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The Unbanked Of Los Angeles

Matt Levin |
November 17, 2014 | 3:05 p.m. PST

Staff Reporter

Bank of America on Hoover Street and Olympic Boulevard. (Courtesy of Google Maps)
Bank of America on Hoover Street and Olympic Boulevard. (Courtesy of Google Maps)
Stand on the northwest corner of Olympic Boulevard and Hoover Street in the Westlake neighborhood of Central Los Angeles and you'll see a subtle but increasingly common dichotomy in 21st century American banking. 

On one end of a cramped strip mall, customers file into a local Bank of America branch, where most patrons can deposit their paychecks and make withdrawals from their checking accounts free of charge. Two doors down, separated by a Metro PCS storefront and a South American restaurant, customers file in to a "Mundo" check cashing outlet, where patrons must pay an advertised fee of one percent of their paycheck to turn their earnings into cash. 

At first glance, the juxtaposition is confusing. The check-cashing outlet does offer certain services Bank of America doesn't, like international money-wiring from Western Union—others offer alternative credit sources like payday and car title loans. But that aside, why would anyone pay for check-cashing, especially when they could walk two doors down, open up a checking account, and deposit their pay free of charge?

"They're both the same," says Victor Ramos, who before opening a debit card account with Bank of America frequently used check cashing outlets like "Mundo. "It's the same thing, same principle. They both try to charge you for something, for any fees."

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Waiting for his bus outside the Westlake strip mall, Ramos says he has frequently gone without a bank account because of the myriad of fees he has encountered with traditional banks. He is forced to pay these fees when the money in his account drops below minimum balance requirements or when he overdrafts. Ramos compares that experience with the convenience of check-cashing outlets, which are open 24 hours and do not place any holding period on his checks—meaning he can cash them for their full value the same day he receives them.

"Usually the bank gets more fees," says Ramos. "They charge you every month, and every time you go overboard they charge you for that too."

Ramos is not alone in his on-again, off-again relationship with traditional banks. According to a recently released survey by the Federal Deposit Insurance Corporation (FDIC), nearly 9.6 million U.S. households are "unbanked." That means they do not have any account at a financial institution insured by the federal government. The FDIC estimates that roughly 16.7 million adults and 8.7 million children live in those households.

While the report did find a statistically significant improvement in the national rate compared to years past (7.7% in 2013, compared to 8.2% in 2011), the marginal progress masks one of the driving forces behind the large numbers of unbanked Americans: African-American and Latino households are much more likely to be divorced from the traditional banking system than whites.

That disparity is especially acute in the greater Los Angeles area. According to the FDIC, more than one in four black households and nearly one in five Latino households in the Los Angeles metropolitan statistical area—a Census geographic grouping that extends to Long Beach and Santa Ana—do not have a formal banking presence. In startling contrast, nearly 99 out of 100 white households in the area are banked.

So why is the number of families without a formal banking presence so much higher within these communities of color? And, considering the indifference those like Ramos feel towards traditional banks, should that even be considered a problem to begin with?

Overdraft Fees vs. the Long-Term Costs of Being Unbanked

Most of the research surrounding so-called "fringe banking" suggests that, in most cases, the unbanked pay more for basic banking services than individuals with traditional bank accounts.

"Generally, if you do not have a bank account, you have to pay twice," says Joe Valenti, the director of asset building at the left-leaning think tank Center for American Progress.

First, there's the cost of basic check-cashing services, which typically range from two percent to five percent of a check's value when all fees are included.

Secondly, there's the cost of related banking services that most banked households take for granted.

“Then you have the expense of buying money orders, or putting money on prepaid cards, or paying bills in person," says Valenti. "You have to be able to convert that cash into payments that the electric company or your landlord or other vendors are going to accept."

While estimates for the direct expenses incurred by unbanked households vary by geography and by researcher assumptions, one study conducted by the Federal Reserve of St. Louis estimated that a household with a net income of $20,000 could pay as much as $1,200 annually in alternative banking service fees.

