Reducing the Cost of Being Poor
April 6th, 2009 by Al Lewis (alewis)ThinkOOB proposes one instance in which a government subsidy, followed by a more-than-one-to-one payback to the government, makes a lot of sense. A bank account is more than just a convenience. It’s one of those things, like your voice, which you only learn to appreciate when you lose it. Take direct deposit. You don’t think twice about it. Your paycheck goes to your bank account and then you draw on it. Simple as that.
But what if you don’t have a bank account? You can’t have direct deposit. You go to a “checks cashed” place. Think those are free? Think again. As part of doing actual research, I went to one to cash a check. They wanted to give me ninety cents on the dollar. That’s 10% to get my money now instead of waiting five days for the check to clear. The annual percentage rate I would be paying to get my money now would in effect be four figures. All because I don’t have a bank account.
There must be a way to arbitrage between a four-figure interest rate, or other high rates as described below, and a bank account. Suppose the government gives everyone who wants one a $100 bank account, but charges back $1 for the first 150 transactions. Everyone benefits except the check-cashers who would have charged perhaps $10 for a transaction, but the government is still out $100, which multiplied by millions of people is a lot of money no matter how worthy the cause.
But now suppose that the balance cannot fall below $100 until 150 deposits have been made and/or checks have been cashed. Over time, the government would get its money out and then some by charging back $1 each time..
To make it fair for the banks, only transactions done using an ATM card would be free or very inexpensive. Teller transactions might cost extra, since if teller expense is uncompensated, you would have to add these bank accounts to the growing list of offerings on which banks don’t make money.
The $100 is intended to protect against bounced checks or other exigencies. Very few people who didn’t need a bank account would sign up for the “free” $100 account because not being able to draw down the $100 until one has paid 150 one-dollar fees makes it attractive only to those who don’t otherwise have an account.
Tags: microfinance
April 7th, 2009 at 7:03 am
NOW you’re back in your groove. This si a 10 on a scale of 10. You need to use the social media or some other way of getting these ideas out there so many more people can see thm
April 7th, 2009 at 8:37 am
Agree with Deb. This is the go-to place for great ideas but lately they’ve been a little too out-of-the-box.
Why $100? I think $200 with a $2 payment to hte government would be a better idea becasue the amount in the account should “cover” the checks and many more checks could be included. You mght have to pay the banks more than you think too. but still a way better deal all around than check-cashers.
April 7th, 2009 at 10:18 am
My former mother in law did not have account and you really don’t notice how much you think about it until you don’t have it. Sending her money was a total pain. A postal money order or Western Union. Just a few case studies are all you need to see why this should be the idea of the year, not just of the month
April 8th, 2009 at 8:19 am
I am very concerned about banks buying back their toxic assets with government money in a 1:1 match. The Wall Street suits will always out-think the government on ways to game the system. This seems pretty easy, pretty ungamable but do it on a trial basis to make sure there isn’t some loophole, some way for people or bankers to take advantage
April 8th, 2009 at 11:07 am
If the banks will go along with this it also makes many more things possible, I think Direct deposit of income tax refunds, wihch are otherwise a big ripoff.
by the way, do you screen these comments before you post them? The yseem so much more intelligent than comments on other websites.
April 8th, 2009 at 5:52 pm
good idea here but I think the banks will need to charge more than you think. They only do $100 accounts because they don’t like turning people away and they make money on the checking and the accounts could grow and the customers could also get loans etc. down the road. NOne of that is true here. Even so, when you work the whole thing out there is clearly a terrific “arbitrage” opportunity even if the bank does end upa having to charge for each transaction. it will be much less than the moneylenders
April 8th, 2009 at 5:56 pm
Yes, I do screen the comments. I get my share of dumb ones and occasionally let them through just so people can comment them. BUt most are quite intelligent. These aren’t like comments on articles about the Red Sox. People who want to comment are very interested in economic policy and recovery. Also since I don’t advertise the site and since I’ve temporarily stopped doing interviews it’s not easy to find. That is by deisgn.
April 10th, 2009 at 9:36 am
you are only looking at a small part of the cost of being poor. You’ve left out the higher cost of car insurance, the cost to people’s health of working in low-end jobs which expose them to chemicals or injuries that their employer doesn’t provide workers compensation for, greater likelihood of being a victim of crime and probably many more things. I don’t know how to fix those but maybe someone else can look at this site and come up with an idea
April 20th, 2009 at 8:01 am
this is like a bailout for poor people. that is not a bad thing. Could be very popular and profitable. Should probably be done on $300 rather than $100.
May 3rd, 2009 at 1:55 pm
they will also need some education on how to use bank accounts. Don’t assume everyone already knows