Currency exchange rate hike to hit the unbanked with more fees

Angelica Rosales

Photo by José Alejandro Córcoles

Angelica Rosales turned to using currency exchanges for financial services after her bank kept hitting her with low-balance fees.

Update: On Aug. 3, 2018, Gov. Bruce Rauner signed into law a new bill requiring state regulators to consider the impact of raising check-cashing fees on low-income residents who are often unbanked and rely on currency exchanges for their financial needs.

Update March 13, 2018: A bipartisan legislative committee unanimously approved a deal today to raise some check-cashing fees, but by less than the currency exchange industry had wanted. The compromise between consumer advocates and the industry increases the maximum fees charged at currency exchanges but also cuts rates for those receiving public assistance regardless of check amount.

Angelica Rosales’ seasonal minimum wage job often left her short on money. After paying rent and other bills, she never had enough left in her checking account to avoid her bank’s low-balance fees.

Rosales eventually began using currency exchanges to cash her paychecks, pay utility bills and purchase money orders for her rent. But those transactions cost her $100 a month in fees. “That’s a whole week’s worth of food that these people are taking out of my babies’ mouths,” Rosales says.

Now she and other Illinois residents who rely on currency exchanges are poised to take a bigger hit to their wallets. A legislative panel is likely to approve a proposed increase in check-cashing fees at its Feb. 13 meeting. Opponents say the increase will disproportionately hurt lower-income people of color, like Rosales, who have been driven out of mainstream banking by high fees and into currency exchanges.

A Chicago Reporter analysis found that currency exchanges are most common in low-income African American areas, followed by Latino communities. For instance, the 60651 ZIP code includes parts of Austin and West Humboldt Park and has a mix of black and Latino households. That ZIP code has six currency exchanges, but just one bank.

If the rate hike is approved, for example, the cost to cash a $100 check would increase from $2.40 to $3.50. The cost to cash a $500 check will go from $11.25 to $12.50.

Proposed currency exchange rate increase

Check amount            Current rate             Proposed rate             Percent increase            
$100 or less 1.4% + $1.00 2.5% + $1.00 46%
$100.01 – $1250 2.25% 2.5% 11%
$1250.01 or more 2.25% 3.0% 33%

Source: Woodstock Institute

Advocates point out that the rate increase illustrates how financially vulnerable low-income residents are hit hard by fees and fines that quickly add up, says Tracy Occomy Crowder, a senior organizer with Community Organizing and Family Issues. Her group opposes the hike.

“A lot of these fees kind of build, like parking tickets. They start out at one amount then it doubles…. It keeps families from moving ahead,” Crowder says. “It is giving them less access to their actual earnings. People just kind of need every penny that they make.”

In response to the likely increase, State Sen. Jacqueline Collins (D-16) has introduced a bill to lower and cap rates and provide consumer protections against future increases. Previous attempts to pass similar legislation failed to gain traction in the General Assembly.

Brent Adams of the Woodstock Institute, a nonprofit advocacy group that has been fighting the rate hike since June 2017, calls the increase “a rate system that targets lower-income folks and communities of color. It would be difficult to devise a system that would be more regressive than this one.” Woodstock and other groups in late January began a last-minute campaign to pressure the bipartisan Joint Committee on Administrative Rules to block approval of the rate increase.

The group representing the currency exchange industry first petitioned state regulators early last year for the rate increase, saying increased competition from prepaid cards and big-box retailers entering the check-cashing business has chipped away at profits and driven 191 exchanges out of business in the last nine years. It would be the fourth hike since the state first established check-cashing fees in the early 1980s.

Martin Lieberman, president of the Community Currency Exchange Association of Illinois, called the rate increase fair and equitable since it will still be lower than most other states. The closure of currency exchanges, he says, affects entire communities that lack traditional financial institutions.

“They have to travel farther to cash their checks,” Lieberman says.

Why lower-income people are unbanked 

Currency exchange in Englewood

Photo by José Alejandro Córcoles

A man enters a currency exchange in the Englewood neighborhood on the South Side. In Chicago, currency exchanges are most common in low-income African American areas, a Chicago Reporter analysis found.

 

The lack of banks in black communities, and the rise in alternative financial services like currency exchanges, can be traced to the lingering effects of discrimination, experts say. Practices like restrictive covenants and redlining devalued the wealth in black communities, making mainstream banks less likely to service these areas. Deregulation of the banking industry in the 1990s allowed bigger banks to gobble up smaller ones and close less profitable branches, often in communities of color.

