My Day Without Banks

For the roughly 35 million Americans who have little interaction with major financial institutions, just cashing a check can be an expensive hassle.

Steve Snograss/Flickr

Our first problem was that we couldn't cash a check.

Our small group had come to a supermarket in west Los Angeles to cash a $15 personal check that we needed to help pay for several financial transactions we had set out to accomplish. But we couldn't take the first step because the store, it turned out, wouldn't cash an out-of-state check. So we were stalled at the starting line.

That was a revealing early moment in a financial scavenger hunt across Los Angeles last week that I joined along with several dozen participants from the financial industry, non-profit groups, and advocacy organizations. The field trip, called FinX, was organized by the Center for Financial Services Innovation, a group that works to expand access to the financial system. The goal was to expose us, if only briefly, to the daily experiences of the roughly 35 million American households who conduct much of their financial lives outside of the traditional banking system, according to federal figures.

Here are some of the lessons that the group took from our dip into this murky world. It's expensive to be poor. It's also very time-consuming. And there isn't much guidance to help you make good decisions, more effectively manage your money, or begin building a positive credit history.

But participants also concluded that many of the front-line workers who interact with customers are friendly and helpful. And that the archipelago of check-cashing storefronts, supermarket and dime-store money transfer counters, and payday and title loan lenders add up to an alternative financial system that can ultimately meet the needs of some families living at the margin, even if they involve costs in time and money that more affluent families might consider unacceptable. "The message is that it's nuanced," said Jennifer Tescher, president and CEO of the CFSI, which organized the outing as part of a conference it co-sponsored here last week on innovation in reaching underserved families. "It's complicated. We need to throw away our perceived ideas about what the consumer needs."

The group I joined included three young people from different corners of the industry: Ranjit, the manager of strategy and development for a leading microfinance lender; Katherine, a senior policy analyst for a DC-based group that advocates for greater financial access, and Rodolfo, who works at a venture capital firm that invests in financial services start-ups. Each of them was razor-sharp and expert on the big trends of technology, demography and business opportunity reshaping the financial system. Yet we sometimes found ourselves baffled by the trade-offs of time, cost and convenience that we faced.

The CFSI provided each group with two checks: a payroll check for $105 and a personal check for another $15. Using only the proceeds (and none of our own money), we were required to complete a series of financial transactions, including executing a money transfer, buying a money order to pay a bill, obtaining and loading a prepaid debit card, and inquiring into payday and title loans. And we were supposed to visit a pawnshop.

As compared to consumers who can only afford public transportation, we had a big advantage in that a car and driver were assigned to get us around. But we were provided only the most general guidance about the kind of places where we might complete the assigned transactions. We were told to search out the specifics through our smart phones, which research shows to be the principal way many lower-income families interact with the Internet.

We stumbled out of the gate. When we brought the $15 check, made out to Ranjit, to the financial counter at a supermarket on bustling Pico Blvd. they told us it would be $2 to cash it, but free if we bought something in the store. So we headed over to find our prepaid debit card.

When we returned to the counter, though, the clerk took a closer look at the check. And then announced that she could not cash it, even with a purchase. "We don't cash out of state checks," she said. "So," Ranjit told the rest of us, as he turned around to return the prepaid card, "we don't have any money to buy this."

The clerk told us to try a commercial bank two blocks east. We walked out to the street and didn't see a bank in sight. So we piled back upstairs to the car and drove down Pico until we found one. Once we arrived, Katherine successfully cashed the $105 payroll check made out to her-but for a $6 fee. Even so, the bank wouldn't let her complete any of the other tasks on our list, she explained as she rejoined the group, "because I'm not an account holder."

For our $15 check, we stopped next at a check cashing storefront squeezed next to a liquor store in a Venice strip mall. The room was stark: no chairs, no desks, glaring fluorescent lights, and a single clerk behind a plexiglass window. It vaguely suggested a police station. When Ranjit went to the counter, the clerk informed him that it would cost $5.99 to cash the $15 check. He also needed to fill out an extensive questionnaire of personal information. ("I was surprised," he said later, "by the amount they wanted to know.")

