Too Big to Serve the Working Class

Ron Grzywinski and Mary Houghton are upset about the state of banking in America. In 1973, Ron, Mary and two partners started Shore Bank, the nation's first community development bank, on the south side of Chicago. Shore Bank closed its doors in 2010. But Ron and Mary, both in their late 70s, are still deeply engaged with the industry, arguing for the nation to get "the banks we deserve." Unfortunately, the biggest banks continue to disappoint.

I met Ron and Mary while working on a project to understand why so many people were choosing to use alternative financial services — payday lenders, check cashers and the like — instead of, or in addition to, banks. I also spent several months working as a teller at RiteCheck, a check casher in the South Bronx, and at Check Center, a check casher and payday lender in Oakland, Calif., in order to learn firsthand how people manage their finances. I found that there is a clear reason why so many Americans are operating outside of the financial mainstream: they cannot get reliable and affordable service from the companies that dominate our nation's banking landscape.

Nearly 8% of Americans had no bank account at all in 2013, according to the Federal Deposit Insurance Corp.'s recently released National Survey of Unbanked and Underbanked Households. Another 20% are underbanked: they have bank accounts but also rely on alternative financial services.

Policymakers are concerned about these statistics, so they've been working hard to get people to open bank accounts. The problem with this focus on getting everyone banked is that not all banks are created equal.

As it turns out, there is a connection between the large group of unbanked and underbanked Americans, the growth of the alternative financial services industry and megabanks' too-big-to-fail mentality. As banks have grown larger and their numbers have shrunk, the largest ones have focused so single-mindedly on profit that they have sacrificed their customers in the process. Meanwhile, alternative financial services providers have stepped in to fill the gap. 

The roots of these developments can be traced back to the 1980s. Following bank deregulation, hundreds of small savings and loans failed. A wave of commercial bank failures was not far behind. Between 1986 and 1995, the government closed 1,043 savings and loans, approximately half the total number in the U.S. In the mid-1990s, the trend switched to consolidation as larger banks bought out smaller ones. The 2008 crisis led to even more consolidation as already-large institutions merged in so-called "shotgun weddings."

This surge of bank failures and consolidations created less incentive for banks to compete for customers. Moreover, the very biggest banks now make more of their money from risky investment products than from customer transactions. They see retail banking as a poor stepchild, secondary to their core business.

Smaller banks and credit unions do a better job of serving their customers because that service is either critical to their business model, part of their mission, or both. Surprisingly, the same is true of check cashers. Unfortunately, most of these smaller institutions lack the reach and the resources of the big banks. The Arkansas-based Southern Bancorp, for example, focuses poverty reduction, unemployment and education. At $1.2 billion in assets, Southern is one of the nation's largest community development banks. But its ability to make an impact is limited in comparison with banks like JPMorgan Chase, which spent $2.2 billion in 2013 in litigation fees alone.

But you don't have to be tiny to understand the importance of service. Take the Cleveland-based KeyBank, where the old-fashioned notion of relationship banking appears to be baked into the culture. KeyBank is what's known as a super-regional bank — a mid-sized bank that has a strong geographical presence across the Midwest. KeyBank offers in-branch check cashing at 300 branches in six states, Colorado, Indiana, Maine, New York, Ohio, and Oregon, with the intent to bring familiar financial services to customers who are new to banking or feel that these choices better fit their needs. The bank has long been a pioneer in this area; in 2007, Key Bank deployed its first check-cashing-enabled ATM in a North Canton, Ohio, supermarket.

"We did it because it's what our customers needed; we saw it as a client acquisition strategy," Bruce Murphy, KeyBank's president of community development banking, told me recently. "Most banks say this market isn't profitable, but it depends on how you think about it.  Regional banks like us have enough scale to experiment, but we're not pressured to take the kind of risks the big banks take by offering exotic products."

Many of the customers I served as a teller in the Bronx and in Oakland told me they used check cashers because they didn't trust banks. Caroline, a RiteCheck customer I interviewed, opened a bank account in order to get a direct-deposit of her disability check. But she still goes to RiteCheck to pay her bills.

"I like coming here because I know that it's going to get done fast, you know, and it's safe, reliable," she told me.  "And I know that my bills are paid, and I don't have to worry about anybody taking my money, so I gotta do it here."

Jack, a police officer at the local precinct in Mott Haven, had a checking account for six years but closed it after the bank withdrew money for an overdue credit card that Jack never had. He currently cashes his check at RiteCheck and deposits the cash he receives onto a prepaid card.

It's clear that banks that are too big to fail pose a threat to Americans in more ways than one. Discussions of how to address this issue have been going on since at least 1911, when Woodrow Wilson, the then-governor of New Jersey, wrote, "The great monopoly of this country is the money monopoly... The growth of the nation, therefore, [is] in the hands of a few men, who... are necessarily concentrated upon the great undertakings in which their own money is involved." More recently, the federal government demanded that big banks create living wills that specify how they would dismantle their operations in the event of impending failure. But this plan appears to be flawed: in August, the FDIC and the Federal Reserve rejected the living wills of eleven of the largest banks as "unrealistic or inadequately supported." Some observers have suggested that forced downsizing could be an alternative solution to the too big to fail problem.

In the meantime, instead of labeling the American public as banked, underbanked or unbanked, we should be classifying financial institutions according to whether they provide the high-quality, affordable products we need. Jennifer Tescher, executive director of the Center for Financial Services Innovation, argues that banks have a lot to learn from the health care industry, where the focus has shifted from "treating sickness to promoting wellness."

"Banks," she argues, "need to see themselves as being in the financial health movement."

If we could get the entire financial services industry to switch to this mindset, we might just get the banks we deserve.

Lisa Servon is a professor of urban policy and management and a former dean at The New School. She is writing a book about consumer financial services and collecting stories about individuals' experiences with check cashers, credit unions, banks and other institutions at lisaservon.com.