Thursday, June 05, 2014

It's expensive to be poor. Bank accounts make it cheaper.

It sucks to be poor. It's even worse to try to work your way out of poverty.

That is next to impossible. There are dozens and dozens of traps that keep people from moving up economically.

There's one trap we can eliminate: currency exchanges.

Currency exchanges make a lot of money off of working people by charging hefty fees for basic services like cashing a check or cutting a money order. The people who own them do very, very well. And the people who use them … not so much.

Trouble is, banks don't like to open in poor neighborhoods. There's a bank on almost every corner in rich neighborhoods, but not in poor neighborhoods. Into that gap come the currency exchanges, charging a fee just to cash a check.

Imagine that! Imagine every time you deposited a check you paid a 1% or 2% fee. Every time! That's a whole week's worth of pay, just to cash your checks. Getting into a free checking account at a bank means an entire week's extra pay. For working people living on the edge, that's a big deal.

10 years ago, this would be a really tough problem to solve. It's hard to make banks open up branches in poor neighborhoods. And it's politically hard to regulate the fees that currency exchanges pay because they have so much money to throw around to block any bills.

Today, though, online banks are everywhere. All you need is a phone with a camera and you can deposit your check by taking a picture of it. Some of them don't charge any fees. This is a big opportunity to get working people out of expensive currency exchanges and into cheap banking.

It's still a little bit isolated, though, without any branch or in-person institution to connect to the online bank account. This is where government can step in, especially local governments with lower-income residents.

Governments deal with residents all the time. They collect fees. They collect taxes. They mail to residents. Kids go to school and parents sign up. People sign up for park programs and set up accounts.

What we don't do – and we should – is connect them with a free, online bank account when they financially interact with the government. So when they pay local taxes or pay for a school field trip or even pay a parking ticket our local governments should offer to set them up with an online bank account. And even better, because the governments will be marketing these accounts to thousands of potential customers, they should negotiate with the banks a great package for very low overdraft fees (as working poor people don't have much of a cushion week-to-week to keep a positive balance).

Every high school kid should get a free bank account online as part of going to high school. One study suggested how powerful a simple bank account it – the professor found that of those kids who graduated high school and intended to go to college but just didn't, for whatever reason, the number on statistically significant factor for those kids who actually went to college is whether they had a bank account in their own name.

Just having the bank account made a major difference in the lives of these kids. Perhaps it's a sense of autonomy or self-direction that a bank account provides. But whatever the reason, it helps.

For those of us who are fortunate enough to have been born into a culture and wealth bracket of banking and relative prosperity, we should extend those privileges to people who aren't so lucky and make it slightly less expensive to be poor.

This is a great issue for local elected officials to champion. We just need someone to run around and convince them to do it – ideally after working it out with a few different online banks so the potential vendors are ready to go.

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