Source: Huffington Post
Last week's news that Congress and state officials are working to crack down on the payday loan industry was welcome--and overdue. For too long, America has been facing a crisis hiding in plain sight: Nearly 1/3 of the U.S. population is unbanked or underbanked. These are men and women who either don't use banks at all, or rely on check cashing services, payday loans, money orders and pawn shops for most of their financial needs.
The unbanked and underbanked -- who are mainly low-to-moderate income earners -- face tremendous obstacles as a result. Some of the most important pathways to middle class American life become out of reach when one has little or no credit history. Buying a car or house, or sending a child to college can become close to impossible.
Those outside the mainstream financial system incur outsized expenses for basic financial services. Though they are least able to afford it, the underbanked have to pay far more than most Americans for basic transactions.
Take turning a paycheck into money you can actually use, for instance. For Americans with a bank account, depositing a paycheck is usually free and often automatic via direct deposit. The unbanked, however, often have to pay 4 -- 5 percent of the check's value in fees just to get the cash. And check-cashing services don't offer options like savings accounts that make it easier for their customers to put money away for the future.
Getting a loan is even worse. Many unbanked or underbanked people in need of cash before their next paycheck turn to payday lenders, which can charge annual interest rates of 400 percent or higher. As a result, those who are already struggling to make ends meet often end up in a cycle of debt that is nearly impossible to break.
The unbanked and underbanked are more likely to be minorities, immigrants or young people -- all groups whose prosperity is closely tied to our future. If we are going to expand the middle class, strengthen our economy and address damaging income inequality, more people have to be able to participate in our financial system. Everyone needs to do their part: educational institutions, nonprofits, community groups, governments and banks alike.