By Pedro Nicolaci da Costa

When Wall Street and its regulators talk about servicing the so-called “unbanked,” people who are generally disconnected from the banking sector, it often sounds like a mission to do God’s work — bank unto others as thou banketh for thyself.

“Basic financial services are out of reach for one in four individuals on Earth,” U.S. Treasury Secretary Jack Lew, a former Citigroup banker, said at a December speech launching the White House’s latest initiative targeted at the unbanked, which involves a partnership with JPMorgan Chase and PayPal.

A report co-sponsored by JPMorgan Chase in 2014 speaks of the problem in similarly biblical terms: “Roughly 75 percent of the world’s poor — 2.5 billion people — do not have a bank account or otherwise participate in the mainstream financial system.” The lack of access to “secure, affordable financial products and services severely limits the global poor’s financial security and opportunities.”

Yet when bankers and regulators debate the travails of the unbanked or underbanked — effectively euphemisms for poor and lower-middle-class Americans — they usually avoid two key questions: Why is this cross-section of society so marginally attached to the banking system in the first place? And who is behind the provision of “alternative” services — high-cost loan sharks, payday lenders, cash checking stores, pawnshops — the poor turn to instead of banks?

In reality, it is the banks themselves that appear to have cut off and driven away the low-income consumer, not the other way around. Wall Street won’t make loans to the poor — at least not directly. But large banks, it turns out, are behind many of the predatory nonbank, high-cost lenders that notoriously prey on poor communities. Most recently, the same JPMorgan Chase that’s working with the White House to reach the unbanked partnered with OnDeck Capital, an online lender that approves loans in a flash and charges eye-popping interest rates that averaged around 54 percent as of 2014.

In other words, the big banks are already well-acquainted with the poor unbanked poor — and they’re fleecing them. They’re simply doing it the clean, Wall Street way, through intermediaries and with little accountability.  Some banks are willing to do the dirty work themselves. This is how Wells Fargo advertises its Direct Deposit Advance Loan, which carries an annual percentage rate of 120 percent: “These short term loans … can assist you with getting through a short term financial crisis by providing you with options and flexibility…. [for example] a medical bill, car repair, or similar unplanned expense.” How sweet of them.

Those who are already in the system don’t fare much better. Big banks push the poor into the more shadowy corners of consumer finance by charging those at the financial margins high and sometimes repeated and lofty overdraft fees, ATM charges, and checking account minimum balances. The poor often live in areas that lack bank branches, meaning that even after they open an account, they have to use a local ATM that charges them $3 on top of the $3 their own bank likely charges. So taking out a $20 bill could cost $6, a 30 percent surcharge.

“What happens is many times people who become unbanked had a bank account but because of marginal balances, insufficient funds, overdrafts, the banks decided to close their account,” said Charlene Crowell, African-American and Latino outreach manager at the Center for Responsible Lending.

“The average overdraft fee is $34 dollars,” she added. “And for a person who had little or no financial cushion in the first place, the likelihood of getting hit with fees is very high.”

This pushes consumers to nonbank lenders, such as check-cashing stores, payday lenders, online lenders, and pawnshops, all of which charge exorbitant rates and which, again, are often owned or funded by the banks that just gave them the boot. They also take advantage of differing state usury laws by in places where there is no limit on the interest rate they can charge. “States with high or no rate limits tend to have the most payday loan stores per capita, and states with lower rate limits tend to have fewer stores, with each store serving more customers,” according to a 2014 report from the Federal Reserve Bank of St. Louis. Perhaps not surprisingly, “in states with higher or no interest rate limits, lenders charge borrowers a much higher fee.”

These products are advertised as a way for consumers to cover one-time emergency expenses, or for workers with irregular income streams to fill in the gaps. However, research suggests the money ends up getting used for basic, recurring expenditures like rent and food rather than for one-time emergency needs, and the high rates make repayment prohibitive, leaving borrowers in a debt trap that becomes difficult to exit. The lenders explicitly rely on this model and stand immediately ready to offer new loans, at similarly exorbitant rates, when borrowers are unable to pay their original principal.

“Although marketed as a means to meet short-term credit needs, many consumers use payday loans to make up for ongoing cash-flow shortages,” the St. Louis Fed report found. “Nearly 70 percent of first-time customers turn to these loans to pay for recurring expenses such as utility, rent, mortgage, or credit card payments.”

Read more: Big Banks and the White House Are Teaming Up to Fleece Poor People

Source:FP