Check cashing and payday loansPlenty of journalists write about the unbanked and underbanked markets, but how well do these writers really understand the hardships regularly confronting those households who are excluded from traditional banking and financial services?

To help these journalists and others gain a better understanding of what daily life is like for many of the unbanked, the Center for Financial Services Innovation (CFSI) arranged for journalists, financial services IT vendors, industry analysts, investors, and other professionals to spend a day “walking in the shoes” of people who rely on check-cashing kiosks and pay-day loans to get through the week. A day before the CFSI/American Banker EMERGE Conference began in June, CFSI arranged for this decidedly “banked” group to divide into groups of three and spend a day conducting various financial transactions in a poor neighborhood in Los Angeles.

Here’s how Kevin Wack, writing for American Banker, described the experience:

We’d been given a series of tasks to complete: buy a prepaid card, purchase a money order, cash a pair of checks and so on.Every transaction took longer than it seemed like it should, but still, our money quickly started to dissipate. We were charged $6.15 to cash a $105 check, then another five bucks to send a $40 money transfer. In one store, we peered at the fee schedule posted on the wall: to borrow $100, we’d pay $17.64, which translates to a 460% annual percentage rate on a two-week loan. . . .

The Ace Cash Express store had no self-service kiosks, just an old-fashioned queue to speak with a clerk. When we got to the front of the line, it became more apparent why many stores in this industry look like dinosaurs: we had to provide a lot of detailed personal information in order to complete some fairly simple transactions.

Having encountered similar high fees and paperwork with his group, Robert Brownstein in The Atlantic drew these lessons:

It’s expensive to be poor. It’s also very time-consuming. And there isn’t much guidance to help you make good decisions, more effectively manage your money, or begin building a positive credit history.

But participants also concluded that many of the front-line workers who interact with customers are friendly and helpful. And that the archipelago of check-cashing storefronts, supermarket and dime-store money transfer counters, and payday and title loan lenders add up to an alternative financial system that can ultimately meet the needs of some families living at the margin, even if they involve costs in time and money that more affluent families might consider unacceptable. “The message is that it’s nuanced,” said Jennifer Tescher, president and CEO of the CFSI, which organized the outing as part of a conference it co-sponsored here last week on innovation in reaching underserved families. “It’s complicated. We need to throw away our perceived ideas about what the consumer needs.” . . .

When we were done, the question I found myself asking wasn’t whether the system functioned-but whether it was the best we could do for families who are already operating with so little margin for error. “The challenge we are focused on,” Tescher told me after I returned, “isn’t whether you have a bank account; it’s whether you are managing your finances day-to-day in a way that provides security and opportunity.” We didn’t encounter much of either during our brief immersion into the hazy archipelago of alternative finance.

For anyone interested in better understanding this market, Wack’s and Brownstein‘s accounts are both worth reading in full.

Bravo to CFSI for arranging this eye-opening event.

Photo Some rights reserved by Orin Zebest