It Is Very Expensive To Be Poor

Cash checking fees, prepaid card fees, money transfer fees, cashier's check fees -- all together, the unbanked pay up to 10% of their income simply to use their own money. And when lower-income people face an emergency, they must turn to expensive payday loans, title loans, and tax refund loans. As Mehrsa Baradaran (University of Georgia) writes in her new book, How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, "indeed, it is very expensive to be poor."

How did this happen? And how might we begin to solve the problem? In her book, Baradaran details how banks and government are and always have been inextricably tied, with the government helping banks and the banks supposedly helping the public in return. But this "social contract" has eroded. The banking sector has turned away from less profitable markets, leaving people with small sums of money to deposit without a trustworthy place to stash their cash, and people in need of small sums of money to borrow nowhere to turn but fringe lenders. Moreover, these people understandably often are uncomfortable dealing with large banks. And the result is that an astonishing large chunk of the American population is unbanked or underbanked.

If the unbanked and underbanked had a trustworthy place to deposit their cash, some of the fees they pay simply to use their money would go away. This alone might allow families to stay financially afloat. Likewise, if they had the option to borrow small sums of money at reasonable rates, temporary financial emergencies may not set so many families up for a lifetime of financial failure. Which leads Baradaran to a proposal that I’m fond of (indeed, I’ve blogged about Baradaran’s thoughts on it before): postal banking.

The best part of the book is that the proof of postal banking’s potential is in the history that Baradaran sets forth. And the history is an interesting and surprisingly quick read. Not only does it set up her argument for postal banking, but through the history she highlights a very important fact about low-income people who turn to fringe lending. They do so because they have to and are very cognizant of the risks. They are not ignorant, and they also are not poor money managers—or at least no less adept than others. In fact, they likely are more adept. As Baradaran notes, both the poor and middle (and even upper) classes must juggle in their financial lives, “but in comparison, the middle class seems to be juggling with beanbags, and the poor are juggling with knives. Dipped in poison.”

Postal banking, even if the post office system only is used to accept small dollar deposits, may represent the best current option to at least provide lower-income people with gloves to protect themselves while they are juggling. And history tells us that it might strengthen our banking system to boot. If you want to know more about this fascinating history and the full potential of postal banking, pick up a copy of Baradaran's book. And if you want even more convincing, watch her discuss the book here.