The financial-services industry affects our lives on a day-to-day basis. We take out loans, pay for goods and services, invest, and deposit money all through different parts of this one industry. Despite this shared utilization, our experiences can be quite different. While most households have traditional deposit accounts, others use alternative financial services.
The FDIC estimates that 21.7 percent of Massachusetts households are underbanked or unbanked. Someone who is unbanked is an individual with no checking or savings accounts, while an underbanked person is someone with a deposit account, but who also uses services outside the traditional banking system. In Massachusetts, a widely used alternative service is check-cashing stores.
These stores target low- and middle-income households and are often conveniently located for their market. In Massachusetts, the average median income of U.S. Census tracts with check-cashing stores is about $20,000 less than Census tracts without them.
These stores allow a customer to cash a check without a bank account, but often charge hefty fees to do so. Some stores charge a few dollars for the service, while others take a percentage of the check.
Massachusetts does not set fee limits, so the amount a customer pays varies from place to place, but it often falls within 1 percent to 4 percent of face value. While that percentage may seem small, people who only use this option can end up paying hundreds of dollars annually in fees alone.
Check-cashing stores can charge these fees because many of their customers don’t have a real choice. Page 41 of the 2015 FDIC survey reports that 37.7 percent of unbanked households said they were unbanked because they did not have enough money to meet minimum account balances. An additional 11 percent said they had problems with bank account fees, and 6 percent had problems with ID, credit or former bank accounts.
Check-cashing services with high fees exist because there’s demand for the product. Banning these establishments would not solve the problem, because the service is necessary for many people. Instead, at least part of the solution can be found in the demand for their services. Incentivizing the traditional financial industry to offer more low-income-friendly deposit products would at least give unbanked households the option for cheaper banking services.
This wouldn’t solve all the problems of unbanked and underbanked households, but it could help save money for those who need it most.