Consumers are from Mars. Banks are from Venus

Jim worked as a technical support provider for a defense contractor until shortly after Sept. 11. He had a house and two cars and easily provided for his family. But then he was laid off. He struggled for the next 15 years, sometimes working as a car salesman or some other job, sometimes collecting unemployment. His wife was diagnosed with cancer and Jim with diabetes, leaving them with large medical bills. Then his stepson lost his job and moved in with them and their three children. “I was the only breadwinner,” Jim told me. “And it was too much for me to handle.” He asked his bank for a loan but was turned away. So he took out payday loans to make ends meet.

Jim (not his real name) was my customer when, as part of a research project, I took a break from being a university professor to work for alternative financial services providers. Those like Jim, who rely on high-cost credit, are part of the “new middle class,” a group that, despite working hard and playing by the rules, still lives in a state of chronic financial uncertainty. Nearly half of Americans now live paycheck to paycheck and one-third have no savings. Fifty-seven percent could not come up with $500 in the event of an emergency. Instability is the new normal.

To understand why so many people were using alternative financial services, I worked as a teller at a check casher in the South Bronx and as a payday lender and loan collector in Oakland, Calif. I quickly learned that my customers like Jim could not plan, budget or save the way we’re all told we should.

I also learned that mainstream financial services providers like banks haven’t adjusted their business models to accommodate the growing group of financially precarious Americans. There’s a mismatch between Americans’ financial needs and what most mainstream financial services providers offer.

“I used to walk into my bank and they’d know me by name,” Jim says. “If I asked for a loan, they’d say, ‘Oh yeah, you’ve been coming here for 13 years and you have two direct deposits to our bank and stuff. Shouldn’t be a problem.’ Now they say, ‘Well, your FICO is this or the credit bureau says that. We can’t lend you the money. Even though we see you every week and take your direct deposit. We're glad to make money off your money, but we don’t really want to help you.’ ” This change is partly a result of the virtual disappearance of small banks, which tend to be more willing to work with their customers to offer them loans. They do take credit scores into account, but also look at other factors. Larger banks typically rely on a less flexible set of requirements, set by a central headquarters far removed from the neighborhood branch. Jim’s experiences are in step with current banking trends; since 2000, one in four small banks has closed, leaving a lending landscape dominated by bigger banks less willing to work with customers on a case by case basis.

Banks’ rising account fees also make it difficult for consumers to maintain accounts. The average charge per overdraft rose from $21.57 in 1998 to $31.26 in 2012. Furthermore, banks’ requirement to keep monthly minimum balances, the speed with which overdraft charges are levied, and the days it takes between depositing a check and having access to the money, all are a poor fit for the growing number of Americans who cope with unpredictable cash flow. A young man wrote to me after reading an article I had published. He expressed his frustration, saying, “I’ve been attempting to maintain a bank account with TD Bank for the past year with little success. I currently work two jobs and still have a hard time actually keeping a healthy positive balance. I’ve had my account closed three times and have pretty much given up on the idea of maintaining a checking account.”

More and more Americans with characteristics we generally associate with the middle class are now feeling the pinch. Clarity Services, a subprime credit bureau that evaluates the creditworthiness of potential borrowers with less than stellar credit scores, found that a higher-earning, more stable segment of borrowers in its database had increased by more than 500% between February 2010 and August 2011. These are the people who used to form the core of banks’ target market. Seven years ago, consumers in the Clarity database experienced a “destabilizing event” — such as loss of a job, a medical issue or a car breakdown — every 87 days. In 2017, these events occur every 30 days on average.

The four megabanks that hold half of our deposits aren’t doing much to help financially insecure Americans cope with financial instability. They seem content to cater to their wealthiest customers while figuring out how to maximize the fees the rest of us pay. Bank practices haven’t changed to accommodate the less predictable nature of work. Lack of access to credit affects people’s ability to invest in their home and businesses.

The innovation that’s necessary is coming from smaller regional banks like KeyBank, which provides check-cashing services and small loans to its customers, and from fintech startups like Even, an app that helps users cope with unpredictable income. Crunching past paycheck data, Even works with a user to arrive at an average paycheck amount and ensures that the user receives that average every month — regardless of whether the user’s checks are lower or higher. For example, if the established average is $500, and the user gets a check for $450, Even will deposit $50 into the user’s bank account. When the user gets a paycheck of more than $500, Even sets the excess aside or uses it to repay money previously “borrowed.”

To be sure, these interventions can’t solve the deeper problems that lie at the root of widespread financial instability — decades of declining wages, a greater reliance on part-time and on-demand workers, and rising childcare and healthcare costs. But they do enable some people to better cope with this new reality. And as long as the biggest banks fail to fill the void, they’re all we’ve got.