WASHINGTON — Douglas McGray thinks payday lenders and checkcashers have a lot to teach both banks and credit unions aboutreaching out to lower-income and underbanked communities.
McGray is an Irvine fellow at the New America Foundation and theauthor of “Check Cashers, Redeemed,” an article that ran in theNov. 7 New York Times looking at why some people use check cashersand payday lenders and how they operate.
McGray also participated in the foundation's roll out of itsCommunity Banking Trust proposal on Nov. 20.
In his article, McGray examined at length the workings andcustomers of the Nix Check Cashing chain that was purchased by the$4.2 billion Kinecta Credit Union in 2007. Speaking at a recentpress briefing on the foundation's community banking proposal,McGray recounted that his research into why people use checkcashers and payday lenders indicated that those consumers behavedin an economically rational manner.
“I would not say that they were 100% rational when they chose touse payday lenders,” McGray said, “but I don't think they werecompletely economically irrational either, and I think we have tolisten to them explain the reasons they make their choices.”
McGray said his research identified a number of key barriers thateffectively keep lower-income and underbanked consumers from usingtraditional financial institutions.
First, McGray explained that while the fees at check cashers andpayday lenders are usually deplorably high, users of check cashersand payday lenders often prefer those fees over the uncertainty andlack of trust that they associate with traditional financialfirms.
“When a customer walks into one of the payday lending stores, hesees all the different products and services the firm offers up onthe wall almost like a menu in a fast food restaurant,” McGraysaid. “The fees are high, but they are all there where everyoneknows about and can see them and they aren't going to come back andhit them with unexpected expenses.”
By contrast, McGray recounted the tale of a lower-income student ata California college. As part of her college scholarship, thestudent had a biweekly stipend deposited directly in her checkingaccount a large bank. For reasons she could not control and did noteven know about, one of her deposits had been delayed and she hadinadvertently paid several small bills that overdrew her account.By the end of a short afternoon, she had run up over $240 inoverdraft fees.
“Now, this story is going to become legend in the retelling,”McGray said. “Over time, the fees will grow and the charges willgrow. But the principle from the point of view of the lower-incomeconsumer of financial sources is that traditional financial serviceproviders cannot be trusted and are out to take your money.”
It is certainly rational, McGray observed, for payday lendingconsumers to opt for higher fees known up front over charges thatcan come up unexpectedly.
The policies of banks and credit unions also sometimes present abarrier to lower-income consumers, McGray observed. A key obstacleis policies that bar consumers who have had too many overdrawnchecks in the past, for example. Some studies have shown that up to70% of consumers in lower-income communities would be blocked fromopening checking accounts because of their previous checkinghistories, McGray said.
The culture of financial institutions can also be a barrier tolower-income consumers, McGray explained. He quoted oneAfrican-American woman in Los Angeles who noted that it might be a“small thing,” but she appreciated the payday lender's willingnessto hire people from the community to serve as tellers in theirstores.
“She knows that it's not a big deal,” McGray observed, “but ithelps to make the payday lending stores feel more open andwelcoming to their customers-it helps make the customers feel morewelcome and open to what they are selling.”
He contrasted that approach with an experience of visiting an areacredit union, the name of which he said he could not remember,where anyone coming into the branch had to pass through a mantrapsecurity door and where the only way to find out about products andservices the CU offered was to ask someone inside.
After visiting the CU with the owner of a check cashing outlet heprofiled for his story, McGray quoted the owner as saying, “it'swild that they would want to serve my customers here.”
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