“These are some of the historical trends that you see – policies allowing banks to move out and to create a vacuum and predatory [financial services] to fill that space,” says Terri Friedline, faculty director of financial inclusion at the Center on Assets, Education and Inclusion and a University of Kansas assistant professor.

The Community Reinvestment Act, passed in 1977, was meant to encourage banks to serve low-and moderate income communities’ credit and financial needs. But in Chicago, blacks and Latinos are still far more likely to be unbanked: 19 percent of black households and 18 percent of Latino households have no bank account, compared to 3 percent of white households, according to Prosperity Now, a Washington, D.C.-based policy organization focused on economic opportunity for low-income communities.

Friedline’s research shows that in Chicago, the distance one must travel to a bank becomes greater — more than a half a mile — in predominantly low-income black communities. The opposite is true for Latino, Asian and predominantly white areas.

“If you are living in a census tract that’s high-poverty, the nearest financial service is more likely to be a payday lender than a bank,” she says. “Even if a bank is in your community, or credit unions, it doesn’t necessarily mean you can afford to go there.” High balance requirements and fees drive people out of the banking system, experts say.

Currency exchanges are more commonly found in ZIP codes with high poverty rates as well as in non-white areas of the city. (This excludes Loop ZIP codes, which have a relatively high number of currency exchanges and low population totals.)

“Overdraft fees are expensive, at $35 a pop. And when you have low-income customers, that is going to add up and create a large detriment on their finances,” says Thaddeus King, who works for The Pew Charitable Trusts’ consumer finance project. The project’s research on overdraft fees found that 60 percent of people cite overdrafts as a reason for not having an account, while 45 percent cite lack of money to open an account. The research also found that blacks are more likely to rack up extensive overdraft charges.

Between 1984 and 2015, banks more than doubled their revenue from service charges, which includes overdrafts, account maintenance and other fees, according to Pew’s research. Banks nationally brought in $33 billion in overdraft fees in 2016, according to an analysis by economic research firm Moebs Services Inc.

Getting banks to offer low-cost accounts has been a challenge. Nationally, only nine percent of 1,625 banks surveyed by researchers at the University of Kansas offer low-cost checking accounts that meet some of the Bank On National Account Standards. These standards, created by the Cities For Financial Empowerment (CFE) Fund, call for no overdraft fees and low maintenance fees. While the survey found 150 banks did offer minimum opening deposits of $25 or less and had no maintenance fees, all still imposed overdraft fees.

That can be problematic for low-income residents, since the average transaction that triggers an overdraft is the price of a cup of coffee but the average overdraft fee is $35, Friedline says. “That is a pretty high interest rate on what was just a $4 or $5 charge,” she says. “Overdraft policies are a bank’s version of a payday loan.”

Banks may close accounts that have racked up extensive overdraft charges, and these negative transactions show up in an individual’s banking history, making it hard to open another account. These involuntary account closures by far affect more lower-income and consumers of color, she says.

One initiative that sought to address the financial needs of the unbanked was the Bank On initiative, says CFE Fund Principal Kant Desai. The Bank On initiative started in San Francisco in 2005 and spread to other cities, including Chicago. The goal was to have community nonprofits work with banks to lower monthly fees to get people to sign up for accounts. But consumers were still blindsided by overdraft fees that put them in debt.

Eventually the effort “lost steam” until CFE Fund in 2015 became involved in the effort. A year later, they established guidelines to help participating banks create accounts that wouldn’t adversely affect low-wage earners.

“There’s a perception that low-income people didn’t want bank accounts or are too risky to have bank accounts and would likely overdraw or engage in fraud,” Desai said. “[But] technology has changed so that banks can more easily offer an account that is less risky for everybody.”

Beyond the challenge of getting banks to offer affordable accounts is getting people like Rosales back into mainstream financial institutions. Those who have had their accounts closed involuntarily are reluctant to try and re-establish a banking relationship, says Otis Monroe of the Monroe Foundation. That’s a hard sell for a community that has been constantly told “no,” he says.

“When you got generations of individuals and families that known only one option and that is the currency exchange, it can be pretty challenging to change behaviors,” he says.

While Monroe commends efforts to stop the currency exchange rate hike, he and Friedline say state and federal banking regulators, not just nonprofits, should push financial institutions to offer low-cost accounts. Monroe worked with State Rep. Emanuel Chris Welch (D-7) on newly submitted legislation that would requiring banks to report to the state treasurer on their efforts to provide affordable accounts to low-income people.

“I am not the only one who uses currency exchanges,” Rosales says. “There are a lot of families out there and if banks are not one of the resources that they can use, the currency exchange [is] and now they are gonna charge more. What are we going to do? Where are we going to go to cash our checks? That is a big issue.”