Being poor is expensive.
And it’s even more so for those who have no or only limited access to banking.
Thirty-one percent of Nevada households are unbanked or underbanked, according to a 2017 survey by the Federal Deposit Insurance Corp (FDIC). Those are people who either don’t have a bank account, or have an account, but still must use financial services outside the banking system.
By using alternative services outside a bank, families wind up paying a lot more for basic financial transactions, making it even more difficult to build a savings. Cashing a check, for example, is relatively inexpensive or even free when done through a bank or credit union. Cashing a check elsewhere often means getting hounded by high fees.
“It’s really expensive to go unbanked,” said Peter Aldous, a consumer rights attorney at Legal Aid Center of Southern Nevada. “You get your paycheck and then you have to go cash it and then you have to pay a fee to cash it and then you have to go pay for money orders to pay your bills.”
Households that are unbanked tend to be lower-income, less-educated, young, black and Latino, according to the FDIC data. They rely on payday lenders, check-cashing stores, prepaid debit cards and other alternative financial products.
Not only do those services cost money, but relying on them makes it harder to manage money and get a good sense of how much they have and how to save, said Aldous.
“I mean, it’s literally under their mattress,” Aldous said.
Nationally, 25 percent of U.S. households went unbanked or underbanked, according to the FDIC survey of more than 35,000 households, conducted in partnership with the U.S. Census Bureau.
There are clear racial disparities among those who are unbanked. About 17 percent of black households and 14 percent of Hispanic households were unbanked, compared to only 3 percent of white households.
More than half (52.7 percent) of unbanked households said their main reason for not setting up an account with a financial institution was because they did not have enough money to keep an account.
In Nevada, Aldous said one of the biggest obstacles to obtaining a bank account he sees in his work are documentation issues. Due to the Patriot Act, banks are required to verify photo identification, tax ID, a social security number and a physical address before awarding an account.
Low-income people also have a higher chance of losing access to bank accounts. A bounced check or unpaid bank fees might get you listed in ChexSystems, a consumer reporting agency. A negative file is often all it takes for a bank to turn down your application for a new account.
About 30 percent of unbanked households that previously had an account said they left their bank because the account fees were too unpredictable and too high for them to afford, according to the survey.
Creditworthiness also has racial disparities, according to the survey. Thirty-six percent of black households and about 32 percent of Latino households had no mainstream credit, compared with about 14 percent of white households. And at all income levels, black and Latino households were more likely not to have mainstream credit.
A low or unverifiable credit score bars people from accessing credit cards or signature loans. When they need to fill a gap in the budget, they turn to more expensive forms of credit with high interest loans like payday loans and title loans.
“It’s really easy to get trapped in a cycle where the debt continues and it gets worse and worse,” Aldous said.
‘Obviously there is a need’
Nevada does not cap rates charged by payday lenders, and the Center for Responsible Lending reports that the typical annualized percentage interest on a payday loan in Nevada is 652 percent.
There have been attempts by Nevada lawmakers to rein in the industry over the years. Last legislative session there was a bill to cap interest for payday loans at an annual percentage rate of 36 percent, but it died in committee.
Payday lenders are major contributors to the Democratic party. Even Gov. Steve Sisolak indicated reluctance to take on the industry, echoing the lenders’ arguments that it provides a vital service for the unbanked and underbanked.
“Some people can use payday loans responsibly, other people can’t use payday loans, whether that’s the government’s place to interfere or intervene in that, I’m not totally sure,” Sisolak said. “Sometimes people need to access money and they can’t get it from a bank and I don’t know what’s the alternative frankly.”
Aldous argues that payday lenders only drag people further into debt and give people “a false sense of hope.”
“It’s giving them a false sense of hope because people are really optimistic about their finances,” Aldous said. “Unfortunately the hardest truth is that for a lot of these people, you will never be able to afford some of these things. If you’re going to be evicted two months from now no matter what but you delay it by two months because of this payday loan, you need to move now. Getting this payday loan is not a solution to the problem. Your rent is too high and your income is too low.”
“In lots of states there is no alternative and people are getting by,” he said.
Center for Responsible Lending research shows that people do in fact find alternatives to payday lenders in states that have essentially banned them. And whatever their shortcomings, as the report put it, those alternatives “are still less harmful than payday borrowing.”
Darwin Hopwood, adjunct professor at UNLV and the coordinador for the commercial banking program in the finance department of the Lee Business school, echoes Sisolak’s wariness of legislation that clamps down on payday lenders.
“I understand the desire of the Legislature to protect the consumer, but you also have to be careful that you don’t have the unintended consequence of taking away a service that may be vital to some people because that’s the only source of financing they can find,” Hopwood said.
Hopwood said he believes a lack of financial literacy could account for the number of unbanked people who could reduce their expenses if they explored establishing a relationship with a bank.
“If you have to go to a convenience store to get a money order to be able to pay for your power bill that’s going to cost you more then it’s going to cost you if you transferred the funds from a bank account,” Hopwood said. “Sometimes it’s lack of awareness of services that a bank might be able to offer you if you open an account.”
Still, Hopwood said, banks are in the business of lending money but have to get it back or else they’re not interested in lending it.
“To make it profitable banks have to be rewarded for the risk and the reward of that risk is a high interest rate on small borrowers,” Hopwood said.
“I think I’d be interesting to see how banks begin to react to the competition from things like payday lenders and check cashing services because when I drive around town I see one on almost every corner. So obviously there is a need,” he said.
Tightening regulations on alternative lenders, as many states have done, would be one way to make financial services more affordable to low-income Nevadans. There is also a national push favored by some reformers to establish banking services at post offices. Some states have also seen the emergence of nonprofit lenders established deliberately to get people out of payday lending debt and into more secure financial positions.