As James Baldwin once said, “Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.” This is true now more than ever. Some call it the “poverty tax”—the surcharge people pay for not having savings or access to “prime” credit and being consigned to “fringe finance.” Fringe finance refers to the array of “alternative” financial services (AFS) offered by providers that operate outside of federally insured banks. Gary Rivlin, author of Broke USA: From Pawnshops to Poverty, Inc., does the math; adding up the profits from the AFS sector and dividing by the forty million households that survive on $30,000 a year or less, the industry receives an average of $2,500 per year from every low-income household. That’s a “poverty tax” of around 10%, depleting the assets of low-income households. This chapter and the next chapter break down the major perils of fringe finance into those related to transactions and those related to credit. This chapter deals with transaction products and services: check cashing and prepaid cards. Chapter Eight covers credit products and services: payday loans, auto-title and pawn loans, and rent-to-own financing. Among households without access to a bank account, 62% have used an AFS transaction product or service and 27% have used an AFS credit product or service. About 23% have used both. Both chapters offer analysis and information to help you identify the common tricks and traps of fringe finance so that you can avoid them. We consider alternatives to the most expensive products and services, as well as how to save money if you’re “locked in” or have no other options. There is no one-size-fits-all strategy for personal finance. We conclude Chapter Eight by outlining some individual and collective strategies that aim to minimize or eliminate our dependence on the current debt-finance system. Investors, however, expect the stunning rates of financial extraction in the poverty industry to rise, and it has created funds to invest in startups and small firms with big growth potential in the fringe finance sector. The “market” that investors want to tap is the unbanked (people without checking or savings accounts) and the underbanked (people who rely on a combination of both “traditional” and “alternative” financial products). Why are investors so interested in this market? Not only is it a market that has previously been off their radar, it is a market that promises greater returns—even after adjusting for increased risk (otherwise, they wouldn’t be interested). In a blog post titled “Not Unbanked: Untapped,” a venture fund manager explains, “It is fair to say that most of these products are generally more expensive than what most of ‘us’ pay. APRs [annual percentage rates of interest] higher than 30% (if not 300%); transaction costs of $2+; money-transfer costs of $10+; access to payroll check for 2–4%.” The transaction services segment of AFS has seen some of the most spectacular growth in recent years, where prepaid cards are making inroads and recording profits that rival the always-profitable check-cashing outlets (CCOs). This is the predicament of the poor in our debt-finance system: it costs poor people significantly more to use money—to spend it, to save it, to invest it, to borrow it, to send it “back home” (for immigrants whose families still live in their country of origin)—and they have less money to begin with. If you’re poor, you are likely forced to engage with the debt-finance system, and the more wealth it takes from you, the more indebted you become. Meanwhile, AFS owners and investors, who enjoy lower financing costs than you and have more money to begin with, profit from your loss and acquire pieces of your debt. Thus, investors on Wall Street come to own pieces of your future. These are the workings of a two-tiered financial system, on the bottom of which are relatively high-cost services marketed to the growing and changing ranks of the unbanked and the underbanked. The nearly ten million unbanked includes the working poor, the unemployed, the homeless, the undocumented, those who do not speak English fluently, those who are or have been incarcerated, those with mental or physical health issues, older people, those working off the books, those hiding from creditors or the “authorities,” those whose homes were stolen by robo-signing investment banks, youth who have been cut off from their parents, and anyone else who “traditional” financial institutions deem unworthy of service. Demographically speaking, the unbanked population is broad and diverse, but it is disproportionately comprised of low-income households (71% of unbanked households earn below $30,000 a year), households of color, immigrant households, and individuals with negative banking histories. (Of course, many of the unbanked fit into multiple categories.) In general, Latino/a and Black people are six and seven times more likely to be unbanked than Whites respectively. Households with an annual income under $30,000 are thirteen times more likely to be unbanked than those with an income between $50,000 and $75,000. More than half of immigrants in New York City are unbanked, according to a recent survey. People of color and immigrants are more likely to have low, unreliable, or seasonal income, making it more difficult to save enough money to meet minimum opening-balance requirements at banks. Not having enough money is the number one reason that the unbanked do not have a bank account. There’s another significant commonality: many people of color, low-income individuals, and immigrants justifiably distrust banks. Losing one’s home or hard-earned property, or being denied credit for no reason but the color of one’s skin—especially in a society focused on wealth accumulation—is traumatic. The effects can ripple across generations of a family, shaping how future generations interact with financial institutions. Banks have