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Monday 10 April 2017

Unbanked But Not Unwise

Tribal Finance

Lisa Servon has written a clever, accessible and pin-point clear piece of ethnographic research. It looks at how an underserved and underappreciated tribe, without access to regular financial services, has developed ways and means of coping in their absence. It's also a damning indictment of the organizations that claim to offer them these services.

The tribe, of course, is middle class America, and the organizations are the banks that fail to serve them.

Many Prices

Over here in the UK we've seen a surge in the use of non-traditional, short-term financial lenders - payday loans is the most common form, but we've also seen a rise in the use of pawnbrokers. The typical view of the investing class I occasionally hang out with is that these companies are predators, feeding off the stupidity and poverty of the poorest and most desperate in our society.

When I tried to compare the fees charged by these lenders with those offered by mainstream banks I discovered something interesting. I could easily calculate what I'd owe for borrowing money from a niche provider - they're increasingly regulated to ensure this - but I couldn't easily figure out what I would pay for an equivalent overdraft with a high street bank. 

The more I looked the more puzzled I became: the charging structures between the banks were confusing for me, and I spend a lot of my life untangling this stuff. We've seen this before in Finance, Where the Law of One Price Doesn't Apply where I discussed how financial service providers come up with deliberately confusing pricing structures and random additional services to prevent straightforward comparisons. This shouldn't happen: rule #1 of economics is that the same service should, all things being equal, cost the same from different providers.

Customers are Fees

Which brings us to Lisa Servon's book, The Unbanking of America, in which she's taken the same puzzling behavior and done something so obvious (in retrospect) it's brilliant; she's actually gone and talked and worked with the people using these alternative loan providers. It turns out that these people aren't dumb or exploited, they're simply using the services most appropriate for them - and they're doing this largely because in the US the mainstream banks have turned the exploitation of the masses for financial gain into an art form.

In America, as in the UK, the idea of the local bank or savings and loan is pretty much dead. Banks have been allowed to merge and grow since the Gramm-Leach-Bliley Act of 1999, which essentially nullified the post-Depression Glass-Steagall Act that prevented banks from performing both retail and investment banking.

The impact has been to create large, centralized monoliths for whom individuals are simply dollar signs. This financialization of customers has a known effect - it's the same problem experienced by operatives using drones as weapons - the targets are no longer "people": it's known as moral disengagement, an issue we looked at in Euphemisms for Morally Disengaged Managers.

Local Banking, Reinvented

This disengagement has allowed banks to engage in practices that make the behavior of the alternative lenders, who aren't exactly a byword for benevolence, look positively altruistic. For example, as Servon lays out, the process of debit resequencing ensures that banks reorder debits to ensure overdraft fees are maximized:
"...You have a balance of $100. The bank could clear the $75 charge first resulting in two overdraft fees. Instead many use software that re-orders the transactions. This software presents the $500 charge first, then the $150 charge, and finally the $75 charge. and you end up paying three overdraft fees instead of two".
As Servon explains, in poor areas the check cashing companies and other local lenders have replaced the local banks. People use them when they need the certainty of when they'll get their cash - they don't have to worry that they'll accidentally go overdrawn because a check clears a day later than they expect. As as the book clearly shows, even a single mistake of this type can mean its better to use an alternative lender, even if their book prices look more expensive.


As it happens here in the UK we are perhaps seeing the start of a technological change that might undermine this type of behavior from our major banks. Firstly checks are pretty much extinct in the UK, we use debit cards or direct transfers from our bank accounts instead. We also now have near instantaneous clearing of funds, all of which helps with the transparency of payment transactions.

However, the underlying problem that bank fee structures are opaque remains, as witnessed by the popularity of alternative lenders. To address this the local competition authority has forced the major banks here to open up interfaces to allow third-parties to access account information and to make instant payments from an account to a third-party. All only with account holder permission, of course.

Open Banking

The Open Banking Working Group is in process of delivering these interfaces, with the first release in early 2018. This looks like it will force the provision of information about the structure of the underlying accounts and the fees associated with them. It also allows third-parties - such as money comparison websites - to access this information and start providing budgeting and switching services to end customers. Amusingly it's already been noted that it's difficult to provide consistent data between banks because the charging structures are so different ...

It's probably too optimistic to think this will put an end to the types of unethical behavior Lisa Servon discusses in her book, but it's an indication of the way that the technology that has isolated our great financial institutions from their customers can be used to fight back. But that starts by understanding that the people who use these services are not stupid or exploited, they're making sensible and rational decisions based on the situation they find themselves in:
"In order to repair the system, we need a shared understanding that access to good financial services is a right, not a privilege of the fortunate few. We need to demand financial justice".

Lisa Servon is speaking in London at Consult Hyperion's Tomorrow's Transactions conference in April (note, that so am I, as I work for them). It promises to be a lively session. 

1 comment:

  1. I encountered the fee game in the mid-90s when my son graduated from high school and joined the workforce in Texas. He wasn't good with cash flow, constantly over drawing his account. After several such events, his mother told the banker they shouldn't let him have an account. The banker said they couldn't deny him an account. It wouldn't be fair. Looking at the situation, it was clear that they made money on every overdraft. It was the business model. At the larger scale, as banks merged, the method was to raise fees at the acquired bank to pay for the acquisition. This is the MBA mind at work. Taking money is disguised as making money. I did know a lady pawnbroker who explained how she helped fund small businesses. People might borrow against jewelry, artwork of the Mercedes.