Wednesday, November 1, 2017

Unprepared and Unproductive: My Day as an “Unbanked” Consumer

According to the Center for Financial Services Innovation (CFSI), 138 million American adults are struggling with their financial health. Many are unbanked (they don’t have a bank account) or underbanked (they have a bank account but supplement it with alternative financial services). For a few hours last month, I walked in their shoes as part of FinX, a real-time, hands-on simulation held in conjunction with the FinCon conference in Dallas.


The best way to describe FinX (short for Consumer Financial Experience) is that it resembles the format of the television show “The Apprentice.” However, all of the tasks involved banking services. Participants work in teams in a large city and have about two hours to complete a series of activities including cashing a payroll check and a personal check, buying a general purpose reloadable (GPR) card, completing a money transfer, inquiring about $500 loan costs from a bank and an alternative financial services vendor, and visiting a pawn shop.


As my team completed various FinX tasks, we briefly experienced the challenges that un/underbanked consumers face and the real-life constraints and obstacles that they encounter on a daily basis. For example, I was unable to cash the payroll check in four locations and the Western Union system was down in a supermarket that sells money orders. After over an hour spend standing in various lines with real consumers performing their typical banking tasks, my teammates and I had little to show for our effort.


In addition to the unproductive use of our time, another key insight was the cost of financial services for un/under banked individuals. To cash a $15 check at one bank without an account there cost $8 or 53% of the face amount! Money orders cost $5 each. The payroll check was unable to be cashed at the same bank from which it was issued due to a procedure called “positive pay.” This is a fraud detection tool that matches a check presented for payment against a list of checks previously authorized and issued by a company. Our check did not have a match on file.


The distance between several financial institutions was substantial, further exacerbating the challenges that un/underbanked people face. Walking (which we did) takes time and busses or Ubers/cabs cost money that limited-income consumers can ill afford. When all the FinX teams got back to the hotel, we debriefed the activity and what we had learned and observed.


Participants discussed the following topics: the high cost of banking fees, high minimum balance requirements (one bank required a $1,500 balance for free checking), problems with fee disclosure (e.g.,  a menu of services and prices), the fact that major banks don’t make relatively small dollar (e.g., $500) loans, inconsistent allocation of policies by bank personnel, the inability to transfer money to people living within the same zip code, and concerns about personal safety if people leave an alternative financial services institution carrying a wad of cash. The FinX simulation also showed that a continuing series of obstacles and crises reduce the amount of “mental bandwith” that people have to make wise financial decisions.


FinX was a visceral experience and frustrating for me and my team because we lacked control over both our money and our time. The key take-away for me is that it is very expensive for people with limited resources and options to access and use banking services. So what comes next? Obviously, some solutions involve structural changes within the banking industry itself. Others may require legislation and public policy changes. Another option is for consumers to simply take maximum advantage of reasonably priced, low-fee bank products that already exist.


In my home state of New Jersey, financial institutions are required to provide a low-cost, low minimum balance Consumer Checking Account. Unfortunately, many people who can benefit from this account don’t know about it. It is barely marketed and rarely discussed by mainstream financial media. I am now motivated to discuss this product at every opportunity that I can get. As a result of FinX, I know how costly and frustrating it is to be un/underbanked. Lack of access to banking services at a reasonable cost is a threat to America’s financial health and financial health matters!

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