Christopher Berry, Ph.D.

Political Economy

Assistant Professor Christopher Berry on Why Banks May Not Be Best

The move to get poor families to use banks instead of check-cashing outlets or payday loans has captured the public imagination. We often hear about the outrageous fees check-cashing outlets charge or how payday lenders prey on the poor. Improving the "financial literacy" of the poor, many argue, will help them avoid wasting their hard-earned money.

However, a study under way by Assistant Professor Christopher Berry in three major US cities shows that the poor are certainly not illiterate when it comes to finances. When asked to estimate the fees charged by check-cashing operations and banks, the respondents in Berry's study were right on the money. Also, the vast majority of "unbanked" households pay less than $100 per year in total fees for financial transactions.

According to Berry, the "fringe banking" sector is highly competitive, with low barriers to entry and little market concentration. Check-cashing operations typically charge from 1% to 2% of face value to cash a check. "Many low-income consumers look on this charge as a fee for convenience, just as many of us regularly pay $1 or $2 at an ATM." And similar to ATMs, check-cashing operations generally have longer hours, more locations, and provide quicker turnaround of checks into cash.

"Banks have a totally different pricing structure," says Berry. "Checking accounts are offered for 'free' but with strings attached, such as a minimum balance or other restrictions. It's often just not obvious that the bank is indeed cheaper."

To further keep their costs down, many low-income families cash their checks at the issuing bank or at grocery stores that do not charge a fee. They avoid money orders by paying their bills in cash. Cash, in fact, is a way of life for many low-income families. Many noted that they did not have a checking account because few establishments, even landlords, in their neighborhood took checks. In short, many of these individuals are doing the right thing economically, considering the costs and the convenience.

"This is not to suggest," says Berry, "that we shouldn't be concerned with improving their options. The fringe institutions would say they're offering the services people need. That doesn't necessarily mean that there can't be improvements." ShoreBank in Chicago, for example, is developing a "payday card" issued by an employer, which is "loaded" each payday and the individual can use it as a credit or debit card. "Improvements for low-income families," says Berry, "may hinge on these sorts of technological improvements."