The Unbanking Of America: How the New Middle Class Survives

by Lisa Servon

“Usury,” a word that has come to mean exorbitant or predatory interest rates, originally referred to the practice of charging any interest at all. The medieval Catholic thinker Thomas Aquinas believed it was wrong to make money from the lending of money, that doing so went against “moral and natural law” and led to inequality. And in Inferno, the Italian poet Dante put usurers on the lowest ledge of the seventh circle of hell—lower even than murderers.

The bedrock of consumer capitalism...

From the 1920s through the 1960s, the use of credit became an indispensable part of American life. Mass production made an enormous range of relatively low-cost consumer goods available.

Many of the people I interviewed were so ashamed of their debt that they hid it even from those closest to them. Julie, a Dallas resident in her early thirties, put it this way: “It doesn’t make me feel comfortable. It’s just always like a pride hit. It’s a little embarrassing, you know? I’d rather go and take care of it on my own and let no one else know about it.”

Relatable!

Payday loan APRs range from 300 to 600 percent in the United States and up to 4,000 percent at similar lenders in other countries.

Since folks pay a fee per $100 they don't necessarily think in terms of APR.

There are more payday lending stores than there are McDonald’s restaurants and Starbucks shops combined.

...and payday lending is banned in 13 states!

Of course, banks do offer all of us a short-term loan. It’s called an overdraft, and if it had a repayment period of seven days, the APR for a typical incident would be over 5,000 percent. Americans paid $38 billion in overdraft fees in 2011, more than they paid to payday lenders.

Unpredictable fees are a big reason people don't trust banks.

Making up more than a quarter of the total US population, the millennial generation, beginning with those born in 1980, the year Ronald Reagan began to strip away the public safety net, totals eighty-three million people and represents the largest generation ever.

I'm always wodering when the Millennials actually start.

We continue to perpetuate the myth that children whose families are economically stable can build on and grow the assets of their parents and grandparents and that children whose families have little can work hard and create a stable foothold. That narrative has never been true for many who are disadvantaged. And a secure future now seems unlikely for many more young people.

Creative destruction, a term coined by the Austrian economist Joseph Schumpeter, denotes the process by which capitalism destroys old economic orders and reinvents them through innovation. Here’s an example of this process at work: innovations in refrigeration and transportation technologies enabled the creation of supermarkets, which ultimately put many smaller food shops out of business. More recently, Amazon, in its use of the Internet, its innovative approaches to shipping, and the creation of the Kindle reader, profoundly changed book selling.

Can we use creative destruction to destroy capitalism?

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 underbanked are somehow deficient. This understanding of the problem also tacitly affirms that banks are the good guys. They’re not. This paradigm has outlived its useful life. It’s time to move on.

The problem is not that people are unbanked, but that they lack high-quality, affordable financial services and the resources to attain the stability that once defined what it meant to be middle class.

In order to make financial health a reality for all Americans, we need to ensure that anyone who works hard for forty hours each week can earn enough to support a family.

Hear, hear! We need income equality!

The only way to guarantee that all of us will have the ability to achieve financial health is for the government to intervene and play a much larger role in the provision of financial services.