First of all, I think it’s worth pointing out that this conversation is about innovation not whether one retail banking system is better. It is possible for a system to be more innovative while also having worse outcomes. For example, the US healthcare system lags in health outcomes in many ways, but is dominant in medical research publications, medical Nobel prizes (a solid majority of medical Nobel prizes have gone to US researchers in the last 30 years) medical device manufacturing, pharmaceuticals, etc.
But in any case, the very fact that many poor Americans are underbanked (which you say leads them to prefer checks) demonstrates that the US banking system is inferior to the European
You are just assuming that these people are bankless due to some unusual quality of American banks.The main reason I have heard for poor people avoiding banks is overdraft charges—something almost all banks in all countries have. It’s quite possible that America just has a more feckless underclass than most European countries, and they are bad at estimating when they will overdraw. For people like that, using cash would make a lot of sense. Or maybe America’s underclass has more cashflow problems because the US welfare system is oriented more toward in-kind services than cash transfers. Or maybe its just a weird subcultural thing that America’s underclass likes having wads of cash on hand.
That said, I don’t think either system is especially innovative, except perhaps in the (sometimes unfortunate) sense of creating new financial products. If we want to find actual consumer banking innovation, it seems to be primarily occurring in the developing world, where we’re seeing things like microlenders, interesting savings products, phone-based money transfer (and the usage of airtime as an alternative currency), and so on.
You are just assuming that these people are bankless due to some unusual quality of American banks. The main reason I have heard for poor people avoiding banks is overdraft charges—something almost all banks in all countries have.
This does not appear to be the case. Here’s a good overview from the Federal Reserve Bank of St. Louis. My personal guess is that the fractured nature of the US banking systems (many small local banks) results in uneven service quality and less caring about reputation from banks, as well as costs being higher per client, making poorer clients less profitable. In addition, Deloitte writes: “In the United States, many traditional bank competitors view the unbanked and underbanked segments as unattractive as their costs to serve are high and income generated low relative to more affluent segments. This is partially a reflection of a high-cost base and expensive and restrictive regulatory actions exacerbated by recent consumer legislation.”
It is not a case of the poor being better off without banking services or anything like that (as mention in the Fed article, and also here’s the World Bank for some international stats), it’s really just a case of poor provision. On the bright side, it seems like the situation is somewhat improving with prepaid cards being offered, which do not require a complicated application process, and which have no overdraft at all (if you think that’s important), with the one downside being that it seems like some of them may have unreasonable fees.
In the United States, many traditional bank competitors view the unbanked and underbanked segments as unattractive as their costs to serve are high and income generated low relative to more affluent segments.
You are very dishonestly misrepresenting your sources, and privileging your hypothesis. None of your sources actually claim that US bank practices are different. Deloitte does say that regulations (ceteris paribus) increase the cost of serving low-income people, but does not actually demonstrate that such costs are higher than they are in Europe. Furthermore, most of these regulations are designed to make banking more appealing to low-income people, since they decrease fees, and force banks to offer overdraft protection. Yes those costs make banks less likely to advertise to poor people, but also make bank use more attractive for poor people. And none of this demonstrates that bank behavior is different in the US—since European countries probably also have consumer protection laws. Deloitte never claims that US banks are more regulated on balance.
The World Bank source actually argues my point in my earlier response to you: that America’s poor people don’t use banks because 1. they have cashflow problems and 2. They don’t trust banks (i.e. a cultural problem). Both of those are characteristics of US poor people, not of US banks.
The Fed St. Louis report also supports my claim:
Some consumers are unbanked for a variety of reasons. These include: a poor credit history or outstanding issue from a prior banking relationship, a lack of understanding about the U.S. banking system, a negative prior experience with a bank, language barriers for immigrant residents, a lack of appropriate identification needed to open a bank account, or living paycheck to paycheck due to limited and unstable income.
You claim that I privilege my hypothesis, while your own hypotheses as originally stated were: 1) overdraft charges are scaring the poor away, 1a) maybe US poor are more “feckless”, 2) maybe US poor have less cash flow due to welfare being less cash-based, 3) maybe US poor prefer to use cash… and then you claim that Fed St. Louis supports you in that paragraph? Really? It mentions none of those things except insofar as one of the aspects of “negative prior experience” is overdraft charges (and by a very generous reading it could perhaps be argued that the “paycheck to paycheck” bit is somewhat similar to what you said). In fact, I went out of my way to search for “overdraft” specifically, as that was your primary hypothesis, and I found that fears of overdraft protection come up in surveys as minor factors for not having a bank account, and as fairly major factors among those who prefer prepaid cards to debit cards (which I mentioned).
