Why Banks Fail So Many Americans—and a Possible Solution

Abstract

Why Banks Fail So Many Americans—and a Possible Solution

Contact: Phoebe Kosman Publicity Manager 617.495.0303 phoebe_kosman@harvard.edu

There are two forms of personal banking in America. For those who can afford it, there are checking accounts, ATMs, and debit cards. For everyone else—including the 70 million Americans who don’t have a bank account or access to traditional financial services—there are “fringe loans”: payday lenders, title loans, and pawn shops. As Mehrsa Baradaran documents in How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, limited access to banking is both widespread and staggeringly expensive:

  • Between 30 and 50 percent of Americans rely on payday lenders.
  • From 2008 to 2013, banks shut down 2000 branches, 93 percent of which were in postal codes where the household income is below the national median.
  • Meanwhile, the payday lending industry has over 20,000 outlets—more storefronts than Starbucks and MacDonald’s combined—and makes $40 billion in loans annually.
  • The average unbanked family with an annual income of around $25,000 spends about $2400 a year on financial transactions. That’s more than these families spend on food.
  • According to current estimates, the unbanked spend $89 billion a year on financial fees and services.

How did affordable banking services become so scarce at the same time that banks have become bigger and more profitable?

Baradaran, Associate Professor at the University of Georgia School of Law, traces the history of banking in America to show how trends including deregulation and the consolidation of banks have resulted in a banking system that, while enjoying government support in the form of deposit insurance, interest-free loans, and bailouts, has no incentive to serve Americans who most need small loans. Meanwhile, the organizations originally founded to serve working-class and middle-class Americans—community banks, savings and loans, buildings and loans, credit unions—long ago drifted from their mission of helping small borrowers.

The solution to this problem, Baradaran argues, is found in every ZIP code: the United States Post Office. In fact, the USPS did provide banking services for many years, and the US, one of the only developed countries in the world without a postal banking network, is unusual in not offering postal banking; only 6 percent of postal carriers worldwide don’t offer banking services. Enabling the USPS, which already offers money orders and which has a presence in every neighborhood, to expand its roster of banking services could be the speediest and most effective way to free tens of millions of Americans from the dangerous and costly cycle of payday loans.

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