historically been places reserved for middle- or upper-class White men, and that explicitly exclusionary past makes its impact felt in today’s world in various less overt ways. Because of the openly racist and classist history of U.S. credit practices, banks can feel like unfamiliar or even hostile territory to many poor people of color (Massey and Denton, 1993). Inconvenient locations, limited hours of operation, and language barriers often make access difficult for low-income households. Undocumented immigrants generally lack the forms of ID required by many banks to open accounts, and furthermore fear that banks will share their immigration status with the authorities. Some of the unbanked and underbanked rely on fringe finance because it helps them avoid unnecessary difficulties posed by mainstream financial products—difficulties which reflect their socially marginalized status. If you are a transgender person applying for a bank account, for example, you must use your legal name and gender, even if it is different from the name and gender that you identify as (though in Washington State, at least, transgender people have the right to be referred to by their name and gender when doing business at a bank). Preloaded debit cards, which do not have the owner’s name printed on them, help trans people avoid harassment caused by a mismatch between the printed name and their gender presentation. (This information was obtained in a private email correspondence with the founder of a trans activist group in the Pacific Northwest. They relayed various members’ experiences with banking and using fringe finance.) It can become difficult for unbanked people to document and prove income when filing for benefits, workers’ compensation, or filing cases against abusive employers. For many of the unbanked, the experience of second-tier status in the financial system mirrors their experience with the two-tiered justice system. Those who are socially marginalized in one way or another are more likely to occupy the bottom tier of the financial system, which makes it more likely they’ll get caught up in the criminal justice system. The criminalization of poverty, the criminalization of immigration, as well as racial and ethnic profiling are well-documented trends that push people to the fringes of finance. And being on the fringes of finance is itself increasingly criminalized. In at least a third of U.S. states, being in debt can now land you in jail. In Washington State, for example, a Black man with mental health issues was incarcerated for two weeks for failing to pay $60 worth of “legal financial obligations” (LFOs). His jail stay, meanwhile, cost Spokane County over $1,500. In many cases, these barriers to the banking system can reinforce each other and create insurmountable walls between the banked and unbanked. The underbanked tend to share many of the same characteristics and face many of the same obstacles as the unbanked.
Check-Cashing Outlets (CCOs)
For nine million households in the United States, cashing paychecks at a bank or credit union is not an option. The unbanked generally do not have bank accounts for any number of the reasons discussed earlier. For many people, a CCO is the only option to transform their paycheck into cash. According to the Federal Reserve, CCOs generally charge between 1.5% and 3.5% to cash a check. For a $500 check, that comes out to between $7.50 and $17.50 in fees taken away. This is actually a conservative estimate. The Consumer Federation pegs average fees at 4.11%, which means that CCOs get a cut closer to $20.55 of the original $500. With a checking account, by contrast, this service would be free. If you’re unbanked and you make $500 every week, in one year you might spend $400 if you’re relatively lucky, but possibly over $1,000, just so you can spend your own money. The average unbanked person with a full-time job can expect to spend more than $40,000 on such fees in their lifetime. That is, throughout the course of one’s life, more than an entire year’s worth of work goes exclusively toward turning one’s salary into cash. Between 2000 and 2005, the number of CCOs in the country doubled, but the added competition did not lower fees. In fact, the price of cashing a check has gone up, with a 75.6% average growth rate between 1997 and 2006. Companies like Walmart, Kmart, and Best Buy have also tapped into this market by offering check cashing at their stores. Although they charge less to cash a check than the regular outlets, they only keep lower prices so that people suddenly equipped with cash will spend it right where they are. As expensive as CCOs may be, and as much as they target people with lower incomes, if they all pulled up stakes and left, what would happen? Several alternatives may be available. You could make an arrangement with a trusted friend, family member, or even your employer—that is, someone with access to a checking account—in which you would write your check over to them and they would give you the full amount in cash. You could join with others in your community and approach a local community center or religious institution to ask if they would be willing to set up a free check-cashing service. You could talk to local credit unions about their free checking accounts and, to encourage the credit union to offer the services you need, organize others to join in your request. Your collective power and voice could open up new possibilities. If you have exhausted other options and must resort to a CCO, it is important to know how to use it in a way that minimizes harm. For example, ask ahead of time for the fee in dollar amounts as opposed to the percentage. And be sure afterward to obtain and save an itemized receipt. Costs may vary not just from one CCO to the next, but by the time of day and other factors. You can compare receipts to determine the optimal approach.
