This comment on the article reflects why many people that I have met personally do not have checking accounts or bank accounts. They are worried about having money seized.
From the comment section of the article -"If you would really like to know why poor people regular these establishments I'll tell you why: it's because they keep you off the grid. I used to have a checking account too all my life. But after I lost my job, even though I'm a fulltime single father, the "child extort" kidnappers levied my checking account several times. They just took money at will no questions asked. There was no rules stopping them and nothing I could do. The Sheriff of Nottingham might as well been barging in me and my daughters tiny apartment and stealing all of our shillings. So after the "child extort" agency did this 3 times, I shut down the account. And from that moment forward I just began to live off the grid using cash and money orders. "
I was talking to my girlfriend last night and she mentioned how her ex-boyfriend doesn't have a bank account. He's actually well off financially, so I wondered why. Indeed, the answer is to avoid wage garnishment for child support.
Not having any paper trail to attract the attention of people and organizations you owe money to is arguably the only rational reason for being unbanked in an urban area of a developed country.
I disagree very strongly with that. Here are a few rational reasons that someone may choose to not have their money in a bank:
- Moral conflicts. Most banks use your money for purposes that many people consider evil, so choosing to not give them your money is a rational choice.
- Lack of trust. Many banks over the last century have run out of money and been unable to honour withdrawal demands/requests. It's reasonable and logical not to trust them to keep your money and give it to you when you ask.
- Inconvenience. If you don't have very much money, having a bank account is a drain on your resources (fees, mostly) and your money is not immediately accessible.
There are plenty of other reasons, too. Running away from people you owe money to is certainly not the only rational reason for not having a bank account.
Mistrust of banks' ability to honour withdrawal requests is largely irrational in a developed country given the existence of government-backed deposit insurance (and the much greater risk of having your cash stolen). I'd actually consider this to be the classic example of irrational mistrust based on a limited understanding of who actually loses out as a result of bank failures, and overconfidence in one's ability to keep hold of their cash.
The inconvenience argument might be true for some[1] people in some countries but is a complete non-starter in my country where retail bank accounts with a positive balance usually are usually fee-free, as are most forms of transfer between domestic bank accounts, most debit card payments and cash withdrawals from most ATMs. It's hideously inconvenient not to take advantage of all that
([1] I understand that somewhere like the US depositors' costs from basic use of the banking system might sometimes be even higher than those levied by non-bank financial service providers they use instead...)
Granted, the moral conflicts argument has a bit more standing, but arguably only if you apply the same standard of scrutiny to other entities you choose to purchase goods and services from (most of whom will deposit your payment in a bank account...). It's not like there aren't banking service providers that have at least seen the marketing benefits of an ethical stance
> Mistrust of banks' ability to honour withdrawal requests is largely irrational in a developed country given the existence of government-backed deposit insurance (and the much greater risk of having your cash stolen). I'd actually consider this to be the classic example of irrational mistrust based on a limited understanding of who actually loses out as a result of bank failures
Pretty much every developed country has spoken in the last few years of forcing depositors to take losses in the event of bank failures, and some have actually done it. Governmental deposit insurance SHOULD be inviolate, but that isn't the way the regulators are talking and acting.
Meanwhile, how many HNers are currently praying that Mt. Gox will stay liquid long enough to give them back their money?
Can you please provide examples of developed countries speaking "in the last few years of forcing depositors to take losses in the event of bank failures" and which ones "have actually done it"? Cyprus is the only example that I can think of that discussed it and I can't think of any that have actually done it.
The people waiting for their money on Mt.Gox should change it back to bitcoin and take the possible hit. The ones waiting for cash withdrawal are playing chicken with Mt.Gox's liquidity problem, and that is the risk they take in exchange for the ~$20 premium they have now.
This sort of argument is what the article complains about. Yes there are easy protections that prevent very rich people from losing money. (The $100k limit simply causes them to open a lot of accounts. Which is why you have mint.com to keep track of it all, I guess. But any rich person will have 4-5 $99999 balance accounts, and have 4-5 of them in multiple countries (US, EU, Switzerland, Dubai, Australia for example), and they know why. There's firms that will arrange it for you).
Suppose you're poor. You do not have the money to support yourself 2 months. You call the helpdesk for cox, they come and repair your cable modem, but somehow they "blame" the problem on you, and that's $250 for riding out thank you very much.
Now let's assess what happens in 3 situations :
1) you have a bank account
- the money's gone the moment they say you spent it with them
- you have no recourse
- you call them
- they've got everything they want, you have zero negotiating position
- even if you achieve the impossible and talk them out of it, the money's gone for 2+ months
2) you pay by credit card (obviously only available to "the rich", granted, not quite "the 1%", but I'm pretty sure >20% of Americans effectively don't have access to a credit card)
- the money's gone the moment they charge you
- you call them up, ask what's going on, they don't cooperate
- you threaten them with a chargeback
- they will suddenly become very cooperative
3) you don't have a back account (with positive balance)
- their payment request bounces
- they have no recourse
- they call you and ask if there's anything they can do
- they're pretty cooperative
The "mystery" of why poor people, students, ... go with option 3 is not much of a mystery to me. It's because option 2 is not available to them.