The clerk raised her eyebrows at the check's amount and asked Ranjit if he might prefer to take out a payday loan the next time he came in. The maximum payday loan, she explained, was $255-which required a repayment of $299.98 within two weeks. We passed on the loan, but bought a money order, and picked up a prepaid card, checking off another two items from our list.

Next we stopped at a 7-11 in another strip mall to check another box: adding another $10 to the card. That was easy enough, and when we stepped out into the mid-day sunshine, Ranjit asked Katherine if she would hold his leftover cash. "That's a really interesting gender dynamic, given that's how many low income families operate," she said with a smile. "The money is in the woman's hands."

We took the money across the street, to yet another check cashing storefront in yet another strip mall. The window was covered with banners advertising "Easy Title Loans," "More Cash/Lower Payments" and "Bad Credit OK." Katherine went to the counter to finish another task: executing a money transfer to another team member that we could pick up somewhere else.

While she was there, working through another sheaf of paperwork, Rodolfo reflected on the interest rates listed for payday and title loans. All were very costly, he said, yet might still make sense for the people standing in line around us. (While Katherine was completing the money transfer, one woman was told she couldn't get another payday loan until next week.) "It's hard to compare because we have alternatives, but the set of alternatives for low-income families are different," he said. Though a payday loan is expensive, he suggested, it might be cheaper than, say, paying to have a utility turned back on after it's disconnected because you didn't pay a bill in time. Besides, he continued, if regulation too severely limits what lenders like this can offer, the next option for some borrowers might be loan sharks who not only charge more, and operate with no oversight at all, but create other risks (like violence). "Depending on what the alternative is," he said, gesturing toward the loan rates listed on the wall, "you can argue that it's cheap or expensive."

Katherine returned singing the praises of the man who had carefully walked her through the money transfer. "He was great," she said. The rest of the trip passed quickly. We stopped in at a title loan store that was suspicious of us because other groups on the field trip had already come through. Then we went to a pawn shop where Katherine discovered she could walk out with some excellent jewelry for a song-but was offered only $100 for her engagement ring. A final stop at an "88 cent store" where Rodolfo seamlessly picked up the money transfer Katherine had purchased-and we were back at the hotel only a few minutes after the deadline.

In all, we had made eight stops in less than three hours. We had acquired $120 in cash, through the two checks, and spent $21.83 in fees across all our transactions-nearly one-fifth of our total resources. We received some very courteous personal service designed to help us complete the immediate transaction we were attempting, but utterly no advice on how to more effectively manage our financial lives. We were required to provide extensive personal information but didn't get much insight back about the details of the products we were purchasing; the entire experience felt a little like looking through a one-way glass. (Or, as Ranjit put it, there was an "information asymmetry.") Nothing we did improved our credit score, or even helped us to establish one. Nowhere were we offered an opportunity to save. If there were new apps or other technology that might have made our transactions easier and smoother, no one pointed us toward it.

And yet, our group finally concluded, for its own limited purposes, it all sort of…kind of…worked. The alternative financial system that we briefly visited, with all the advantages of education, expertise and experience that we carried (not to mention a driver) felt like a car that was held together with duct tape and spent too much time in the shop, but still mostly got you around. It might not work smoothly, and it might cost a lot to operate, but the various pieces of the system did allow low-income families to balance their income against their expenses, meet shortfalls (at high cost) and move money around without interacting with conventional banks. Katherine summarized the group's feelings when she said: "It's hard to justify a lot of the extra costs but there are some ways it is more convenient and meets people's needs better."

When we were done, the question I found myself asking wasn't whether the system functioned-but whether it was the best we could do for families who are already operating with so little margin for error. "The challenge we are focused on," Tescher told me after I returned, "isn't whether you have a bank account; it's whether you are managing your finances day-to-day in a way that provides security and opportunity." We didn't encounter much of either during our brief immersion into the hazy archipelago of alternative finance.