In addition to exorbitant check-cashing fees, there are fees for money transfers. Nearly two-thirds of immigrants in New York City, according to a recent survey, reported using remittance services to send money back to their families in their country of origin, 60% of whom send money every month. Most remittances go simply to pay for basic household needs, such as rent, utilities, and buying food. Immigrants hoping to send money outside of the United States may lose as much as 20% of the amount in the process. While the Consumer Financial Protection Bureau recently introduced new disclosure rules aimed at stopping sudden and unexpected penalties, there’s really nothing that limits the overall fee. By contrast, banks and credit unions charge substantially less for this and other services. Some banks even offer special low-cost money transfers to certain countries. Services that could cost up to $500 annually at a CCO could cost between $30 and $60 annually at a traditional financial institution. Many credit unions, and increasingly many banks, have flexible ID requirements, making it simpler for immigrants to open accounts. Be sure to find out if they require a minimum balance to maintain an account and if they require the recipient to have a bank account. If you must use a money transfer service, be sure to ask what the exchange rate is and how much will actually be given to the recipient. Find out if the recipient will be charged any fees when picking up the money. Remember, you have the right to transfer money in U.S. dollars unless the receiving country has a law requiring money to be converted into the local currency. Be sure to use a licensed transmitter and to keep your receipts. The websites remesamex.gob.mx and remittanceprices.worldbank.org allow you to compare different options and costs when sending money to another country.
First there were credit cards. Then came debit cards. Now there are prepaid cards—and they’re suddenly everywhere. Think about it this way: with credit cards you pay later, with debit cards you pay now, and with prepaid cards you pay early. Credit cards extend credit to consumers for free (with a grace period and assuming good credit). Debit cards give consumers free access to funds in their bank accounts. Prepaid cards charge consumers to access their own funds. So when you use a prepaid card you are essentially paying money to make an interest-free loan to the issuer, who then lends your money to other customers. Charging us for the use of our own money is what banks do. They also provide useful services: the ability to store our money, to access cash, to pay for things without cash, and to turn checks into cash. Prepaid cards—now used by 13% of people in the United States—do the same, although they’re not attached to bank accounts. (Some banks have gotten into the prepaid card game—e.g., Chase Liquid, Bank of America CashPay, PNC SmartAccess—but even their cards are not attached to accounts.) Branded with the logos of American Express, Discover, MasterCard, or Visa, they look like other plastic payment cards and provide ATM access and the ability to make purchases. There are a variety of prepaid cards, including gift cards, payroll cards, government benefits cards, and “general purpose reloadable” (GPR) cards, which let you add funds. Prepaid cards are usually more costly, less convenient, and less secure than comparable services from banks, and they tend to have poor disclosure policies and “gotcha” fees, replicating some of the most aggravating bank practices. Nonetheless, compared with a check-cashing outlet, getting cash from a prepaid card is usually cheaper. When it comes to making payments, prepaid cards are typically more expensive than credit or debit cards, but not necessarily. If you factor in overdraft charges, debit cards can cost more. If you factor in high ongoing balances, high interest rates, and late payment penalties, credit cards may cost considerably more than prepaid cards. Hence, there is no one-size-fits-all strategy for personal financial transactions. What’s more, the rules governing the prepaid card industry are still in flux. In 2010 the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) took effect, tightening regulations for credit cards