Check cashing stores and payday loan centers have a checkered reputation, to put it mildly. Critics say their high interest rates and fees take advantage of people who are already financially disadvantaged. But the truth is, these alternative financial systems are proliferating in Wisconsin and around the country.
Writer Lisa Servon wondered why. Servon is a professor of city and regional planning at the University of Pennsylvania and her new book is called The Unbanking of America: How the New Middle Class Survives.
"The book really started with me kind of going out to... find out why people were choosing not to use a bank account," says Servon. "And what I found out was that for many people banks just aren't serving them very well, and they're making informed choices many, many times not to use a bank account."
When the Glass-Steagall Act was repealed 1980s, that removed a lot of the protections for bank account holders. Servon explains that the act restricted banks' ability to engage in risky behavior, and separated commercial, retail and investment banking from personal banking to protect people's money.
"As banks grew bigger and began to see the potential of making money in other ways, for many of them, the individual account holders who just had checking and savings accounts became less important."
Once the act was repealed, banks could create riskier investment strategies and they were able to branch out more widely. "As banks grew bigger and began to see the potential of making money in other ways, for many of them, the individual account holders who just had checking and savings accounts became less important because they were making their money other ways," says Servon.
Banks also changed the way they made money by creating more fees. "Overdraft fees... monthly account fees, minimum requirements of minimum balances, fees to use ATMs, fees to get a new card, those were all new and banks realized they were real money makers," Servon explains.
Check cashing businesses are often seen as an inordinately expensive way of managing money. But while working at one as a teller, Servon was surprised to learn that many of her customers had started off with traditional banking and simply found it too expensive.
"There were lots and lots of people who were educated, who owned their homes, who were making $50,000 or $75,000 a year who still couldn't make it day to day, month to month, financially. And who were using alternative financial services because they had no better options."
"They had experienced increasing monthly charges, banks were holding their checks longer. One overdraft fee could spiral into hundreds of dollars in fees, and they just couldn't manage that," she explains.
Servon says people who use banking alternatives are often stigmatized as being uneducated about finance, but she found the reality to be much different.
"What I discovered was that there were lots and lots of people who were educated, who owned their homes, who were making $50,000 or $75,000 a year who still couldn't make it day to day, month to month, financially. And who were using alternative financial services because they had no better options," she says.
