I’ve been a student of history for the past ten years, in particular ancient history. I love it! Reading epics and myths, accounting and administrative texts, and contracts and lawsuits over 4000 years old is just plain interesting to me (I’m kind of a nerd that way). I even got my master’s in it: Assyriology, the study of ancient Iraq. Often times we point out that our society is far better than the ancients: our government is more inclusive, our society more free, and, in the world of economics, our fiscal systems are more advanced. One thing I’ve seen in the textual record from a few thousand years ago (specifically the Old Babylonian Period for those interested) is usurious loans, that is, loans made to individuals with a low income at extremely high interest rates that lead to loss of land and ultimately debt slavery. It is interesting to note that these loans would be made with crops and housing, even family members, as collateral, that is, one would promise a percentage of the crop at harvest for a loan today.
It may seem strange, but payday loans have existed for thousands of years and were as destructive to ancient society as they are toward modern. While we don’t have debt slavery, these loans, and other problems that go with being un- or underbanked can cost low income households a significant proportion of their income, ultimately keeping the household under the poverty level and making it difficult to raise themselves out of poverty. As noted in a previous blog entry, children born and raised into poverty are more likely to remain in poverty than the rest of the population.
An unbanked individual is one who has no access to a bank account. This accounts for 7.7 percent of U.S. households, approximately 9.9 million individuals. These households do not have access to such basic financial products as a checking or savings account. Under banked households accounted for 17.9 percent of U.S. households, made up of roughly 21 million individuals. This term describes those who cannot get their basic needs met through a government backed financial institution. “Specifically, underbanked households have used non-bank money orders, non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or refund anticipation loans at least once in the past five years.”
What being un-banked or under-banked amounts to is an inability to access basic financial services. This inability forces an individual to find other means for accessing pay; such as check cashing services, which usually require a fee. One report noted that: “Check cashing fees vary widely across the country and between types of checks, but typically range from 1.5 percent to 3.5 percent of face value.” This same study noted that “A worker earning $12,000 a year would pay approximately $250 annually just to cash payroll checks at a check-cashing outlet, in addition to fees for money orders, wire transfers, bill payments, and other common transactions.”
A further problem is pay day loans, that is, short term loans of small amounts, under $500, to low or moderate income workers who have bank accounts but lack credit, have poor credit, or have reached their credit limit. These individuals, when in financial trouble, will make a short term loan at a very high interest rate, upwards to 400 percent APR for a typical two week loan. These loans ensnare borrowers in a spending trap that forces them to take out additional payday loans or other expensive loans to pay off the initial sum and can lead to poor financial outcomes for the borrower, such as difficulty paying other bills, credit card default, loss of checking accounts, and bankruptcy. Fees spiral out of control for the borrower, a scenario which happens all too often.
These are problems that many at the shelter face. There is no real outlet for them to save money or to put their money when they do work. How do you make ends meet, find housing, feed yourself, and pay the bills, when to even access your wages you have to pay a fee? Being unbanked is just one more thing that keeps our guests in the shelter and trapped in poverty.
And we at NLHHC have taken some steps. One is that any guest who has an income must put 30 percent of their pay into a housing savings account. This money is the guests, but can only be accessed by the guest for housing related expenses. They can always request their money back, but they will be forced to leave the shelter for a time if they do. This forces the guests to save some money for housing and has already increased the number of positive outcomes at the shelter. But this does not answer the problem of being unbanked, nor of usurious practices.
All I have to say is it’s amazing how far we’ve come in the past 4000 years!
 Michael S. Barr, “Banking the Poor: Policies to Bring Low-Income Americans Into the Financial Mainstream” John M. Olin Center for Law & Economics Working Paper Series 48 (2004): 2, http://www.frbsf.org/community/issues/assets/bankonsf/resources/banking_the_poor.pdf
 Ibid. 3.
 “Mainstream banks making payday loans: Regulators must put swift end to new trend,” Center for Responsible Lending Policy Brief (February 2010): 2. http://www.responsiblelending.org/payday-lending/policy-legislation/regulators/mainstream-banks-making-payday-loans.pdf
 Ibid. 2.