How the Poor Got Cut Out of Banking

ABSTRACTThe United States currently has two banking systems-one for the rich, one for the poor.1 It was not always this way. In the past, the U.S. government has enlisted certain banking institutions to serve the needs of the poor and offer low-cost credit to enable low-income Americans to escape poverty. Credit unions, savings and loans, and Morris Banks are three prominent examples of government-supported institutions with a specific focus of helping the lowincome. Unfortunately, these institutions are no longer fulfilling their missions, and high-cost, usurious, and sometimes predatory check cashers and payday lenders have quickly filled the void. These fringe banks do not provide the poor with useful credit and further bury them in debt.This Article tracks the neglected history of government-sponsored institutions designed to offer credit to the indigent and explains how each abandoned its initial purpose. In doing so, the Article highlights the shifts in modern banking that rapidly increased competition among banks and caused homogenization in form. Alternative banking institutions could not survive deregulation and were forced to assimilate and operate like mainstream banks, with heightened profits as their sole objective. The poor were the victims.This Article proposes the reestablishment of government-sponsored banks to serve the poor. Options include redesigning existing government measures and a novel proposal to use the existing Postal Service branches to offer lowcost, short-term credit to the low-income. Such proposals have strong historic roots and could offer credit services to millions of Americans.INTRODUCTIONPoverty in the United States is rising while economic mobility is declining. A complex variety of factors and circumstances cause poverty, making its alleviation a difficult puzzle for even the most committed policy makers. Pernicious poverty implicates every facet of society and the legal structure, but most obviously, poverty is about money-the lack of it, the inability to make it grow, and the inability to borrow it. Low-income individuals have unique financial needs and challenges and cannot be offered banking services as though they are simply rich people with less money. It is on this front that the U.S. banking system is failing the poor.A recent study found that over half the population of the United States would not be able to access $2,000 in thirty days to respond to an emergency.2 Further, approximately one-in-four households in the United States (28.3%) are "unbanked"-meaning they have no formal relationship with a bank-or "underbanked"-meaning they do not have access to incremental credit.3 Thus, they must rely on payday lenders, check cashers, or other fringe banking institutions to meet their short-term credit needs. These lenders are often usurious, sometimes predatory, and almost always much worse for low-income individuals than the services offered by traditional banks to their customers.Many scholars and policy makers agree that fringe banks have high costs for the poor4 and further dislocate them from traditional banking institutions by preventing them from building up a credit history.5 Many have advocated regulating such institutions or even banning them.6 Proposals include technical regulatory changes aimed at usurious rates,7 increased disclosure,8 and other consumer protection measures.9 Rather than joining the chorus of scholars looking to improve payday lending and check-cashing institutions, this Article takes a more fundamental approach: it seeks to examine the gaping hole that these services are currently filling.Throughout most of U.S. history, the credit needs of the poor were met by banking institutions specifically created and designed to appeal to them. Credit unions were a populist innovation designed to give the poor control, choice, and ownership over their money, with the protection of federal insurance.10 The Savings and Loan (S&L) was created to enable middle- and working-class homeownership. …