit for mortgages, and there’s a lack of ability to store their money away from their residences.”
So these are the problems, but where, then, lies the solution? Blankenship has the answer to that as well. The answer, however, is not one sided. Efforts must be made by both bank and the community to meet in a place where the situation can improve.
The Hispanic population has become a catalyst for the U.S. housing market, and data released in 2015 by Better Homes and Gardens Real Estate and the National Association of Hispanic Real Estate Professionals shows that Hispanic women, in particular, are essential to unlocking this buying power, based on their perceived roles within the household.
Before being able to lend to Hispanics, however, lenders must do what they can to earn the trust of a population who, traditionally, does not use banks.
Here are 3 tips Blankenship gives for gaining the trust of the unbanked population:
1. Banks offer smaller loans:
“I know that payday lenders are looked at in a very negative way, but they are supplying a need for some individuals,” Blankenship said. “If there were a way these entities could be monitored so that the interest rates are not as high, where the fees are not as great, where somebody is not in a perpetual cycle of not getting his or her loan paid because the fees and the rates are so high, that would fulfill a need.”
“It would be terrific if we could figure out a way to encourage mainstream financial institutions to offer small-dollar loan products and to make them accessible,” she said. “Doing so would help people build a credit score.”
In June, the Consumer Financial Protection Bureau proposed a law that would limit payday, vehicle title and certain high-cost installment loans.
2. Take financial classes:
This advice is directed toward nonbankers, in order to make them both more comfortable and more familiar with the banking system.
“I tell many people who don’t have conventional banking relationships to look up and attend free financial fitness days,” Blankenship said. “I also tell people that Community Reinvestment Act officers will meet with customers. I’ve seen them work one on one to talk about products that are available.”
3. Strategize bank locations:
“The role that I see people and businesses and financial institutions playing is to ensure that community branches remain in low- and moderate-income neighborhoods so people have access to a local financial institution,” Blankenship said.
“The Fourth Federal Reserve District in Dayton, Ohio, the Human Relations Council [is] working with financial institutions and looking very closely at branches that will be closing or where there’s a threat of closures,” she said. “The council wants to make sure there’s the ability in low and moderate income neighborhoods to access financial institutions.”