The report divides consumers into three types in terms of their banking expertise: “savvy,” who use direct deposit and avoid fees whenever possible; “basic,” who aren’t as proficient at avoiding fees and have at least one overdraft fee a month; and “inexperienced,” who make heavy use of services but typically pay two overdraft fees a month.
Then, the researchers applied those characteristics to more than 200 checking accounts offered by the 12 largest banks, and 52 prepaid cards available online, to see which accounts best-suited each category.
Interesting take away from the study:
Most consumers use prepaid cards as a way to keep spending within their means; overdraft options run counter to this goal and should not be offered.
Check out the fees below.
Along with the report, “Loaded with Uncertainty,” Pew introduced an online tool to help consumers determine which option is best for them. Which one is right for you? Fill out the quick Pew survey below and find out.
Under-banked Americans don’t want charity and they certainly don’t want moral superiority; they just want financial products that meet their needs for convenience, speed, and transparency of pricing. And they are smart enough to determine the best financial option for their unique situation.
Let’s focus our efforts on expanding the financial options for under-banked consumers. This will likely involve innovative new products and new applications of technology and will need to be supported by a progressive regulatory environment.
The last thing Americans need in these difficult economic times is to be given “The Boot” as their only financial option.
Most opponents of short-term credit products like payday loans believe that eliminating options for consumers is the right thing to do because they legitimately believe consumers can’t be trusted to make their own financial decisions. That is a dangerous and patronizing point of view.
The truth is that all surveys of under-banked consumers who use products like payday loans show that they are educated, hard working Americans who fully understand their options.
The average payday loan customer has at least some college education, is meaningfully employed, and makes between $35,000 and $50,000 a year. They understand the bottom-line costs (both economic and psychic) of their options and can be counted on to make the best possible decision for them from the options that are available.
“Several studies have found that payday lenders are indeed more likely to locate in neighborhoods with disproportionately large Hispanic and/or black populations. Importantly, however, this literature uses data at the county or Zip code tabulation area, so the authors can’t really say which households are actually using payday credit. Nor can they control for household level income and other variables that might influence payday credit usage. The household-level data we study allows us to do both.”
Another important piece to NY Fed’s research: Unconditional Comparisons
“…Unconditionally, payday credit users and nonusers differed in a number of ways. The average payday credit user was younger for one, by about 11 years. Users were disproportionately female: 41 percent of users were female, while just 27 percent of nonusers were female. Single households, particularly single households headed by women, were disproportionate users of payday credit.
“There are obvious racial differences between users and nonusers as well, at least unconditionally. Consistent with the targeting critique, blacks and Hispanics were disproportionately represented among payday credit users. Blacks represented 22 percent of users, but only 12 percent of nonusers. Hispanics accounted for 15 percent of users, but just 9 percent of nonusers. By contrast, whites represented a larger share of the nonusers.
“There are some educational differences as well. Perhaps surprisingly, payday credit users are not the least educated members in society; users were actually more likely to have a high school degree or to have a GED than were nonusers. However, they were less likely than nonusers to have completed college.”
“We have a lot of tools,” he said. When the bureau does write rules, it will be through a very deliberative, fact-based process, Mr. Date said.
He added that he sees a lot of room for new research on consumer finance and that new data will help drive policy decisions. Last month, the bureau hired Harvard University economist Sendhil Mullainathan, a leading behavioral economist, to serve as the agency’s assistant director for research.
Nearly 10 percent of Virginia households have used short-term credit in the form of payday, pawnshop, and auto-title loans.
A study by the University of Virginia’s Weldon Cooper Center for Public Service released Tuesday shows that more than 275,000 financially struggling families in Virginia have turned to alternative financial-service providers to pay for basic needs such as food, housing and transportation. They also are using the high-cost loans to pay for unexpected expenses stemming from job losses, car repairs and medical bills.
Nearly 120,000 Virginia households — 4 percent — used payday loans, according to the study, which analyzed 2009 national banking statistics from the Federal Deposit Insurance Corporation.
And it seems Americans are also ignorant of their financial ignorance. Although many haven’t mastered basic economic concepts, such as inflation, nearly 40 percent of gave themselves high scores when asked to rate their own financial literacy. Just 14 percent rated their knowledge level three or worse on a seven point scale.
Other key points of interest:
The average American family has very little financial breathing room
Almost half of the population has trouble covering monthly expenses.
And just over half of the population lacks a household rainy-day fund that could cover three months of living.
Nearly 30 percent of American have no savings account at all. Nearly that same share have at least four credit cards.
The demand for short-term credit is there, and there’s no hiding it. According to recent research, nearly half of Americans say that they definitely or probably couldn’t come up with $2,000 in 30 days.
The survey asked a simple question, “If you were to face a $2,000 unexpected expense in the next month, how would you get the funds you need?” In the U.S., 24.9% of respondents reported being certainly able, 25.1% probably able, 22.2% probably unable and 27.9% certainly unable.
One thing to consider, according to the research, is that “financial fragility is not limited to low-income groups.”
“The more surprising finding is that a material fraction of seemingly ‘middle class’ Americans also judge themselves to be financially fragile, reflecting either a substantially weaker financial position than one would expect, or a very high level of anxiety or pessimism. Both are important in terms of behavior and for public policy.”
The seminar this afternoon will highlight recent research conducted by Community Affairs Senior Economist Kelly Edmiston entitled, “Could Restrictions on Payday Lending Hurt Consumers?” This research provides new empirical evidence on the potential benefits and costs to consumers of restricting payday lending. CFSA’s Communications Chair Darrin Andersen (also president of QC Holdings) will be testifying.