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The Ultimate Irony

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By RICHARD B. KELSKY

Reality is a harsh teacher. For years, check-cashers and payday lenders were routinely chastised for charging to provide financial services to consumers and communities that banks refused to service.

In a go-go economy the unfair attacks only worsened as soufflé-like stock prices (based on fast-paced mortgage generation and inflated asset valuations) allowed banks the luxury of spending lots of money to open branches in less-than-toney neighborhoods.

Post bailout realities and regulations have become a wake-up call, both for banks and for their customers, many of whom are finally feeling pinched enough to read the fine print in their monthly statements and make reasoned decisions about what they do and do not want to pay for.

Party’s Over

The music has stopped. So has the giving of free stuff that, in truth, never was very free.

In many neighborhoods, brick-and-mortar service has stopped, too, with 1,400 bank branches closing nationwide in the last two years.

As the consumer becomes increasingly aware, banks that once lived off less visible overdraft-protection and interchange fees are being forced to be more open about their charges.

It turns out the TANSTAAFL principle is all the more true during a recession.

For those of you unfamiliar with the acronym, it stands for There Ain’t No Such Thing As A Free Lunch.

Banks are just getting accustomed to actually admitting TANSTAAFL to their customers. Finding all of a bank’s fees and charges can be difficult and frustrating, to say the least.

So as it stands, despite all of the rhetoric, check cashers and payday lenders are perhaps the only financial service organizations that have been openly disclosing their charges.

Less Money = Better Choices

More to the point, after all of the unwarranted attacks on the industry, it is coming to light that the un-banked and under-banked are way smarter about managing their money than their well-heeled societal counterparts.

They’re also far better able to make intelligent choices about financial services than their self-proclaimed protectors realize.

I really must apologize for falling prey to using the terms “un-banked” and “under-banked.” They are really just clever creations of bank lobbyists and marketers, since both imply everyone should have a bank account.  Perhaps we should rename this group “The I-Don’t-Want-To-Be-Banked.”

The I-Don’t-Want-To-Be-Banked see neighborhood financial service centers as a simpler, much more straightforward alternative to banking: To cash a check, you present it along with your ID, and assuming everything passes the normal verifications, you get your money, less a fee.

Want to pay a bill, get a money order, send or receive a wire, pay a parking ticket, buy a toll pass, get a transit card? You can do that, too.

The service is local, fast, friendly and fairly priced. In fact, that check cashing fee averages only about 1 percent to 3 percent, depending upon market and type of check. And by the way, it’s a clearly disclosed fee — in most cases posted prominently in the store and on a receipt.

Prepaid Now Mainstream

And what of all the attacks on the prepaid industry?

Well, according to recent AP articles, prepaid cards are now “mainstream.” After reading those articles it seems to me “mainstream” is code for “it’s better to know what you’ve got and what things cost than getting surprised every month by bank charges.”

By the way, a search of “prepaid cards” and “mainstream” produced 395,000 results on Google.

Yes, prepaid cards carry charges. But in today’s consumer-driven marketplace, they’re generally simple, usually well disclosed, and relatively easy to understand. That’s precisely why the free-market made them a runaway success.

Face it: If prepaid cards really were too expensive, or had too many hidden charges, people wouldn’t use them for long. Yet today, because of that very simplicity — what might be termed honesty — prepaid cards are often replacing checking accounts.

Transparent PDLs

Just like check cashing, payday loan disclosures are generally very clear, as are the fees associated with the loan.

Sure, some muckraker can always find the widow who borrowed money in an unregulated state and ended up in litigation, and use it with a broad brush to paint the industry. But that has nothing to do with the thousands of payday loans that serve their purpose and work out just fine every single day.

Payday loan customers realize that the APR calculation cannot be compared to collateralized, long-term, large-dollar borrowing.

A payday loan APR is not driven by interest rates alone.  It’s driven in large part by the fee charged to issue a relatively small, short-term, uncollateralized loan.

What exactly is the equivalent APR on a $34 charge by a bank for overdraft protection for using $12 for two weeks? What would it be on a $60 ATM withdrawal where a $2 (or $5) fee is applied?

Does anyone seriously claim that a person could walk into a bank branch and actually get a loan for $177 to get their brakes fixed so they could drive to work and keep their job?

Funny how those who criticize the payday industry didn’t cry foul about irresponsible mortgage lending and lack of disclosures during the housing bubble.

It’s a heck of a lot easier to attack small business owners than banks — and easier to attack in the name of those who need $200 loans rather than call out the over-banked (over-leveraged) middle class.

