by Jason Sherrill
June 28, 2010
Jeff Gerritt shares some eye opening insights into the banking – or lack thereof – habits of households within the city of Detroit. Party store and check cashing businesses, which charge up to 3% of the check amount, are the “bank” of choice for up to one half of the city’s households. Some of the reasons that these people say they don’t use traditional banks, and thus pay exorbitantly higher fees to cash their checks, are surprising.
One reason poor residents in urban areas like Detroit don’t use banks or credit unions is that they simply don’t trust them. As Jeffry Pilcher reminds us, even many people with money don’t trust their banks, even when the banks tell people to trust them. It’s not surprising people who are poor and lack basic personal financial management skills are leery of trusting financial institutions given all of the reinforcement marketers are giving to the negative evil banker stereotype.
Even if banks and credit unions can convince these people that they are not evil, the likelihood of any bank or credit union being able to retain these customers for long is slim. With overdraft and minimum balance fees anywhere from $9.00 to $35.00 each, someone who lacks basic financial literacy (which is likely a high percentage of Detroit residents since only 35.1% of residents over 25 have graduated from high school1) is likely to rack up significant overdraft charges in a given month. Paying the 3% fee to cash their checks is likely a less costly alternative for these residents than paying bank fees every month. Despite what many critics claim today, the problem is not that the bank fees are too high, but that many people lack the education necessary to manage their money so that they can avoid those fees.
Educating parents about financial management is certainly one option to help steer younger generations away from this practice. After all, children tend to bank at the same institution as their parents, and in this case, that would be the local party store. But teaching parents in inner city areas like Detroit is expensive and difficult and it's nice that Goodwill is willing to take on that effort.
Reaching young people directly in their schools is another avenue that I feel holds value. For example, last year we donated our services to a credit union in New Mexico that is establishing and supporting student run credit unions in the local high schools. The students are involved in managing and marketing their credit union and they’ve incorporated financial literacy into the school’s curriculum. While I do not have any statistics showing the success of these programs, until I see stats that prove otherwise I’m inclined to believe that any financial management education that we can provide to young people is a worthwhile investment into these young people and into the future of the banking industry.
The article cites several other reasons why so many Detroit residents have chosen to remain unbanked and is worth a read if you’re involved with a Detroit area bank or credit union. Organizations like Reframe Detroit may also consider financial literacy training an effort worth undertaking as part of its People Renewal philosophy.
1. Source: U.S. Census Bureau, 2006-2008 American Community Survey
