The surprising logic behind the use of check cashers and payday loans

The surprising logic behind the use of check cashers and payday loans

Often seen as predatory, the check cashing industry has been booming. Lisa Servon wondered why lower-income people who were struggling would cash checks instead of getting a bank account, so she took a job as a cashier to find out. What she learned — that it’s often cheaper — is the subject of her new book, “The Unbanking of America.” Economics correspondent Paul Solman reports.

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And this is East 138th Street, which in many ways is the Wall Street of the Bronx. You have got a lot of financial service providers along the street, bodegas. You have small money remitters.

And there’s a pawn shop, not the kind of financier you would find on the actual Wall Street. But, hey, this is the South Bronx, poorest congressional district in America, where some 40 percent of residents live below the poverty line.

Joe Coleman is president of this chain of 14 stores in the South Bronx and Harlem. They will cash your checks, pay your bills, transfer money 24 hours a day, 365 days a year. Something like half these customers are unbanked, meaning they have no bank account on purpose.

The surprising logic behind the use of check cashers and payday loans

The bank don’t offer all the services that we do. We have prepaid cards. They pay their bills, pay their rent. It’s different things that they can do in one place.

But the best alternative is check cashers, payday lenders, pawn shops? Maybe you assume what I did, that they prey on the poor.

Many of these products really strip away what few assets consumers have. If you’re constantly paying a fee to cash a check, you’re losing money on the deal, compared to if you simply had an account and were depositing checks.

LISA SERVON, University of Pennsylvania: It didn’t make sense to me that people would be using a service like this in increasing numbers if it was so bad for them.

I had done work in low-income neighborhoods for 20 years, and I knew that people who don’t have very much money know where every penny goes. So, that’s when I scratched my head and I realized there’s got to be more to the story.

To find out, Servon worked as a cashier at this RiteCheck for four months and then wrote a book, “The Unbanking of America.” She returned to the window when we visited, and was reminded of what she’d learned: People on the edge have no savings, and often need access to every cent they get can their hands on right away.

One of the things that we do here is to take money off of people’s EBT cards. That’s electronics benefit transfer, what you get. It’s kind of the equivalent of welfare these days. Right?

And we give you how much you want from that, minus a $2 fee. One day, a woman came in and she wanted – she said had $10 on her card. So, I ran the transaction and I gave her $8. And after she left, I just was scratching my head and thinking, wow, she just paid me 20 percent of what was available to her.

Jackie says, well, the ATMs don’t give you $8 or $13 or $28. They give you multiples of $20, maybe $10, if you’re lucky, right? So, suddenly, something that seems illogical makes sense, because you realize that she needed that $8. She needed every dollar that she could get access to, and it was worth it to her to spend $2 in order to get it.

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