The Unbanked Poor

Posted by Deepish Thinker on July 04, 2007
Economics, University of Texas

One of my favorite economics lecturers* once posed a very interesting question.  Why do most house break-ins happen on the poor side of town?

There are several possible answers to this question such as convenience, fewer alarm systems and less police interest.  Another explanation, which had never occurred to me, is that the poor side of town is where all the cash is found.  Wealthy people have bank accounts and credit cards, so they tend not to have a lot of cash lying around.  Poor people on the other hand are often un-banked.  All of their income is either in cash or immediately converted into cash, which they store in their homes.

Breaking into the homes of rich people is often not especially profitable because the goods the thief steals have to be converted into cash via a fence at a rate of cents on the dollar.  Cash stolen from the homes of the poor however, can be spent at full face value and is a lot more convenient to carry.

All of which raises the interesting question of why don’t the poor get bank accounts.  The short answer is that there are fewer banks on the poor side of town.  Banks tend to avoid poor neighborhoods because the deposits are smaller, the creditworthiness of customers is lower and customer service cost higher (especially in immigrant communities where English proficiency is low).

Regulations do exist that attempt to force banks to provide services in disadvantaged communities, however the relative lack of banking services in really poor communities suggest that these measures are at best partially effective.

Fundamentally, government mandates that force businesses to engage in unprofitable operations tend to be unstable for several reasons.  Firstly, the businesses tend to take any opportunity to minimize or close these operations.  Secondly, the oversight agencies tend to be captured by the industries they regulate.  If government officials are recruited from and tend to retire to the industry they oversee it isn’t difficult to predict where their sympathies will lie.  Finally, the regulations tend to be chipped away over time through industry lobbying.

It would be far better if someone came up with a profitable, and thus long term sustainable, model for banking low income communities.  Eventually someone will.  While poor customers may not be that valuable individually, in aggregate that represent a potentially enormous source of new funds and new loan opportunities.

From a historical perspective, Bank of America is now the nation’s largest retail bank at least in part because its founder, Amadeo Giannini, went after middle income customers that his competitors of the time considered too small to bother with.

Perhaps there is a  similar success story awaiting the person who figures out how to profitably provide banking services to poor Americans.

*Dr Michael Brandl of the at the University of Texas (http://brandl.easyjournal.com/)