Let me start with the author's ending: "In order to repair the system, we need a shared understanding that access to good financial services is a right, not a privilege for the fortunate few. We need to demand financial justice."
That is how the book ended. If I read it first, I probably would have returned it to the shelf. But no, I made the commitment to read it when recommended by a colleague, and it was quickly on my Kindle. Something about it being on my Kindle compels me to read it. So I trudged through it to get to her takeaways, which, when I read them, I could have guessed her bio before I read it. Professor of city and regional planning at the University of Pennsylvania.
Didn't see that coming.
Without further anticipation, here are the book's takeaways with a little editorial commentary from me:
1. Change the relationships between banking and government. She argues for renewed government involvement in the consumer financial-services sector. Stating the relationship has shifted to "favoring bank profitability and efficiency over public needs." She further argues the government doesn't hold banks accountable to serve all Americans equally well.
There were ideas in the book to accomplish this that I must report to you: a) Subsidize banks to serve customers with financial instability who are not profitable. b) Enable mission-oriented banks and credit unions to extend their reach. She cited Amalgamated Bank (lost $5.8 million over past five years), Carver Federal Savings Bank (lost $4.9 million), and Lower East Side People's Credit Union (only $50 million in assets, yet profitable on a 5+% net interest margin). c) Have the Federal government provide banking services. She cited Post Office banking as an example. Saying it would be "not for profit, simply because it's the right thing to do."
JFB editorial commentary: Not sure the author was fully aware of the impact government involvement has had on those in the lower economic ladder. For example, the securitizing of the residential lending business moved most of that business away from banks to mortgage bankers and brokers, that far and away were the culprits behind preying on the underbanked. Perhaps a little light reading on the FHA, then later FNMA and Freddie Mac are in order. Dodd-Frank, the CFPB, and regulators "disparate impact" doctrine are pushing community financial institutions out of consumer banking. The Durbin Amendment and Reg E reduced fee income in checking accounts, making low-balance accounts difficult for financial institutions to cover costs. Costs foisted on them by, you guessed it, the Federal government through various laws such as BSA/AML. This resulted in the reduction of "free checking" and the increases in required minimum balances. So forgive me if I am somewhat indignant about sending in the Feds to exact more carnage. Oh, and we already have subsidized financial institutions to serve the underserved. They're called Credit Unions. They pay no Federal income taxes.
2. Enable better decision making. Hold financial service providers accountable by requiring them to make it easier to compare products and make informed choices. Like a fact-box on packaged foods.
JFB editorial commentary: Funny that she talked about the reams of disclosures that confuse the public. These disclosures are required by law and bank regulators. *irony*
3. Create a sandbox for innovators. She admits that regulation stifles innovation.
JFB editorial commentary: This is already happening, without government intervention. Even in spite of it. In a previous post, I offered that banks were slow to use alternative data for consumer loan decisions because of regulatory interpretation of the Fair Lending Act and the disparate impact doctrine. Alternative credit data to make loan decisions would benefit the underbanked. I fail to see how her clarion call for more government intervention sits with this recommendation.
Alright, I've given you enough of this book. When reading some of this stuff I first thought that the author was simply a pen name for Elizabeth Warren.
Are we doing the underbanked and unbanked any favors by pointing to a barely existent boogeyman behind the tree for their challenges? I Googled "free checking" and came up with multiple options. I once had very little in my accounts too. If I overdrew my account, I didn't write a tersely worded letter to my congressman. Yet this is how the author chooses to rationalize individual challenges.
It's the systems fault.
In response to someone overdrawing their checking account, consider the following reactions:
Person 1. The big bank screwed you! Something must be done!
Person 2. Ouch! You shouldn't overdraw your account. Let me show you how I avoid doing it.
I ask you: Which person cares more about the long-term well-being of the underbanked?
I'm about halfway through this book at the moment, and I enjoyed reading your editorial commentary. I'll certainly continue reading with a more critical eye. That being said, I do believe her book provides an invaluable window into the world of the unbanked. I tend to agree that her argument to subsidize and otherwise restructure the mainstream banking system is a bit of a two legged table. On the other hand, I believe members of the unbanked community find themselves in their position because no one has shown them how to avoid overdraft fees and other poor financial decisions.ReplyDelete
I believe the financial deliverance of this population will come from companies who find a way to serve them profitably. By restructuring their fee tables and account requirements to better fit this particular consumer. And most importantly, by adopting a mentor relationship to their customers. Someone who isn't just there to hold their money and execute transactions reliably, but to provide the financial education this population so desperately needs. With the dawn of branchless banks (less overhead) and mobile banking (opportunity for behavior based messaging) fully upon us, I think we'll see major improvements for the unbanked in the years to come.
I agree that poor financial decisions make the underbanked situation worse, and there should be financial education to help them avoid the situation. I also know from measuring product profitability from banks that it is difficult to make low balance, high activity clients profitable. This is why payday lenders are so expensive.ReplyDelete
But there is an evolution to customer relationships. And raising up a customers' financial situation to the point where they are profitable could result in a long-term, loyal, and profitable customer.
Thank you for the comment!