Lisa J. Servon, a professor at The New School, has written a surprisingly sympathetic account of her experience working in the alternative financial services industry. While check cashers and payday lenders charge high fees, Servon observes that they also form durable relationships with their long-term clients, virtually all of whom earn low incomes:
The primary critique of check cashers is that they are expensive. Sitting in my New School office eight miles south of Mott Haven, I had believed that, too. When I interviewed my customers, however, I learned that for many lower income people, commercial banks are ultimately more expensive. The rapidly increasing cost of bounced checked fees and late payment penalties has driven many customers away from banks, particularly those who live close to the edge, like many of my RiteCheck customers. A single overdraft can result in cascading bad checks and hundreds of dollars in charges.
Josh Reich, CEO of the financial services start-up Simple, has offered a related critique of mainstream banks — that customers live in fear of various hidden fees. Much of Servon’s article concerns the warmth of the relationships that the employees at RiteCheck in Mott Haven have with their customers. The labor-intensive nature of this approach makes for a marked contrast with mainstream banks, which have largely automated their businesses, and it presumably contributes to the high fees that define the alternative financial services industry.
Servon ends her piece by arguing that mainstream banks ought to limit overdraft fees and to offer more service and respect to low-income customers. One assumes, however, that mainstream banks have given at least some thought to taking a more benign approach, and that they’ve found it wanting. It seems more plausible to me that the public sector should offer a dead-simple “public option” for basic deposit banking, an idea backed by the financial services entrepreneur Ashwin Parameswaran and the Chicago Booth economist John Cochrane.