A story in the Los Angeles Times reports that more than a quarter of U.S. households use banks little or not at all. They use pawnbrokers, payday loans, and those automatic check-cashing places instead. Of the 25.6 percent, 7.7 percent have no bank accounts at all, and the rest are “underbanked.”
Why do I care? Because it’s a big deal that one in four households – not just individuals, but entire households — in the U.S. are that flaky. I file this in the same category as the information that nearly half the nation’s infants receive Women and Infant Children benefits (in California it’s more than 60 percent, so my kids are in the minority), and that one fifth of the people in Los Angeles County are on welfare and/or food stamps (this does not count unemployment or Social Security), and one out of 100 people in the U.S. are apparently in jail or prison at any given time. It’s too many. And they’re not spread out evenly — they’re concentrated in places where the privileged minority from which is drawn people who write surveys and write Times stories doesn’t have to deal with them. So they can afford to make kindhearted assumptions.
The information comes from an FDIC survey. It doesn’t appear the survey, or the article, considered three of the best reasons for keeping one’s money out of banks:
1) Your bank account can be levied upon by creditors. For example, if the district attorney’s office is after you for reimbursement for the welfare payments your child receives, they can get an order taking it out of your bank account without warning.
2) Banks don’t give people accounts who rip off banks. So if, for instance, you’ve had overdrafts you haven’t made good on, or have forged checks, you’re barred from having an account, and not necessarily just with the bank you cheated. I’m not sure how the banks find out — maybe they run criminal records, maybe there’s just a “bad” list they put people on.
3) Law enforcement can track you down through your banking.
No, the story reads as if traditional banking is an injustice perpetrated by the banks upon the naive and unlucky:
“Stubborn infrastructure” at financial institutions, as well as the cost and range of their services, are to blame for the high rate of unbanked and underbanked consumers, said Red Gillen, senior analyst at Celent, a Boston financial research and consulting firm.
I don’t know what he means by the “range of their services” being a problem. But how much does it cost to have a checking account, like $15 a month? That’s less than an employed person responsibly running a household would lose to fees from automated check-cashing centers and money orders.
Note that the story doesn’t say how many of those completely unbanked folks live on public assistance. I’ll bet it’s a majority. They get a check once a month, and maybe also have an Electronic Benefits Transfer card they use for their groceries and Subway sandwiches. Less hassle to pay the check-cashing fee once a month, and have the rest available in cash so no one can track how they use it.
And I’ll also bet the vast majority have children under 18. So, the numbers mislead us into thinking the problem is smaller than it is, because the percentage is disproportionately represented in parenthood. Look how huge, for example, that WIC statistic gets when it gives us the percentage of infant recipients, versus the percentage of total households. How many law-abiding, self-supporting people have kids anymore?
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Some of this ground was covered on Fred Wilson’s blog today. Also, relevant to this was an NY Times Mag article a year or two ago about low savings rates among the poor. I’m not motivated enough to find the link now, but one of the results of a study the article mentioned was that many poor people don’t have savings accounts because they are afraid that having some savings will make them ineligible for public assistance.
Fred Wilson was a Viet Cong? That can’t be right. What else does VC stand for?
Really? Venture Capitalist.
BTW, you might find this post of interest. I was thinking of suggesting it to you as a post topic, but then I just fired off a quick draft of it myself.
Venture Capitalist. Lovely. Cat Dave, the post you links to appears to be about how non-dirtbags should save more money. It appears he’s talking about working, responsible people becoming more responsible. I’m missing the connection.
As for people on public assistance not wanting savings accounts, yeah, why would they? They’re not worried about a rainy day. They can’t get laid off from GR, SSI, or Calworks. And legislators do try to design those payments so they don’t provide extra.
Sheila,
You’re not connecting the dots. Fred makes no distinction between dirtbags and non-dirtbags (and, being a congenitally nice guy, he wouldn’t make such an invidious distinction). But in the post and his comments it seems clear that he is talking about getting people who don’t currently save (some of whom you, Sheila Tone, might call dirtbags or deadbeats) to save more. I suspect that, having little personal experience with the unbanked, Fred may not be aware of some of the reasons why many of them don’t save (e.g., difficulty in delaying gratification, poor future time orientation, etc.).
On his site, I was going to mention a firsthand experience with this I have had, but my comment was getting too long so I nixed it. But I’ll mention it here instead.
A few years ago, I worked a temp gig as a financial planner for the participants in a large state’s generous pension (defined benefit and defined contribution) plans. We dealt with everyone from DPW clerks to judges and state university professors. Invariably, when low income workers left their jobs they would call to yank out their retirement money, even after we explained to them that they’d have to pay taxes on and an IRS early withdrawal penalty on it.
“We dealt with everyone from DPW clerks to judges and state university professors.”
Dude. That’s a really small slice of “everyone.”
Which is exactly my point. People who read finance blogs and think “venture capitalist” when they hear the abbreviation “VC” also think “DPW clerks” when they think “low-income.” When they hear “irresponsible,” they think “cash out 401k prematurely.” But there’s a whole ‘nother stinking world below that. And it’s a lot bigger than you people think.
