As more consumers choose alternatives to banks, Bay Area social enterprises rise to meet their needs

Jose Rivera, 62, needed to cash two checks totaling $176—the fruits of a few days’ work as a gardener in Oakland. Though Rivera has a bank account with a small community bank chain based in San Francisco, he doesn’t deposit these or any other checks into it. Since the company closed its only Oakland location two years ago, Rivera has relied almost exclusively on fringe bankers, such as check cashing stores, to handle his financial affairs.

Check cashing stores and payday lenders are popularly considered the domain of the unbanked and poor, but as banks increasingly shutter less profitable branches (many in low income communities) and impose a spate of new fees on their low-balance customers, a growing number of low and middle income consumers are seeking out alternative financial products.

In California, nearly one-third of all households have used an alternative financial service, according to the FDIC, as have nearly half of households with incomes between $30,000 and $50,000.

The fringe banking industry is rising to meet the demand. In Oakland, which is one of just a handful of cities that regulates the licensing of fringe banking businesses through zoning restrictions, the number of check cashing stores increased from 74 in 2008 to 86 in 2010. In San Francisco that number increased from 104 to 136 in the same years. In both cities, the stores are concentrated in zip codes with average or below average credit scores, suggesting that their target customers are those for whom traditional credit and banking options are not easily accessible.

When Rivera cashed his two checks, he had several options: He could have walked to the ACE Cash Express on the corner, the Money Mart down the block, or patronized an informal network of unlicensed check cashers—Latino-owned convenience stores, the nearby furniture shop or a handful of small restaurants.

Rivera went another route and chose the least expensive: A small nonprofit store called Community Check Cashing that is situated near a BART station and is conspicuously free of the fluorescent lettering and neon signage typical of its more profitable brethren. While its competitors take three percent or more of cashed checks, Community charges takes just one percent. For payday loans, it charges half what its competitors charge, and sometimes less than that, if the customer is having a particularly hard time making ends meet.

The store is one of several social enterprises to sprout up in the shadow of the Bay Area’s growing fringe banking industry in recent years. The shared goal: To help customers make the transition into more sustainable forms of money management while meeting their immediate financial needs as affordably as possible.

Community Check Cashing is founded on the notion that traditional banking doesn’t work for a significant portion of consumers. Executive director Dan Leibsohn started the nonprofit business less than three years ago because he believed that, unless big banks rapidly and fundamentally changed, fringe banking was here to stay. And without responsible alternatives to high cost check cashers and payday lenders, the low-income consumers who relied on them would sink deeper into poverty.

“There’s a big chunk of the market that is being priced out [by big banks],” said Kellie McElhaney, a banking expert at UC Berkeley’s Center for Responsible Business. As the federal government has imposed greater oversight and regulation of the banking industry in recent years—namely through the adoption of the Dodd–Frank Wall Street Reform and Consumer Protection Act—big banks have imposed new banking fees, stricter loan requirements and a host of other policies targeting low-balance customers, in an effort to recoup potential future losses.

As a result, those who stood to benefit most from the law—low-income consumers gouged by overdraft fees and drowning in debt—now suffer most its unintended consequences. Many turn to fringe banking: the corner check cashers and strip mall payday lenders who will charge dearly for their services but who will not demand overdraft fees, deny a loan or lock down a bank account for maintaining a negative balance.

Lauren Leimbach, the executive director of Community Financial Resources, a Berkeley based financial services nonprofit, developed a low-cost prepaid Visa debit card for unbanked consumers in 2006. Leimbach says that, as banks have become less accessible to consumers, her prepaid card program has attracted an entirely new market: low and middle income consumers who have checking accounts but are dissatisfied with their banks.

“Within the last two years, and especially post financial crash, we started getting people saying, ‘I have a bank account but I hate my bank and I want something different,” she said.

About 30 percent of Community’s clientele have bank accounts, as well, according to Leibsohn. A sheet of paper taped to the inside of the store’s plexiglass service window lists the various reasons that new customers have come in, dutifully elicited and recorded by staff. Nearly every line reads “closed bank account” or “new bank fees.”

Leimbach, a former Bank of America executive with stints at the Federal Reserve and Providian Financial, said that banks create the conditions for a fringe banking industry by excluding low-income communities.

“I was in banking—I know what the economics are,” she said. “Banks don’t service low-income communities because they can’t make their target return. That’s economics 101,” she continued. “If it wasn’t for federal requirements they wouldn’t be servicing these communities at all.”

Consequently, demand for alternative financial services increases—even if they are costly.

“But what worries me about those customers moving to payday lenders, is that it’s totally unregulated so they’re being gouged even more,” said McElhaney. In many cases, she added, that money goes back to big banks anyway, because fringe bankers often bank with with larger financial institutions.

For Leimbach, this reinforces the need for socially responsible alternative financial services. Labor unions have been among the first to seize this opportunity. In 2007, the Services Employees International Union (SEIU) launched a low cost prepaid debit card for its members, modeled on Leimbach’s, and in 2011, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) did the same.

“We organize people like single moms, medical technicians, people from the suburbs, from the exurbs,” said Aruna Jain, spokesperson for Working America, an affiliate of the AFL-CIO. “These are not people who go to an Occupy encampment and sleep there, but they likely sympathize with the movement. So, at time when banks are relentless in their desire and ability to squeeze the average American, we want to offer an alternative.”

The City of Oakland is hoping to offer its own alternative later this year—a municipal ID card with a low-cost, prepaid debit function built in. The City Council approved the program in December, in part because council members believed it would mitigate residents’ reliance on predatory fringe banking services.

“I think there are a lot of reasons to do this,” said Councilmember Jane Brunner at a council meeting last fall, “Specifically for people who are being ripped off, basically, when they’re cashing their paychecks by going to cash stores.”

Other Northern California communities are attempting to crack down on the perceived plague of fringe banking through more prohibitive means. In February, Santa Clara county supervisors passed a 45-day moratorium banning new payday lenders and San Mateo county supervisors are drafting new regulations for payday lenders.

But Leibsohn and Leimbach argue that banning alternative financial services providers only hurts the vulnerable consumers who rely on their services.

“Everyone focuses on payday lenders and check cashers,” Leibsohn said, “and a lot of people think that banks and credit unions are going to be the answer, but that’s not going to be the case.” Fringe banking may prey on low-income consumers, he argues, but traditional banking excludes them altogether. “That whole range of services needs to be addressed,” he said.

The solution, according to Leimbach, would be a proliferation of new more affordable financial alternatives intended to lift low-income consumers out of poverty, rather than entrap them.

“It’s expensive to be poor in the United States,” Leimbach said. “People who can least afford it, end up paying the most.”