In recent years, discussions of poverty have included the term “food desert” to describe low-income neighborhoods with scarce access to fresh produce. But impoverished communities are now experiencing another phenomenon: banking deserts.
At 10:45 a.m. today in the Amphitheater, Mehrsa Baradaran will speak on the topic of banking inequality in America. She wrote about the subject in her 2015 book, How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy.
“After the ’08 financial crisis, there were these market forces where banks got really big and they left certain neighborhoods because it wasn’t profitable anymore,” said Baradaran, associate professor of law at the University of Georgia. “It wasn’t outright discrimination, but banks aren’t interested in small accounts and small loans.”
In 2013, the Federal Deposit Insurance Corporation reported that 20 percent of U.S. households are underbanked. They have a bank account, but insufficient income still requires them to rely on alternative financial services such as payday lenders to cover recurring living expenses.
Payday loans are uninsured small sums, usually $500 or less, paid out by private companies to consumers on the agreement that they pay back the loan with their next paycheck. The problems arise when borrowers don’t have enough in their paycheck to cover repayment.
“These aren’t people who are financially stupid,” said Baradaran, who explained borrowers are aware of the costs but have no other options. Those costs include exorbitant late fees and interest rates upwards of 300 percent, resulting in a cycle of debt that is almost impossible to escape.
According to the Pew Charitable Trust, only 16 percent of payday loan borrowers use the money for unexpected emergencies, such as car repair or medical bills. The rest need the funds for living expenses like groceries, utility bills and rent.
Another 7.7 percent of households have no banking access at all. Payday loans are unavailable without a bank account from which the lender can draw funds, so these people end up paying hefty fees for storefront check-cashing. They also have no secure means of saving.
“They’re not making bad decisions. Some of these people need these loans just to make it,” Baradaran said. “They were looking for a lifesaver and what they get instead is something that makes it much harder for them to live.”
In her book, Baradaran proposes a solution: postal banking.
As the term suggests, postal banking allows for branches of the U.S. Postal Service to facilitate basic bank services such as check cashing, savings accounts and small loans.
The extant presence of USPS offices in low-income neighborhoods is one supporting argument of postal banking proponents, but another argument is that this system already existed in America from 1911 to 1967. Sen. Bernie Sanders of Vermont and Sen. Elizabeth Warren of Massachusetts have both advocated for the reinstatement of U.S. postal banking.
“It’s certainly not something that’s imminent. There’s no bill right now,” Baradaran said. “But I could see some political winds changing and it coming to pass.”