and traditional debit cards. The new Consumer Financial Protection Bureau (CFPB) is presently considering how to bring the prepaid card market into the federal regulatory framework. In the meantime, barriers to cash continue to grow; transactions for an increasing range of basic services are impossible without plastic. Some employers only pay their employees via prepaid cards. Soon many of us will have no choice but to use these cards when employers, government benefits administrators, and even colleges and universities begin to adopt them. Purchasable, usable, and sometimes reloadable without identity verification, many prepaid cards offer the advantage of anonymity, which is why they’ve become the preferred means of laundering money and the de facto currency of the prison system. There are also branded cards that are linked to celebrities, heroes, and social causes, and tend to be the most predatory corner of the market. Many consumer advocates consider prepaid cards just the latest addition to the array of high-cost and inferior financial products for which the poor pay more. Not only do prepaid cards generally fail to serve their ostensible function of helping marginalized groups enter the financial mainstream, they also tend to intensify financial segregation. The predicament of Millennials, who appear to be the industry’s latest target, is especially alarming. Not long after the CARD Act restricted credit card companies’ access to college campuses and to customers under twenty-one, prepaid cards began moving in, looking to establish “partnerships.” Now with prepaid cards increasingly serving as student IDs, enrolling in college also means enrolling in a bank.
General purpose reloadable (GPR) cards
GPR cards are the kind that you buy and set up yourself, like a gift card with fees. They range from competitively priced, no-frills cards to premium-priced celebrity cards, which are marketed as symbols of achievement or aspiration as often as they are advertised as financial tools. Beyond utility, the latter promise respect, empowerment and freedom. Of course, prepaid cards are not unique in this sense: everything we consume says something about who we are and what we believe. The problem with most celebrity cards is not simply that they don’t deliver what’s promised, but that they’re designed to deliver exactly the opposite of what’s promised, resulting in financial marginalization. These cards can quickly extract money from their users. Consumers Union found many different types of fees for a range of prepaid cards. In addition to monthly fees, they found fees for activation, point-of-sale transaction, cash withdrawal, balance inquiry, transaction statements, customer service, bill payment, adding funds, dormancy, account closure, and overdraft. Making matters worse, only a few of the fees charged by card issuers are disclosed prior to signing up for the card. Retail displays often contain only purchase prices and initial load amounts, and card company websites frequently require users to click on sign-up pages or registration forms in order to obtain fee information. Consumer Action surveyed twenty-eight different prepaid cards and found that twenty of them carry a monthly maintenance fee, the highest being $14.95. Fees for out-of-network ATM withdrawals range from $1.95 to $3. A few cards charge users to reload money. Ten of the cards surveyed charge 50 cents to $2 to talk to a customer service agent and two of them charge 50 cents for automated help. Like the worst practices in subprime mortgage lending, private student loans, and payday lending, the marketing and sales strategies of the celebrity prepaid card business are predatory; the best predators have a deep appreciation for the needs of their prey. “Well-banked” celebrities like Russell Simmons and Suze Orman are marketers of prepaid cards that target financially marginalized people. While their marketing suggests they are running charities, Simmons and Orman are managing private companies whose unequivocal objective is to profit from providing financial services to poor people. They deceptively present their enterprises as altruistic projects striving for collective emancipation (e.g., theapprovedcard.com). Yes, this is how capitalism works.
