# D. What is the problem with being unbanked?

One major problem with being not having a bank account or not having access to bank credit is that the alternatives tend to be significantly more expensive. Most check-cashing outlets, for example, charge two to three percent of the face value of a paycheck to cash it.<sup>10</sup> They also levy fees for money orders, stamps and envelopes, and for handling utility bill payments. This means that a household with $20,000 in take-home income that regularly uses a CCO for all of its payment services can easily spend $600 year on just payment services. Were the same household consistently able to meet a bank’s minimum balance requirements and not bounce any checks, it would almost always pay less than $100 a year in bank fees, and often substantially less. Such a difference can make a noticeable impact in the standard of living of low- and moderate-income households whose budgets are already stretched to pay for household necessities.

Similar cost differences arise in the case of bank credit versus the credit of lenders that serve mainly high-risk borrowers. Pawnshop interest rates are regulated by states, not the federal government. In states where pawnshops thrive, they generally charge annualized interest rates of 150 percent or more on typical loans of around $100. Payday lenders, which have become more numerous than pawnshops, are also regulated by the states. In the states where payday lenders are common, the lenders charge annualized interest rates of 300 to 500 percent on typical loans. Small loan finance companies, which make somewhat larger loans and refuse to accept very high risk customers, typically change annualized interest rates of 50 to 100 percent. Annualized interest rates on bank credit cards are have generally hovered between 18 and 25 percent in recent years. Households that must borrow in the alternative financial sector because of impaired credit histories or heavy debt burdens, pay a substantial penalty for their status. When these are lowerincome households who already struggle economically, this compounds their problems.

Interestingly, in an ethnographic study conducted by Caskey et al (1997) among lowerincome households in a large city and in a small town, the researchers found that the unbanked did not complain about the cost of payment or credit services. Rather, they complained most about the personal stress of living paycheck to paycheck without easy access to credit. They fully expected that minor or major personal financial setbacks, such as a required automobile repair, a large health care expense, or an employment interruption, were coming their way as such setbacks had in the past. They said that they worried constantly about this because their credit histories and complete lack of savings turned every such set back into a very stressful personal financial crisis. The stress associated with their situation may, in fact, be the major problem of being unbanked and of lacking access to bank credit.

> 10 This is not true in New York City.  New York law set a maximum check-cashing fee of 1.4%.  Most states do not limit checkcashing fees and, among those that do, few set a maximum rate below 2.5%.

27