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There's also the safety of FDIC-insured savings, as opposed to carrying loads of cash on your person or stashing it in your house. While this concern has softened somewhat because of the rising popularity of prepaid debit cards among the unbanked, research suggests that payday loan shops and other alternative financial services vendors are often hot spots for crime. 

Those supporting the superiority of traditional bank accounts typically make an important assumption: account holders will not incur overdraft fees.

"Overdrawing could easily cost you hundreds of dollars a year and really make having a bank account more expensive than not having one," says Valenti. 

The likelihood of incurring overdraft fees has been diminished by recent Federal Reserve regulations requiring that consumers actively "opt-in" to overdraft protection. Prior to the regulatory change, many accountholders incurred overdraft penalties because they did not know the bank's overdraft protection program was voluntary. Without overdraft protection, a sale may be denied or check bounced at point of purchase because of insufficient funds, but the consumer will not incur any fee, just embarrassment.

SEE ALSO: Bank Of America To Cut 2,000 Jobs

Despite the regulatory changes, the sting of an experience with a hefty overdraft penalty still steers many away from mainstream banking. Just a few blocks south from the Bank of America strip mall on Hoover Street sits a PLS Financial storefront. Large block letters declaring "CAMBIAMOS CHEQUES" — "we cash checks" —blare in neon orange signage. PLS Financial is one of the most popular check cashing chains in Southern California, as it also provides a full array of alternative financial services like payday and car title loans.

Walking away from the store, a woman who would only identify herself as Diana rushes with her five-year-old daughter to meet her husband, who works at the neighboring car wash. Diana, who said she works at a United Oil gas station, says she has an account at Bank of America, but that she frequently utilizes check cashing services like PLS Financial.

She says her experience overdrafting by $2 on her Bank of America account still leaves a sour taste in her mouth, and she is pretty restrictive with how she uses her account.

"I don't like to use it to deposit money," she says. "I use to change my checks, but that's about it."

Valenti, who is also a financial services expert, says that in recent years national retail banks have made significant strides in offering products specifically tailored for previously unbanked clientele. These products include so-called "checkless" checking accounts, accounts with no minimum balance requirements, and prepaid debit card products.

High Unbanked Rates in Black and Latino Communities

But advocates for bringing unbanked black and Latino households into the financial mainstream face numerous challenges. A deep and persistent distrust of banks, stemming from a disgraceful history of discriminatory behavior by the financial sector here and abroad, persists in many households.

"Banks were not always interested in serving these populations," says Valenti. "And if you didn't grow up using a bank account, and you were more accustomed going to a check cashier or managed money in other ways, it's probably how you would manage money as an adult."

The legacy of discriminatory practices like redlining may have behavioral consequences for personal financial behaviors, but it also carries much more practical consequences—like a lack of conveniently located banks in many low-income communities of color.

SEE ALSO: Moody's Downgrades Three U.S. Banks

Theology student Robert Dudley says he pays $9 a month for a prepaid debit card he loads at PLS. Part of the reason he prefers PLS to conventional banks is because it’s much easier to find a PLS where he lives, just west of the 110 freeway in South Los Angeles.

“It’s pretty easy and convenient because PLS is everywhere and it’s easy to get to them,” says Dudley. “It’s kind of hard to get to some banks. Especially in my area, it’s kind of hard to get to some banks.”

While convenient access to banking services remains an issue across communities of color, immigration status is of particular concern for many unbanked Latino households. While federal law allows unauthorized immigrants to open FDIC-insured accounts with documentation from their country of origin, fear of handing over sensitive personal and financial information to banks remains widespread.

Cesar Rosas, vice president of administration for Pan-American Bank in East Los Angeles, says fear of deportation dissuades many would-be clients.

“They feel reluctant to come into this bank and share their deposits,” he said. “They prefer to be anonymous, they prefer to keep the money at home, and also you have to remember, they live paycheck to paycheck for the most part.”

Follow Staff Reporter Matt Levin on Twitter here



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