The Unbanking of America - Book Review
Lisa Servon, a professor of city and regional planning at the University of Pennsylvania, found inspiration from a guest speaker to work as a teller at a check-cashing business and as a payday lender in Oakland. Her experience exposed her to the truth about a mainstream banking and credit system in the US that underserves tens of millions.
The book she wrote to expose her findings - The Unbanking of America - describes the unmet need, the people impacted, the financial services products available to them, and the companies that provide them.
The Unbanking of America
Houghton Mifflin Harcourt
In summary, this is an excellent reference for understanding the unbanked population in the United States. The early chapters are objective, factual and descriptive. It's an excellent market gap overview in that it provides a qualitative view of the actions of market participants.
That said, this is an extremely fast moving space. The chapter on innovators is now dated, the final chapter on policy choices is subjective and prescriptive, and the numbers and research on the area need an update to reflect the impact of the pandemic. For example, the FDIC National Survey of Unbanked and Underbanked Households shows a decline in this segment attributed to government payments.
The author takes us through her journey in 9 chapters. As you expect from an accomplished professor, Servon backs up her findings with copious notes and an extensive bibliography. The book is filled with facts that prove the inability of monopolistic banks to serve a large part of the present and future US population.
Here are some highlights from the book.
The Introduction calls us to see that we are all underbanked. Even those with a good job may suddenly find themselves in financial trouble. The FDIC measures three different groups - the banked who use a bank or a credit union, the unbanked who have no bank account and the underbanked who have a bank account but continue to rely on alternative financial services. In 2013, 8% of Americans were unbanked and 20% were underbanked. Though this improved in the 2021 FDIC survey (link above), many feel even less secure now. People are turning to alternatives because the banks serve consumers poorly.
In chapter 1, Where Everybody Knows Your Name, the author describes her experience working as a teller in both a check cashing service and a payday lender. Check your privilege at the door. The customers are just trying to find the best path that satisfies their financial needs. Their needs are transparency (sign on the wall with big font shows the fees), convenience (immediate availability of funds to pay vendors and employees who might not be banked), and service (personal and flexible because people on the margin might have special circumstances).
In chapter 2, Bankonomics, we learn about the origin of financial services consolidation (especially regulations, but also bailouts) and its impact on their business models. No longer able to make money on bank deposits, big banks instead turned to overdraft fees. Increasingly sophisticated methods of charging various fees has pushed more and more people away from the banks. From a product perspective, the four banks left (Chase, Bank of America, Wells Fargo and Citigroup) look like dinosaur monopolies waiting to be undercut. This chapter provides excellent background on why that is exactly the case.
In chapter 3, the author takes us into the mind of the New Middle Class who live in a state of perpetual financial uncertainty. They are just one economic catastrophe from falling into the underbanked class. They pay more for loans, but one out of five of these small-dollar borrowers earns more than $50k per year and nearly half had a college degree. The underlying issue that the author raises here is the fragility of this economic class today. Despite productivity increases, compensation has not kept pace. Workers are the ones on the edge today, and they must turn to these services to get by. People may argue over policy that alters this industry trend, but it points to the acceleration of opportunity for alternative financial services.
Chapter 4 describes The Credit Trap. This is where people use credit to pay for things they need. Those who can't pay off the card each month end up paying interest to pay for needs (essentials) rather than wants. This doesn't end well. After a survey of the deceptive practices associated with credit card offers, the author segues into alternative lenders that better meet the requirements the unbanked have for transparency. They can't afford to be surprised by fees.
In Chapter 5, we learn that Payday Loans satisfy a number of requirements for the financially insecure. However, they are controversial. Consumer advocates like the Center for Responsible Lending (CRL) oppose such loans because they trap people in a cycle of rollover borrowing. These loans exist though, because the banks don't serve the needs of these small borrowers. For people trying to make ends meet and move forward, they are the only choice in the moment.
Chapter 6 brings us to Living in the Minus: The Millenial Perspective. Macroeconomic forces drive an entire generation of nearly 83 million people into financial insecurity from student debt, underemployment and consumer culture. They have been driven into a near term focus, living paycheck to paycheck. Hit hard by the financial crisis of 2008, this generation distrusts banks. They've turned to banking apps on mobile devices as an alternative. Compared to recent generations, they have impressive money saving and budgeting tactics. They want to save for something better. In this way, they are not so dissimilar to the unbanked.
In chapter 7, Borrowing and Saving Under the Radar, the author takes us through the concept of a rotating savings and credit association (ROSCA). This structure allows a small group of people to spin-up a "bank" for lending within a member community. Available under different names around the world, these unregulated entities depend on social capital to ensure trust among the members. They are banks, but informal ones, under the radar, composed of individuals on the margin or otherwise distrustful of institutions, connected to each other in a web of trust.
Finally, chapter 8 takes us Inside the Innovators. As mentioned before, this information is already outdated. Innovation works quickly and adapts to the rapidly changing market. We can still learn how to view this innovation through the lessons of this chapter. At the time, the core disruptive ability of these innovative products was the ability to eliminate friction. By lowering the cost of providing the trusted service much value can be created. Innovators have found opportunity where there are changes in consumer behavior, regulatory changes and meeting the needs of people with cultural differences.