Tags: Servon | bank | checking | account

New School's Servon: People Leaving Banks for Alternative Financial Services

New School's Servon: People Leaving Banks for Alternative Financial Services
Saving for college, piggy bank with diploma cap, illustration. (Karen Roach/dreamstime)

By    |   Sunday, 02 November 2014 04:06 PM

More people are abandoning banks, due to their high and confusing fees, and turning to nonbank, alternative financial services like prepaid cards.

Banks and government policy makers, who accept the benefits of traditional banking as a given and continually talk about how to get consumers to open bank accounts, see that trend as a problem.

They need change their thinking, argues Lisa Servon, professor of urban policy at the New School in New York. Many consumers are actually better off without a checking account.

"The problem is not that people are unbanked, but that banks are becoming too prohibitively expensive for people to use them," she writes in an op-ed for The New York Times.

"Does using a bank really contribute to financial health? For an increasing number of people, the answer is no."

Servon worked at check cashier businesses to get an inside view on why many people prefer alternative financial services to banks. She found that consumers think bank fees are too high and their offerings are too confusing.

The average monthly service fee on checking accounts jumped 25 percent in one year alone, from 2010 to 2011, she states. "Only 39 percent of noninterest-bearing checking accounts were free in 2011, down from 76 percent in 2009. And the average overdraft fee is now $32.74."

Put off by high bank fees, some consumers, particularly Latino immigrants, pool their savings to start informal rotating savings and credit associations

"Why aren’t these practices on the radar of policy makers?" Servon asks.

According to new FDIC data, 9.6 million households, or one in 13, were unbanked last year, meaning they had no bank accounts whatsoever. Almost 25 million households, or one in five households, were underbanked, meaning they had bank accounts but also used nonbank alternative financial services like prepaid cards, check cashers and payday lenders.

A majority of the unbanked, or 57.5 percent, said not having enough money to keep a checking account's minimum balance was a reason for not opening a bank account, the FDIC survey indicates. Meanwhile, 34.2 percent said their distrust or dislike of banks was a factor, and 30.8 percent said high or unpredictable account fees was a reason.

Unbanked households are increasingly turning to reloadable prepaid cards and are typically not getting them at banks, the FDIC reports.

Some companies see high banking fees as an opportunity.

Working with Green Dot Corp., Wal-Mart recently announced its rollout of GoBank, which it says will not charge overdraft fees, minimum balance fees or monthly fees with qualifying direct deposits.

"Many so-called free' checking accounts aren't really free because they have high overdraft fees," says Steve Streit, founder and CEO of Green Dot and chairman of Green Dot Bank.

One study, he says, estimates that consumers pay $218 to $314 per year for a basic checking account.
 

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More people are abandoning banks, due to their high and confusing fees, and turning to nonbank, alternative financial services like prepaid cards.
Servon, bank, checking, account
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2014-06-02
Sunday, 02 November 2014 04:06 PM
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