Electronic Benefit Transfer (EBT) cards and payroll cards
Over the past 15 years, the federal government and state governments have been gradually replacing paper benefits checks with Electronic Benefit Transfer (EBT) cards. For the unbanked, the shift to electronic payments means no check-cashing fees, less need to carry cash, faster payments, the ability to make purchases or pay bills electronically, and no ChexSystems screen (see Chapter One for information about ChexSystems). But overall, costs and benefits will vary depending on the fees and terms that apply to the particular prepaid card designated for your benefits program. These are administered by different federal and state government agencies, which contract with various prepaid card issuers. California and New Jersey are considered to have negotiated relatively good contracts for their unemployed workers, providing free and ample access to cash and transaction information with no penalty fees. Tennessee workers, on the other hand, get slammed with the highest junk fees courtesy of JPMorgan Chase, the bank contracted to service that state’s unemployment compensation (UC) prepaid card program. For recipients of Social Security, Supplemental Security Income (SSI), or Veterans Affairs (VA) compensation, the Direct Express prepaid debit card has much lower fees than other prepaid cards and comes with strong consumer protections. Card accounts are insured by the Federal Deposit Insurance Company (FDIC) and are subject to federal consumer protection regulations (i.e., Regulation E). The prepaid card programs administered by the states to disburse UC, as well as Temporary Assistance to Needy Families (TANF) and food stamps (Supplemental Nutrition Assistance Program), are more problematic. They’re generally less beneficial for recipients and more beneficial for banks and states. Forty states now use a prepaid card for paying some or all UC recipients. A survey by the National Consumer Law Center found significant shortcomings in fee structures, access to card information and payment options. Across the board, fees charged to benefit recipients are being used to cover the administrative costs of delivering UC benefits—in violation of federal law. Cards may charge ATM balance inquiry fees, denied transaction fees, $10 to $20 overdraft fees, and inactivity fees. On top of this, card issuers such as Bank of America, Citibank, and JPMorgan Chase earn interchange fees—fees paid from one bank to another when accepting a transaction—as well as interest on the funds on deposit. Last year, card fees and ATM surcharges cost California welfare recipients over $17 million. The bottom line: for those who have a bank account, prepaid cards offer little, if any, advantage over direct deposit. Benefit recipients with checking accounts will save money and time with direct deposit. Those who do not have that option—who lack access to a bank account or who live in one of the six states that have eliminated the direct deposit option—will be forced into the prepaid payroll card program(s) contracted to disburse your particular benefit(s). Since you have no choice about which card to use, familiarize yourself with the terms and fees that apply to the card designated for your program. This information should arrive in paper form with your EBT card. You can also look up the details of the particular prepaid payroll program online.
Survival strategies and resources
Articles and Books
- Candice Choi, “Reporter Spends Month Living Without a Bank, Finds Sky-High Fees,” Huffington Post, December 11, 2010.
- Sharon Hermanson and George Gaberlavage, The Alternative Financial Services Industry, AARP Public Policy Institute, August 2001.
- Dick Mendel, “Double Jeopardy: Why the Poor Pay More,” in Double Jeopardy: Advocasey Explores the High Cost of Being Poor, 2005, 5–21.
- Gary Rivlin, Broke USA: From Pawnshops to Poverty, Inc., How the Working Poor Became Big Business (New York: HarperCollins, 2010).
- “The Truth about Immigrants’ Banking Rights,” NEDAP.
- John Ulzheimer, “Are Pawn Shops, Rent-to-Own and Other Loan Alternatives Worth It?” Mint Life, January 30, 2012.
- Jean Ann Fox and Patrick Woodall, “Cashed Out: Consumers Pay Steep Premium to ‘Bank’ at Check Cashing Outlets,” Consumer Federation of America, November 2006.
- National Association of the State Treasurers Foundation: Tomorrow’s Money for Young Adults, “Check-Cashing Stores,” 2012.
- “Prepaid Cards: Loaded with Fees, Weak on Protections,” Consumer Reports, March 2012.
- Deyanira del Rio, “Perils of Prepaid Cards,” NEDAP, December 22, 2010.
- American Civil Liberties Union. “In for a Penny: The Rise of America’s New Debtors’ Prisons.” October 2010.
