A word of warning to those fleeing big banks and bringing their money to nonbank lenders.
This past Saturday was “Bank Transfer Day,” in which 40,000 frustrated customers joined the 650,000 who had already switched their money out of bank accounts with the Too Big To Fail behemoths to smaller community banks. The preliminary results are encouraging: On that day alone, customers deposited $90 million with credit unions and had moved $4.5 billion in the weeks leading up to it.
It’s easy to understand frustration with these banks. It wasn’t too long ago that Bank of America and a handful of others were threatening to charge customers for using debit cards, even though profits from consumers are helping keep some of these banks afloat. Bank fees can add up, particularly for lower income people who may not be able to keep minimum balances, use direct deposit, avoid overdraft fees, and otherwise stay away from banking fees.
But that frustration may be leading some into the arms of even more pernicious institutions: those that serve the unbanked. Before Move Your Money, about a quarter of American families, or 60 million people, were already considered unbanked or underbanked, meaning that they have little to no relationship with traditional banks. But someone has to fill that hole. Those who step in see a real business opportunity, as the ranks of the unbanked are growing.
The traditional stand-ins are payday lenders, check cashers, and prepaid debit card companies. The first problem with these institutions is that they avoid the scrutiny and regulation that is supposed to reign in traditional banks (although the CFPB stands to change all of that). On top of that (and likely because of it), they come with extremely high interest rates and hidden or unexpected fees. For example, payday loans can come with interest rates that exceed 450 percent when annualized. That doesn’t include fees, which can include an upfront $45 — no small price for those with stretched budgets. Check cashers often skim between 2 and 4 percent of each check’s value. That could add up to $40,000 over a customer’s working life.