The Unbanking of America

The consumer financial-services system is broken. This system, which consists of not only banks, check cashers, and lending circles, but also policymakers, regulators, and credit bureaus, fails to provide Americans with the products, services, and information they need to achieve financial stability. As a result, too many Americans are unable to participate fully in the economy and in civil society.

The first step toward improving the system is to change how we talk about it.  Framing the problem as “banked versus unbanked” has helped spotlight problems of financial exclusion, but it has also placed a value judgment on some people’s financial decisions without understanding their situations, implying that the un- and under-banked are somehow deficient. This understanding of the problem also tacitly affirms banks are the good guys. They’re not. This paradigm has outlived its useful life. It’s time to move on.

What if, instead of focusing narrowly on people’s “poor choices” – failing to save, patronizing predatory lenders, running up fees—we worked harder to understand the options available to people and the context in which they make those choices? Looking at the problem systematically will lead to a much different conversation and ultimately to transformational solutions.

Until the will arises to make sweeping transformational changes, there are ways to improve the consumer financial-services system that will support greater financial health. For one, the government can enable better customer decision-making. It’s impossible to make healthy financial decisions without the right information. Consumers need access to clear, easy-to-understand information that will help them make the best financial decisions for their individual situations.

Government can hold financial-services providers accountable by requiring them to make it easier for consumers to compare products and make informed choices. The solution is not more disclosure—which tends to result in long fine-print documents that no one reads or understands—but simple, clear ways to compare products and make choices. Financial-information boxes that resemble the nutrition-information boxes on packaged food would provide consumers with clear, standardized information about fees, interest rates, penalties, and the like. The information on packaged food allows consumers to easily compare two kinds of breakfast cereal, yogurt, or frozen pizza right in the supermarket aisle, so they can make healthier choices. There’s no reason why a standardized “fact box” can’t replace the opaque technical language, asterisks, and fine print that typically accompany financial products.

Some progress has already been made in this area, but no single standard has been adopted by all companies, making comparisons difficult; also, these efforts at transparency are voluntary, not required. The Consumer Financial Protection Bureau should continue its initiatives to make this information consistent across the full range of consumer financial products.

But it’s not just the products that consumers need to understand—it’s also the providers. It’s impossible for consumers to keep up with which financial institutions are providing the best products at the lowest prices. Here too, precedents for creating such a system exist. In 2010, the New York City Department of Health implemented a system for communicating to consumers the results of its restaurant inspections. Every establishment that serves food must now post a sign in its window with a large blue grade—A, B or C—to state how it fared in its most recent inspection. It used to be that you had to go online and search for that information. Michael Barr recommends using just such an easy-to-understand symbol, a gold seal or the like, to identify financial institutions judged to offer safe and affordable bank accounts.

We know that some banks treat their customers better than others and some payday lenders engage in illegal collections practices, while others don’t. Using a rating system modeled on the one used by the US Department of Health would inform customers as to how well financial-services providers do their job.

In order to make the best of these rating systems, it has to be easy for people to move from one financial institution to another. Right now it’s anything but. Moving would be simpler if we each had a universal, portable financial identity we could control. When we move from one bank or credit union to another, that identity would go with us. Information about how we use financial products and services, and what we pay for them, could be included as part of this identity.

Even if consumers were able to access clear and complete information about financial services easily, they would still need well-developed skills and knowledge in order to make sound decisions. A recent study conducted by the Urban Institute found that financial coaching positively affected participants’ financial health on a range of outcomes, including nonretirement savings balances, credit scores, budgets, and ability to deal with financial stress. This kind of coaching will require a significant investment, but the returns are potentially great.

Lisa Servon is Penn IUR Faculty Fellow and Professor and Chair, Department of City and Regional Planning, University of Pennsylvania. This article is adapted from her new book The Unbanking of America: How the New Middle Class Survives (Mifflin Harcourt, 2017). To learn more, listen to Lisa Servon discuss The Unbanking of America on NPR’s Fresh Air. Or purchase the book on Amazon.