- Bajaj, Vikas, and Ford Fessenden. “What’s Behind the Race Gap?” New York Times, November 4, 2007.
- Clinton, William, and Arnold Schwarzenegger. “Beyond Payday Loans.” Wall Street Journal, January 24, 2008.
- Consumer Action News. “Dos and Don’ts: Choosing and Using a Prepaid Card.” April 2012.
- Consumer Financial Protection Bureau. Electronic Funds Transfer (Regulation E). Washington, DC: GPO, 2012.
- Consumers International. “The Remittances Game of Chance: Playing with Loaded Dice?” January 2012.
- Credit Union National Association. “New Fin Lit Survey: 56% of U.S. Adults Don’t Budget.” April 4, 2012.
- Federal Deposit Insurance Corporation. National Survey of Unbanked and Underbanked Households. Washington, DC: GPO, 2009.
- Fox, Jean Ann, and Patrick Woodall. “Cashed Out: Consumers Pay Steep Premium to ‘Bank’ at Check Cashing Outlets.” Washington, DC: Consumer Federation of America, 2006.
- Haughney, Christine. “City’s Poor Still Distrust Banks.” New York Times, August 17, 2009.
- Insight Center for Community Economic Development. “The Racial Gap in Debt, Credit and Financial Services.” June 2009.
- Massey, Douglas, and Nancy Denton. American Apartheid: Segregation and the Making of the Underclass. Cambridge, MA: Harvard University, 1993.
- McCauley, Michael. “Consumers Union Report: Prepaid Cards Come With Long List of Fees and Weak Consumer Protections.” Consumers Union, September 15, 2010.
- National Association of the State Treasurers Foundation. “Check-Cashing Stores.” Accessed March 26, 2013.
- New, Catherine. “Prepaid Cards Rise in Popularity as More Americans Are Shut Out from Traditional Banks.” Huffington Post, April 11, 2013.
- Popken, Ben. “Why Money Launderers Love Prepaid Debit Cards.” The Consumerist, May 25, 2011.
- Prager, Robin A. “Determinants of the Locations of Payday Lenders, Pawnshops and Check-Cashing Outlets.” Washington, DC: Federal Reserve Board, 2009.
- Rivlin, Gary. “America’s Poverty Tax.” Economic Hardship Reporting Project, May 16, 2012.
- Rust, Adam. “Prepaid Cards for Prisoners.” Bank Talk, September 20, 2010.
- Saunders, Lauren K., and Jillian McLaughlin. Unemployment Compensation Prepaid Cards: States Can Deal Workers a Winning Hand by Discarding Junk Fees. Washington, DC: National Consumer Law Center, 2011.
- Schutte, Arjan. “Not Underbanked: Untapped. Underserved Spend $45B on Financial Services.” Inside the Underbanked, November 2, 2011.
- Silver-Greenberg, Jessica. “Welcome to Debtors’ Prison, 2011 Edition.” Wall Street Journal, March 16, 2011.
- Silver-Greenberg, Jessica, and Stephanie Clifford. “Paid via Card, Workers Feel Sting of Fees.” New York Times, June 30, 2013.
- Steinisch, Monica. “Governments Adopt Prepaid Cards for Benefits.” Consumer Action News, April 2012.
- Tuttle, Brad. “Big-Box Banking: Why the Unbanked Are Cashing Checks at Walmart.” Time, February 1, 2011.
- U.S. Department of the Treasury. Banking on Opportunity: A Scan of the Evolving Field of Bank on Initiatives. Washington, DC: GPO, 2011.
- Vissa, Preeti. “Debit Card Overdraft Fees: Reforms Welcomed but More Are Necessary.” The Greenlining Institute, April 2010.
- White House Office of the Press Secretary. “Fact Sheet: Reforms to Protect American Credit Card Holders.” May 22, 2009.
- Work Permit. “U.S. Banks Help Immigrants Send Money Home.” January 30, 2006.