In addition, I would appreciate it if in the future you would not assume that someone is being willfully dishonest unless you are absolutely certain of it. Having reread my previous post and re-skimmed the sources I cite, I do not see where I misrepresented them. Although I obviously did not write everything each of them said (and indeed I also read three or four other things I did not link at all), I believe my post is broadly in alignment with their intent.
Regardless, I find I have no interest in further discussing this topic with you, so this will be my last post.
This doesn’t seem to be true. I’ve confirmed that both the UK and France have overdraft fees. US banks also are required by law to offer overdraft protection (which is opt-in).
First of all, I think it’s worth pointing out that this conversation is about innovation not whether one retail banking system is better. It is possible for a system to be more innovative while also having worse outcomes. For example, the US healthcare system lags in health outcomes in many ways, but is dominant in medical research publications, medical Nobel prizes (a solid majority of medical Nobel prizes have gone to US researchers in the last 30 years) medical device manufacturing, pharmaceuticals, etc.
You are just assuming that these people are bankless due to some unusual quality of American banks.The main reason I have heard for poor people avoiding banks is overdraft charges—something almost all banks in all countries have. It’s quite possible that America just has a more feckless underclass than most European countries, and they are bad at estimating when they will overdraw. For people like that, using cash would make a lot of sense. Or maybe America’s underclass has more cashflow problems because the US welfare system is oriented more toward in-kind services than cash transfers. Or maybe its just a weird subcultural thing that America’s underclass likes having wads of cash on hand.
I agree with this.
This does not appear to be the case. Here’s a good overview from the Federal Reserve Bank of St. Louis. My personal guess is that the fractured nature of the US banking systems (many small local banks) results in uneven service quality and less caring about reputation from banks, as well as costs being higher per client, making poorer clients less profitable. In addition, Deloitte writes: “In the United States, many traditional bank competitors view the unbanked and underbanked segments as unattractive as their costs to serve are high and income generated low relative to more affluent segments. This is partially a reflection of a high-cost base and expensive and restrictive regulatory actions exacerbated by recent consumer legislation.”
It is not a case of the poor being better off without banking services or anything like that (as mention in the Fed article, and also here’s the World Bank for some international stats), it’s really just a case of poor provision. On the bright side, it seems like the situation is somewhat improving with prepaid cards being offered, which do not require a complicated application process, and which have no overdraft at all (if you think that’s important), with the one downside being that it seems like some of them may have unreasonable fees.
Well, that went off-topic.
You are very dishonestly misrepresenting your sources, and privileging your hypothesis. None of your sources actually claim that US bank practices are different. Deloitte does say that regulations (ceteris paribus) increase the cost of serving low-income people, but does not actually demonstrate that such costs are higher than they are in Europe. Furthermore, most of these regulations are designed to make banking more appealing to low-income people, since they decrease fees, and force banks to offer overdraft protection. Yes those costs make banks less likely to advertise to poor people, but also make bank use more attractive for poor people. And none of this demonstrates that bank behavior is different in the US—since European countries probably also have consumer protection laws. Deloitte never claims that US banks are more regulated on balance.
The World Bank source actually argues my point in my earlier response to you: that America’s poor people don’t use banks because 1. they have cashflow problems and 2. They don’t trust banks (i.e. a cultural problem). Both of those are characteristics of US poor people, not of US banks.
The Fed St. Louis report also supports my claim:
You claim that I privilege my hypothesis, while your own hypotheses as originally stated were: 1) overdraft charges are scaring the poor away, 1a) maybe US poor are more “feckless”, 2) maybe US poor have less cash flow due to welfare being less cash-based, 3) maybe US poor prefer to use cash… and then you claim that Fed St. Louis supports you in that paragraph? Really? It mentions none of those things except insofar as one of the aspects of “negative prior experience” is overdraft charges (and by a very generous reading it could perhaps be argued that the “paycheck to paycheck” bit is somewhat similar to what you said). In fact, I went out of my way to search for “overdraft” specifically, as that was your primary hypothesis, and I found that fears of overdraft protection come up in surveys as minor factors for not having a bank account, and as fairly major factors among those who prefer prepaid cards to debit cards (which I mentioned).
In addition, I would appreciate it if in the future you would not assume that someone is being willfully dishonest unless you are absolutely certain of it. Having reread my previous post and re-skimmed the sources I cite, I do not see where I misrepresented them. Although I obviously did not write everything each of them said (and indeed I also read three or four other things I did not link at all), I believe my post is broadly in alignment with their intent.
Regardless, I find I have no interest in further discussing this topic with you, so this will be my last post.
I have never had any interest in discussing this with you. I did so merely as a courtesy for someone who seemed to have an interest.
Customer protection laws in Europe don’t allow banks to operate the same way with overdraft charge as banks can operate in the US.
This doesn’t seem to be true. I’ve confirmed that both the UK and France have overdraft fees. US banks also are required by law to offer overdraft protection (which is opt-in).