And just who were most of those folks who purchased homes with that easy mortgage money?  They were not the customers of check cashers and payday lenders or users of prepaid cards. Turns out they were mostly middle- and upper middle-class folks looking to make money in the housing market.

They couldn’t predict where the market was going, had no idea what their costs were going to be, or even how they were ever going to make that monthly payment. Many of the very same folks doomed to a lifetime of credit card debt — with bank-issued credit cards.

The Rest of the Story

Below is a table showing selected published rates for four of the largest banks in the United States.

It took some work to prepare this chart. On July 11, 2011, I went to each of their websites and set out to determine their detailed account charges.

Mind you, I feel that I am an above-average computer user and a proficient web consumer. My experience locating detailed bank charges and fees varied from relatively ready access to a single-page rate chart to rates located in 30-page-plus PDFs.

Actually, I had listed a fifth major bank, but deleted it when I had zero success in finding their detailed account charges after spending more than an hour on their website.

I then went on to look at other bank sites both large and small.  Just trying to find each bank’s checking account charges highlighted the challenges faced by consumers as well as serious disparities between banks.

Namely:

• Required disclosure doesn’t mean easy-to-find-or-easy-to-understand disclosure

• Differences in where to find charges

• Differences in presentation of charges

• Differences in terminology and definitions

• Differences in the amount of information

This experience reminded me of the story about a manager reviewing an employee’s expense report:

Manager: “I have a little problem with your expense report.”

Employee: “What’s that?  It’s all there.”

Manager: “I see a total of $710 — the gas, the hotel, the meals, and the raincoat for $89.  We don’t pay for raincoats.”

Employee: “But it started to rain after I got there.”

Manager:  “You have to take it out.”

The next day …

Manager: “I got your revised expense report. The raincoat is gone — good — but the total is still $710.”

Employee: “Oh, the raincoat’s still in there — you just have to find it.”

Lessons Learned

What did I learn overall?

If your financial life is simple, and you don’t want to spend your time defensively managing a bank account, you can economically use the services of a financial service provider, and avoid a potentially complicated and potentially expensive relationship.

It is important to note that some services provided by neighborhood financial service providers are materially less expensive than banks. Like bank money orders of $5 each, or bank wires from $18.75 up to $50.

When your landlord won’t accept a personal check or your relatives need money, paying a lot less (an average of about $1 for a money order at a check casher) for those services becomes important.

Add to the mix keeing a bank monthly account fees, overdraft fees, multiple overdraft fees, and extended overdraft fees, overdraft transfer fees, returned item fees, statement fees, and many, many others, and you suddenly begin to appreciate why bank-free money managing options are increasingly the choice of people who need make their buck go father than ever.

E=mc2 F=MA S=1/2AT2  and Others

Speaking of checking accounts, one of my favorite requirements to avoid a monthly checking account maintenance fee is to “maintain an average daily balance.”

I consider myself a fairly smart person, but calculating “average daily balance” on a daily rolling basis takes a bit of work — and probably a spreadsheet program. Since an ordinary person can’t figure it out, they are either forced to maintain their balance at a higher level to protect themselves or face the penalty of a monthly charge.

I should point out that some accounts do provide multiple ways (typically involving direct deposit or use of other services) to avoid a monthly account maintenance fee, but if you live paycheck-to-paycheck the monthly charge may be inescapable.

Conclusions

The check cashing and payday lending industries are by and large composed of hard-working, honest business owners who charge fees for the services they provide.

They make investments and take economic risks and are often highly regulated by their host states, and where applicable, as Money Service Businesses by the federal government.

In many states, their rates are regulated by law.

Personally, I love banks and believe they serve a vital role. They have the absolute right to charge fees for all of their services.

So do check cashers, payday lenders and prepaid card issuers. They can peacefully coexist, serving different customers with different needs, wants and resources.

In today’s information age, average consumers have no trouble figuring out what’s a reasonable price to pay (provided the price isn’t buried deep inside some opaque billing structure several clicks deep on an Internet site, and then inside a multi-page PDF).

With tough times pressing them to watch every dollar, they’d much rather be plainly told what they’re paying, pay it, and be sure there are no surprises, than kid themselves that they can get something for nothing.

Richard Kelsky is president of TellerMetrix, Inc. a provider of POS transaction, compliance, interface, electronic deposit and marketing software to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of NYU and NY Law School grad, a certified anti-money laundering specialist, and a frequent lecturer on business, legal, compliance, and technology issues. He can be reached at: rkelsky@tellermetrix.com


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