WASHINGTON — Douglas McGray thinks payday lenders and check cashers have a lot to teach both banks and credit unions about reaching out to lower-income and underbanked communities.
McGray is an Irvine fellow at the New America Foundation and the author of “Check Cashers, Redeemed,” an article that ran in the Nov. 7 New York Times looking at why some people use check cashers and payday lenders and how they operate.
McGray also participated in the foundation's roll out of its Community Banking Trust proposal on Nov. 20.
In his article, McGray examined at length the workings and customers of the Nix Check Cashing chain that was purchased by the $4.2 billion Kinecta Credit Union in 2007. Speaking at a recent press briefing on the foundation's community banking proposal, McGray recounted that his research into why people use check cashers and payday lenders indicated that those consumers behaved in an economically rational manner.
“I would not say that they were 100% rational when they chose to use payday lenders,” McGray said, “but I don't think they were completely economically irrational either, and I think we have to listen to them explain the reasons they make their choices.”
McGray said his research identified a number of key barriers that effectively keep lower-income and underbanked consumers from using traditional financial institutions.
First, McGray explained that while the fees at check cashers and payday lenders are usually deplorably high, users of check cashers and payday lenders often prefer those fees over the uncertainty and lack of trust that they associate with traditional financial firms.
“When a customer walks into one of the payday lending stores, he sees all the different products and services the firm offers up on the wall almost like a menu in a fast food restaurant,” McGray said. “The fees are high, but they are all there where everyone knows about and can see them and they aren't going to come back and hit them with unexpected expenses.”
By contrast, McGray recounted the tale of a lower-income student at a California college. As part of her college scholarship, the student had a biweekly stipend deposited directly in her checking account a large bank. For reasons she could not control and did not even know about, one of her deposits had been delayed and she had inadvertently paid several small bills that overdrew her account. By the end of a short afternoon, she had run up over $240 in overdraft fees.
“Now, this story is going to become legend in the retelling,” McGray said. “Over time, the fees will grow and the charges will grow. But the principle from the point of view of the lower-income consumer of financial sources is that traditional financial service providers cannot be trusted and are out to take your money.”
It is certainly rational, McGray observed, for payday lending consumers to opt for higher fees known up front over charges that can come up unexpectedly.
The policies of banks and credit unions also sometimes present a barrier to lower-income consumers, McGray observed. A key obstacle is policies that bar consumers who have had too many overdrawn checks in the past, for example. Some studies have shown that up to 70% of consumers in lower-income communities would be blocked from opening checking accounts because of their previous checking histories, McGray said.
The culture of financial institutions can also be a barrier to lower-income consumers, McGray explained. He quoted one African-American woman in Los Angeles who noted that it might be a “small thing,” but she appreciated the payday lender's willingness to hire people from the community to serve as tellers in their stores.
“She knows that it's not a big deal,” McGray observed, “but it helps to make the payday lending stores feel more open and welcoming to their customers-it helps make the customers feel more welcome and open to what they are selling.”
He contrasted that approach with an experience of visiting an area credit union, the name of which he said he could not remember, where anyone coming into the branch had to pass through a mantrap security door and where the only way to find out about products and services the CU offered was to ask someone inside.
After visiting the CU with the owner of a check cashing outlet he profiled for his story, McGray quoted the owner as saying, “it's wild that they would want to serve my customers here.”
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