When I left a journalism job back in the 90s I cashed out my 401k soon afterward. It was a small amount and I needed the money, stiff penalties or not. I don’t think my arguable lack of budgetary diligence should put me in the neighborhood with welfare moms with kids by multiple fathers, and people with criminal records on GR. Unfortunately, the places I could afford back in those days did put me around those types.
If you don’t want your kids around those people, you almost have to be rich nowadays. Gated communities, private schools — it’s not about the vanity.
Another scary number is the LAUSD dropout rate, which is apparently around 30%. Unfortunately, that number is probably going into the permanent underclass.
Also, reading this post makes me think about my own reflections on the LA area. In general, I know these vast populations exist, but I don’t really notice it in my day to day existence. Of course, I don’t have kids. I, however, do have relatives who fit into those categories; got to rack up prole points somehow. But without a detailed family knowledge, I couldn’t tell that they visited check cashing places or had babies on medicaid. So I probably couldn’t do it for the general populace as well. On my next trip to LA I’ll have to pay more attention to my surroundings.
And Ecco, that dropout rate is around 50 percent at the poor school such as Jefferson High. Of course at some school in the better areas of L.A. it’s less than 10 percent. Another example of how averages distort the specific reality.
“Dude. That’s a really small slice of “everyone.””
Sheila, the cross-section included employees making ~15k per year to those making ~$200k. Not just DPW clerks on the lower end but school crossing guards, lunch ladies, etc. And the money the low income folks were pulling out wasn’t 401(k) money — none of them were contributing to their government equivalent of a 401(k) (a 457) in the first place. The money they were cashing out was from a separate pension plan that they never had to contribute to.
I know poor people. There are plenty in the city where I live now. There were plenty in the city where I grew up. I went to school with them. I dealt with plenty of the same types in that financial planner gig. So you’re lecturing the wrong guy about that “‘nother stinking world”.
Excellent post. You made some good points that I never thought of. However, I’ve always assumed that in order to “cash” a check at your bank, even if it’s a paycheck, your checking account needs to already have the funds in place to cover it. Otherwise, your check has to get held until it clears. (I’m pretty sure this is the way it works, right?)
If so, that explains a lot. A lot of people can’t get (or stay) one paycheck ahead. They also can’t wait three days for their next paycheck to clear. Direct deposit solves these problems, but a lot of people are so paranoid about their money that they don’t trust anything other than the cash in their pockets.
Sheila, you are an awful human being. Do you have a sister?
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-{Trumwill: Race-baiting is not allowed on Hit Coffee.}-
The only real issue in terms of providing bank services is that for those who are carless, most of the United States is lacking in public transport needed to get to a bank, especially since banks tend to eschew poor neighbourhoods.* Otherwise, Sheila’s argument is considerably more compelling than what the study offers. There are plenty of banks and credit union that offer low cost checking and savings accounts, but if you have a warrant, bad credit, or child support judgements, then a checking account is just about a trap for watching your money disappear. Besides, when you’re on welfare, there is no incentive to save given that after a certain small amount, you become inelligble for most forms of assistance. Either we reform child support laws and permit great savings levels for public assistance, or we’ll continue to suffer from super low savings rates from our poorest citizens.
*Even high prole black neighbourhoods seem to be devoid of banks…
If you don’t want your kids around those people, you almost have to be rich nowadays. Gated communities, private schools — it’s not about the vanity.
Either your standards are really high, or SoCal is awful. Even here in New York, you can find a decent home in a good neighbourhood for $450K with no need for a gated community or private school.
David, one can get into a gated community for $450k where I live. I wasn’t saying it’s automatically horrid outside the gates, just that it’s not as snobbish as many make it out to be.
In a $450k home, there aren’t welfare folks holding title or lease, but the lease/title holders still may have children or other relatives living with them whose standards of behavior aren’t so high. My desire is to raise my children around college-educated people who don’t breed before they are self-supporting. It’s a tall order.
And the public schools take in a wide swath. I have a colleague who sends his daughter to a well-regarded public school in Valencia … and yet she was getting picked on by a girl who turned out to be under the supervision of dependency court (she was with a relative foster placement, which is better than a non-related professional foster family, but still). That wouldn’t happen if she’d been in private school.
Side note: isn’t a $450k home out of the reach of 95% of Americans?
As I stated, the fact that you *need* a gated community to avoid the proles is what I find problematic. Despite our problems here in the East Coast, even the prole white neighbourhoods are relatively safe areas with schools that do decently with most students attending some form of higher education.
My desire is to raise my children around college-educated people who don’t breed before they are self-supporting. It’s a tall order.
I’m almost tempted to argue that you may want to leave Southern California entirely…
Side note: isn’t a $450k home out of the reach of 95% of Americans?
That’s slightly above average in my neighbourhood. The homes in the black neighbourhood nearby sell for $250K to $300K. And one can add high closing costs and yearly property tax in the $8K to $11K range.
Oh, did I add that the local rental market is composed mostly illegal apartments in basements or second floors charging $1000 for a one-bedroom and $1500 for a two-bedroom unit?
Side note: isn’t a $450k home out of the reach of 95% of Americans?
Not for two-income couples.