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The Unbanking of America: How the New Middle…
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The Unbanking of America: How the New Middle Class Survives

by Lisa Servon

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The new middle class that Servon describes isn’t, really. That is, its members may have good incomes, but even if they do they lack significant savings or other wealth, and often job security as well, and thus they are vulnerable to sudden shocks. Servon talks to one man whose database of consumers with subprime credit scores included many with relatively high incomes, college degrees, and homes in their own names; seven years ago, the people in his database experienced a “destabilizing event”—job loss, health issue, car breakdown—every 87 days, but it’s down to every 30 days now. Americans are spending more than they earn because they’re earning less than they need to live. (I also didn’t know that as recently as 2012 data showed that women continue to pay more than men for credit cards.)

After the financial crisis, many more Americans dropped checking and savings accounts; banks don’t want people as customers unless they can provide expensive services or charge high fees to those people and so using a check cashing place can seem much more sensible—at least you know what the prices are instead of getting surprised by them, and you aren’t at risk of hundreds of dollars of overdraft fees. Banks may also deny people the ability to open accounts if there’s any history of overdrafts—more than one million people have been deemed ineligible for bank accounts because of new software tracking bounced checks etc. The idea of a checking account as an indicator of financial stability no longer makes sense, even though policymakers are still acting as if it did. Unless there are significant changes in banking, Servon contends, thinking of people as “underbanked” wrongly implies that they’re making bad choices. (Servon notes that regulators actually encouraged banks to rely more on fees to make themselves less vulnerable to interest rate shocks. Once banks saw how profitable overdraft and other fees were, however, they were hooked. And the average charge for overdrafts and ATM fees has shot up over the past decade.)

As for credit cards, deceptive practices and other problems made credit cards not a great idea for many people. Companies have severely dropped the limits for “risky” cardholders, down to $500 for the most risky. And when you have a lower limit, your use is a greater percentage of your available credit, which lowers your credit score. Over half of African-American middle-class households had at least one credit card cancelled, a lowered credit limit, or a denial of a credit card after the financial crisis. Servon also points out that many people who use payday loans with their huge interest rates have unused credit on their credit cards—but this makes sense to them because they don’t want to use up their last source of emergency credit, if something else happens. Plus, failure to repay a payday loan doesn’t decrease a consumer’s credit score, while failure to repay a credit card does. Servon concludes that it’s just not clear whether the benefits of payday loans outweigh the costs (but in the end discusses ways of getting cheaper financial services to the same borrowers). Compared to states that don’t ban payday lending stores, households in Georgia and North Carolina, which do, bounced more checks, filed more FTC complaints about debt collectors, and filed for bankruptcy more often. Colorado limited payday loans in certain ways, such as banning lump sum loans that have to be repaid in full; on average, payday loans in Colorado take only 4% of a borrower’s paycheck, and Colorado borrowers spent 42% less on loan fees and the number of rollovers—new loans used to pay off old—decreased by more than half.

Among other places, Servon worked at a check cashing place where people appreciated clarity and convenience—immediate money to pay the bills instead of waiting three or more days for a check to clear. This was important, among other things, to small employers who needed to pay their employees right away. Check cashers also prioritized customer service, which traditional banks no longer do. Servon also investigated informal savings schemes—tandas, where largely Latina women each put in a certain amount of money every week, and then every week one woman gets the others’ contributions—a way to force oneself to exercise savings discipline/avoid pressure from family and friends wanting to borrow cash on hand. Tanda bankers get tipped but they also have to make sure that the participants are reliable. The tanda banker Servon followed also made loans which didn’t bear interest but, when paid off, came with additional “gifts” of money (in true Viviana Zelizer fashion; just like the tanda payoffs themselves, this was a different “kind” of money that was earmarked for specific things). Tandas also have risks; Servon tells one story of a tanda in which the banker just ran off with the cash. And, of course, even successful tandas don’t build credit in the mainstream economy, so users remain more isolated form the formal economy than they perhaps could be.

Servon also has a chapter just about millennials, whose financial insecurity is, among other things, hampering their ability to build social capital—attending a friend’s wedding can mean financial strain for momths. Millennials feel they have to choose between retirement, a house, or kids—pick one. The problem, she reiterates, isn’t “underbanking”—it’s underfunding. “Most people have very good reasons for doing what they do with their money.” People need more stable incomes, and financial services can only be a small part of that, though she does write about various entrepreneurs trying to use digital services to reach people underserved by mainstream banks. ( )
  rivkat | Jun 16, 2017 |
This is really a series of news articles cobbled together. And it is well done. It will encourage you to stop judging from afar and actually consider how our financial system creates sets of winners and losers. And that those losers may be making rational choices for themselves even if we don't understand them from the outside. It's definitely a sad read ( )
  kallai7 | Mar 23, 2017 |
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Amazon.com Product Description (ISBN 0544602315, Hardcover)

An urgent and incisive exposé of our broken banking system—why Americans are fleeing traditional banks in growing numbers

What do an undocumented immigrant in the South Bronx, a high-net-worth entrepreneur, and a twenty-something graduate student have in common? All three are victims of our dysfunctional mainstream bank and credit system. The Unbanking of America exposes the ways in which banks have quietly abandoned lower- and middle-class consumers in favor of servicing only the wealthiest. Today nearly half of all Americans live paycheck to paycheck, as income volatility has doubled over the past thirty years. Banks, with their monthly fees and high overdraft charges, take advantage of these fluctuations rather than help their customers manage them. 
  
Lisa Servon delivers provocative dispatches from inside a range of banking alternatives—from predatory to responsible—as new players rush in to do what banks once did. She works as a teller at RiteCheck, a check-cashing business in the South Bronx, and as a payday lender in Oakland, California, listening to the stories of the alternative bankers as well as their consumers. And she delivers fascinating, hopeful portraits of the entrepreneurs who are counting on a permanent “unbanking” of America—and designing systems to transform how nonwealthy Americans can gain the access and agency to their own money that they, especially, need.

(retrieved from Amazon Fri, 04 Nov 2016 13:40:39 -0400)

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