U Penn Professor Research Why People Choose Check-Cashing Services Over Banking
Inside Subprime: Jan 25, 2019
By Lindsay Frankel
Lisa Servon, Professor of City Planning at the University of Pennsylvania, has spent her 20-year career focused on better understanding how people living in low-income communities get by. For her, something about the common assumption that everyone would be better off financially if they participated in services offered at traditional banking institutions didn’t sit quite right. That is, she couldn’t quite buy into the assertion that educating the “unbanked” (including approximately 7% of US households without checking or savings accounts) and the “underbanked” (including the almost 20% of US households that have bank accounts but still seek out and use alternative financial services) would result in improved financial outcomes.
As she told Business Insider, “The implication of that was these people were making poor decisions… I knew that the people I had worked with closely who don’t have very much money know where every penny goes. They budget things. They know where to get the best deals on things. And so it struck me that if they were using check cashers, there must be a good reason for that.”
So, to reconcile what the experts and her instincts seemed to say, in late 2012, Servon got a job working as a teller at a check-cashing store in the South Bronx, where she spent four months learning firsthand why people choose “unbanked” financial services. To her surprise, she learned that people were choosing check-cashing services over banking because non-banks seemed to meet customers’ needs better.
Her book, “The Unbanking of America: How the New Middle Class Survives,” fully details her experience and findings with anecdotes and examples of the trends she heard. In short, Servon learned of three primary reasons why people — including the “underbanked” who do have bank accounts — chose to seek out check cashers, payday loan stores, and other subprime services over banking: cost, transparency, and service.
On the cost front, Servon told Business Insider that “People told me they were saving money by going to the check casher instead of the bank.” While the check casher charges fees that can add up, including set and percentage-based fees that vary with the total amount, customers reported that those fees were still less than banks’ money order charges or maintenance and overdraft fees.
Customers also reported that check cashers operate more transparently than banks. As Servon told Business Insider, customers “felt like they knew exactly what they were paying when they went to the check casher. And if you go into a check casher, you will see there are signs that span the teller window that list every product that’s for sale and how much it costs.: This is in stark contrast to banks, which sometimes have more convoluted and less obvious fee amounts and conditions that can vary with each specific account type. For customers with minimal discretionary income, being able to predict where each cent goes is imperative.
Finally, Servon heard from her check-cashing customers that they valued the customer service they received there more than they did at banks. Because check cashers rely on high volumes of customers to turn a profit, they recognize that they need to meet people where they are and offer flexibility — even if that flexibility comes with an additional fee — to keep customers coming back. That, in turn, makes those customers feel valued.
Servon’s analysis presents cause to reevaluate how mainstream financial institutions and entities conceive of lower-income and middle-income Americans’ financial behavior and choices. At the very least, it reaffirms her initial instinct and begs a larger question: the people choosing to purchase subprime financial products are not doing so out of naivety or lack of education, so how can both banks and socially responsible subprime lenders better provide for these customers to keep their business out of the hands of their predatory competitors?