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Undercover Economics

Lisa J. Servon, Professor of City Planning at the University of Pennsylvania, addressed a crowd of attentive, financially curious students on October 23 about the alternative financial services (AFS’s) the American middle class has embraced to make ends meet in an increasingly expensive economy. The lengthy title of her talk was The Unbanking of America: Reforming the Debate about Financial Inclusion: Evidence from an Up-close view of Alternate Financial Services.

In his introduction, Shannon Mudd, Director of Microfinance, Impact Investing, and Social Entrepreneurial Programs and Visiting Assistant Professor of Economics at Haverford College, stressed the confusion many face when trying to navigate a complex economy only the wealthy and privileged have the perspective to understand. Because big banks use this confusion to deceive their customers, organizations like the Security Exchange Commision (SEC) and the Consumer Financial Protection Bureau (CFPB) were created to protect consumers.

In her talk, though, Professor Servon focused on people who banked outside of this small cadre of big banks, embracing AFS’s such as payday lending. Policymakers to this day refuse to recognize payday lending as a legitimate form of banking; it is currently illegal in 15 states. Nevertheless, 20% of Americans bank using such services. Servon approached her research with one simple question: why do people elect to use such disreputable services?

Her answer was threefold. First, AFS’s have much lower costs and much greater liquidity than big banks. From 1990 to 2011, the overdraft fee for most AFS’s have increased 400% in payday lending and 5,000% in traditional banks. She used the example of a carpenter hiring workers in the informal economy (ex. picking up workers waiting outside of a Home Depot) as an example of a customer who often needs large sums of cash to sustain his business, highlighting the advantage of greater liquidity in payday lending. 

Second, AFS’s have much more transparency than traditional banks. The average disclosure statement for a traditional bank is 128 pages. A payday lending office, on the other hand, displays the fees for all of their services on screens over the clerk’s desk, the same way a fast food restaurant displays its meals. 

Third, customers develop personal relationships with their bankers that big banks simply can’t provide. Servon described customers buying their clerks baby shower presents and using terms like ‘community’ and ‘family’ to describe their banking experience. Payday clerks would often work with financially-strapped customers to help them pay debts that in a traditional bank setting would jeopardize their bank account.

To conduct her research, Servon set aside her academic practices and went undercover as a payday clerk, observing the inner machinations of these AFS’s. What she found contradicted much of what academia led her to believe. Seeing customers work with their clerks to find the best financial package for their specific situation sparked a realization that modern banking had become impersonal and robotic. When she asked the crowd who had stepped inside a bank in the past week, one person rose their hand. People, she found, will seek a feeling of community in their banks because this translates to trust and dependability. 

Such qualities are lacking in traditional banks today, she says. In the deregulation spree under the Trump Administration, banks have been freed from many of the restrictions preventing them from hiking prices for customers. Servon has a special connection to this deregulation. She bragged that she was fired by President Trump himself when he dissolved the Consumer Advisory Board.

Servon’s talk made a deep impression on the audience. In the Q and A, many students, almost all of them assuredly Econ majors, asked probing questions about the future of the big banks and their potential to change. Many were affected on a smaller level. In the middle of the Q and A, Haverford freshman Magnolia Clayton ‘23 pulled out her laptop and began searching banks in the Ardmore area to compare their deals to hers in Illinois, just to make sure she wasn’t being duped.

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