The same goes for being a customer of any service firm. Internet, telephone, car insurance, ...
> but is a complete non-starter in my country where retail bank accounts with a positive balance usually are usually fee-free,
But not penalty free. A few months ago, I clicked a form twice in my online brokerage and accidentally doubled a ACH transfer from my bank account. Since I was transferring more than half, the double transaction was too much. My bank hit me with a $25 fee.
No big deal to me— but to many poor people a $25 fee could start a spiral of overdrafts which would leave them hopelessly short money. To someone in that situation an arrangement which charged them 5% per transaction would be preferable to one which carried any risk at all of an overdraft spiral of doom.
>Mistrust of banks' ability to honour withdrawal requests is largely irrational in a developed country given the existence of government-backed deposit insurance (and the much greater risk of having your cash stolen).
I don't recall the exact date, but within the last two weeks Marketplace on NPR had an interview with several financial executives about the 2008 collapse. One of the execs had his wife run to the ATM to withdraw the maximum limit ($500) when money market funds broke the buck, and even GE couldn't get short term funding. He was seriously concerned about the ability to get to his own funds.
Being in a developed country doesn't mean your money doesn't have any risk when tied up at an institution.
Do you not consider Cyprus a developed country? Just a few months ago, many of its citizens had their deposits garnished, some at rates of 40%. How about Greece? There were talks of doing the same there.
> Many banks over the last century have run out of money and been unable to honour withdrawal demands/requests. It's reasonable and logical not to trust them to keep your money and give it to you when you ask.
Within the last century, yes, but quite far back within it: the last time anyone with modest amounts of money in the U.S. lost deposits in a bank failure was 1933, the year the FDIC was created.
You can still lose money in a bank failure if your deposits are above the FDIC insurance limits, but poor people by definition would not have that much money, so it wouldn't explain their choice not to use banks.
The bigger risk if your poor is not having access to your money while the FDIC sorts out the problems. Now, I don't know how long it would take to restore access to your money in a bank closure but, for a lot of these people, having your funds frozen for a week or two would be crippling.
There was a This American Life episode during the financial crisis when interest in bank failures was high. They followed an federal takeover of a bank, and from what I recall, it was an extremely swift and surgical procedure. The don't inform the bank ahead of time when they're going to take it over, because the last thing they want is a bank run. For that reason they also try to disrupt banking hours as little as possible if at all.
There are also instances though where the FDIC can't find another bank willing to acquire the failed institution, so it can't just close on a Friday and then reopen on Monday as a branch of a new bank.
So it seems like in an instance like this, while you get a check for your insured deposits from the FDIC, your bank is gone and presumably any auto-debits or outstanding checks would fail to clear. You get to wait for the FDIC to mail you a check. Then you'd have to find yourself a new bank. This seems like something that would be fairly disruptive even if you are not poor.
If a bank failed, how long would it take to be reimbursed by the FDIC? Probably much longer than a poor person could weather.
Also, if you chose to forgo paper statements to "save the environment" (and reduce the bank's costs), and you were lax in downloading your statements, it would probably take even longer to be reimbursed.
Well, that's not quite true. There is always a small risk of losing some (or even all) of your money, particularly if you have a large amount in your account. Obviously that risk is very, very low for smaller amounts of money.
There are risks we should be concerned about, and risks we should not be concerned about. If you stuff money under your matress, the risk of losing it to a house fire or robbery are several orders of magnitude greater than losing it in a bank run.
Assuming your account is under the FDIC limit, how could you lose money on an insured account? Suppose there's a massive bank run and the Fed has to print oodles of cash to repay depositors. This leads to runaway inflation that occurs over a very short period. If you could have otherwise exchanged your cash on hand for a different currency, sure you would have lost money.
Compared with the actual risks of being unbanked, this is a hallucinatory concern.
The rational response to concerns about crippling fees is to choose an account without a minimum balance or with low overdraft fees, or preferably no overdraft facility at all. Sure, people living on a financial edge are often less well-informed than the general public when it comes to understanding fees, but it's probably rare for the optimal solution to be paying 2%[1] of your meagre income to the nice guys at RiteCheck, or 20% if you've cashed a bad cheque in the recent past... or eye-wateringly high fees if you actually need to borrow some money
You speaking of rational responses. You likely refer to the rational expectations hypothesis in economics. The default assumption is of course that everyone makes rational decisions, including the poor.
Since they are making decisions that you don't think are rational ("it's probably rare for the optimal solution ..."), you conclude that the reason is that the poor people are less well-informed.
