The alternative financial system is the innocuous name given to businesses like pawnshops, check-cashing stores, and purveyors of pre-paid cards bearing the Visa and Mastercard logos. But being one of the un- or under-banked is not a condition New Yorkers would relish; it means you’re probably poor or in serious financial straits.
Pawnshops and check-cashing stores thrive in the city’s high-poverty neighborhoods where, depending on the neighborhood, it can be difficult to find branches of major commercial banks. Take it to the Bank, a May 2015 report by New York City Comptroller Scott M. Stringer’s office, quoted statistics finding “1.2 branch locations for every 1,000 residents in areas with a majority-minority population, compared to 3.6 locations per 1,000 residents in areas that are majority white.” The report also found that “the Bronx has the lowest concentration of bank branches per household of any county in the nation, while also having the lowest median household income in the five boroughs.”
Back in 1994, the New York State Omnibus Consumer Protection and Bank Deregulation Act was enacted to help low-income consumers establish bank accounts so they would not be at the mercy of the often predatory practices of the alternative financial system for basic transactions such as cashing a paycheck or paying the rent or utility bills. The act mandated that every bank, trust company, savings bank, savings and loan, credit union or branch of a foreign bank offer basic banking accounts. Guidelines stipulate an opening deposit of no more than $25; a minimum balance requirement of no more than one penny to maintain the account; a monthly maintenance charge of no more than $3; eight free withdrawal transactions per month, including checks, in-person bank withdrawals, and withdrawals from a bank’s own ATM; and unlimited, no-charge deposits. There are some restrictions for users such as direct deposit, closing all other similar accounts at that or another bank, and in some cases New York State residency.
Although some headway has been made in the intervening years, many New Yorkers still depend on the alternatives for financial basics, according to the city’s Office of Financial Empowerment (OFE), part of the Department of Consumer Affairs (DCA).
A 2015 study the Urban Institute on behalf of the OFE titled “How do New Yorkers Perceive Their Financial Security,” showed that in 2013, 11.7 percent of New York City households (360,000) did not have any bank accounts, higher than the 7.7 percent national figure. In addition, 780,000 households were categorized as under-banked, meaning that they had bank accounts, but also used alternative services. Between 2011 and 2013, the number of unbanked households in New York City decreased, but the number of under banked rose. The largest concentration of unbanked households is in the Bronx.
But just what are predatory financial services?
Loans against items of value, such as jewelry (pawn loans) are state-regulated and interest rates on them can range anywhere from 3 percent to 25 percent per month, according to the National Pawnbrokers Associate (NPA). In addition, pawnshops are allowed to charge an additional 20 percent per month as a service charge. The maximum finance charge in New York State is 4 percent per month, a bargain.
Check-cashing fees are based on the face-value of the check and can vary from store to store, but in New York the maximums are set annually by the Department of Financial Services (DFS). The rate for 2016 was 2.01 percent.
The check-cashing business isn’t limited to storefronts or bodegas: Those services are also offered by deep-discount retailers such as COSTCO and K-MART. Other New York City retailers are also in the money-transfer business. Drop into a Rite-Aid, a Duane-Reade, Walgreen’s, or even a local independent pharmacy and you’ll see signs for Western Union. Although many remember Western Union as a telegram company and an early 20th century innovator of telecommunications, nothing of that past remains but the name and they’re now an international financial services company. For the unbanked and anybody else, Western Union provides fee-based bill paying, money transfers, pre-paid credit cards and the entire range of alternative financial services.
Small, high-cost loans known as payday loans made with a borrower’s post-dated check or access to the borrower’s bank account as collateral are illegal in New York State. Of course that doesn’t mean they don’t exist. According to OFE, online payday loan companies connected to financial institutions outside New York advertise their products online in an attempt to circumvent New York law. During the most recent New York State legislative session, a bill was introduced that would allow check-cashing stores to start making loans to small businesses, and even individuals, but the legislation was blocked.
But with widespread availability of low- or no-cost standard checking and savings accounts at any financial institution in the state why do people continue to use such expensive, predatory services?
Lack of adequate information, fear, and neighborhood norms are at the heart of the problem, says Nicole Smith, OFE’s deputy director. Those factors play a big role not only in the use of alternative services, but in what the OFE calls lack of overall neighborhood financial health.
Many low-income New Yorkers fear banks because they hear about high minimum balances or overdraft fees, says Smith. There is also misinformation about what kind of identification is needed to open an account. And some immigrants avoid banks because they fear being monitored. In addition, if your neighbors and friends use the alternatives, it’s more likely you’ll use them too.
The industry is no stranger to aggressive advertising either. No longer the dark, shadowy dens depicted in old movies, the modern pawnshop looks like any other retailer, is completely computerized, sports flashy electronic signs, and advertises heavily. Check out their subway ads during your next commute.
While the 1994 law requires financial institutions to use the name “basic banking account” in promoting the accounts, Take it to the Bank reports that many fail promote them at all, or in the same way they promote other accounts.
Conduct your own informal survey and walk into any bank in your neighborhood. I did that in the West Village and Chelsea looking for displays about mandated low-cost accounts, but I came up empty. On the Web, some backs identify the option explicitly, but others don’t.
Although basic banking accounts were supported by the New York Bankers Association (NYBA), the banking trade group, the way “banks apply these principles is in their discretion,” they said in an email statement.
According to the NYBA’s statement, “New York has the most innovative programs in the nation designed to encourage consumers to establish banking relationships, including the Banking Development District Program, the Bank on New York Program, and financial literacy programs across the State.”
Nicole Smith says that it isn’t merely a matter of banks vs. alternative services; it’s about teaching people how to manage their money even if they have very little of it. The OFE works with local community organizations to educate residents about sound financial practices, and disseminates information about low-cost or free accounts.
DCA started an expanded public awareness and education initiative in 2015 to inform New Yorkers of the city’s free tax-preparation options and important tax credits, such as the Earned Income Tax Credit (EITC) and the NYC Child Care Tax Credit. Some 150,000 people used the tax-prep service, which resulted in over $250 million in tax refunds and savings to low-income New Yorkers.
Another DCA program provides free one-on-one financial counseling at its network of Financial Empowerment Centers And the city offers an NYC SafeStart bank account–a reboot of the basic banking account—in partnership with banks and credit unions. Those banks and credit unions have agreed to accept the IDNYC as the primary form of identification to open an account.