This makes sense, so long as everyone has equal access to the same services, or at least access to the same services you do, and that there is competition among those services.
However, as the author points out, the poor areas are under-served in terms of banking choices, and banks use "private databases like ChexSystems that currently keep more than a million low income Americans from being able to open accounts."
Because of the obvious market inequality, you cannot conclude as you did that the people who use RiteCheck are making either an irrational decision or un-informed decisions.
It's not the rational response at all. The rational response is to get a bank account like your wallet. One that ASKS YOU explicitly for permission before paying out money to someone else.
A bank account is not that, at all. A credit card is closer to that (because of chargebacks). Prepaid credit cards, and getting a new one every month (carrying over the balance, and because of the number changes, it's very hard to charge you things you don't want to pay for), are better still. Cash is best.
You want to improve the situation of 90% of America's poor ? Find a way to convert a check into a prepaid credit card (with balance transfers from a previous prepair card, ideally), for as low a fee as possible. Make that option available in poor neighbourhoods. When you have that, offer a bank account to them as well, NOT linked to the credit card, fee-free (no-one will care if it's also interest free) that they can save money into.
The people we are talking about use cash, but need a service to turn checks into cash.
You propose what you think should be a better solution. This history so far shows that your solution is not clearly better. Just this month "The Consumer Financial Protection Bureau issued a bulletin warning employers against using only so-called payroll cards to pay workers." ... "Complaints received included fees for withdrawing cash and checking card balances. Critics say payroll cards with high fees mean that some workers are essentially making less than minimum wage." -- http://www.usatoday.com/story/money/business/2013/09/13/agen...
Yes, there can be a time where that's a better solution than a check.
However, we are not yet at that time, so it's not a rational choice NOW.
just to clarify, I realize there are plenty of options within the 'big box banking' world that mitigate overdraft fees (well, a few options anyway.)
What I was saying in the parent comment is that overdraft fees are a perfectly rational motivation to avoid major banks.
I personally bank with both Wells Fargo and Bank of America (for convenience, and because several family members that are international do the same; gotta have that free transfer service). I am close with a few people that have foregone banking, and paid out of pocket to have their paychecks cashed where ever they can. As far as I can understand, this is a rational decision if your income does not provide the ability to meet a minimum monthly balance of about $100 of 'slack'. If you've ever worked a menial job for a regular period, I'm sure you'll understand.
If your monthly balance variance is < ONE PAYCHECK +/- $50, a $35 overdraft fees represent a significant percentage of your income.
These overdraft fees are a profit center for banks. Even if there are options to mitigate them, what motivation do the poor have to pursue them? The burden of proof of utility is on the banks, as far as the poor are concerned. If it seems to be more convenient or cheaper to operate without them, people will. This may be partly due to ignorance, but for the most part, it is because there are small inherent costs associated with a bank account that the middle class doesn't seem to recognize.
You CAN operate with less expense with cashed checks and payment cards than you can with a bank account and a debit card. Hobos and junkies would not do so if it were not the case. Hard living makes people rational like a motherf*er. You may forego some potential interest incomes, bank protections, and countless conveniences associated with using a bank account, but when it comes down to brass tax, it just costs less.
While studying, I was quite poor, and rarely had any reserve cash on me. In an effort to secure me against emergencies, I borrowed a small amount from a friend and put it in my bank account. It was not to be used except if the house burned down and I needed a motel or if some other unlikely event occur.
After my studies was done, I was unemployed and thus went and sought some social security money to pay rent with. When the first check came in, it was reduced with the amount I had in the bank.
TLD: paper trails are contextless, and do not always paint the correct picture. Giving the state this information can be quite costly on a personal level.
It's also not unknown for a state you used to live in to suddenly decide you owe them a large amount of taxes, and take it directly from your bank account.
Last year, to attend a tradeshow I opened a sales tax account and Wisconsin. As I was engaged in extended travels afterwards, and made no sales taxable sales at the show, I did not file any returns with them. If course, they expect you to file each quarter even if to report zero sales.
When I returned it to my house nine months later, I found a wide variety of letters from them culminating in lien on my bank account for about $1500.
Why they decided that I would have $10,000 in sales that were taxable, given on my history of never having reported anything ever on a brand-new account, I have no idea. Strangely, others at the show who also failed to ever file did not receive liens.
From the comment section of the article -"If you would really like to know why poor people regular these establishments I'll tell you why: it's because they keep you off the grid. I used to have a checking account too all my life. But after I lost my job, even though I'm a fulltime single father, the "child extort" kidnappers levied my checking account several times. They just took money at will no questions asked. There was no rules stopping them and nothing I could do. The Sheriff of Nottingham might as well been barging in me and my daughters tiny apartment and stealing all of our shillings. So after the "child extort" agency did this 3 times, I shut down the account. And from that moment forward I just began to live off the grid using cash and money orders. "