By Bruno Gremez and Samir Kasmi, Fintech entrepreneurs and co-founders of Fincluziv
As Europeans, we started spending time in the US after our fintech startup Fincluziv was selected and invited to take part to the BECU Fintech Incubator in cooperation with the University of Washington earlier this year.
Obviously, we are not unbanked people, but having bank accounts outside of the US does not mean you can easily use them for day-to-day transactions in the US. This is how, in our day-to-day life, whenever paying bills, making payments, etc, we discovered that a number of simple things can get complicated when you do not have any US bank account (yet). We started to talk to Americans, including bankers, and discovered a financial world completely new to us.
As Europeans, we opened our first bank accounts when we were teenagers. It was easy, and more importantly, free. In Europe, anyone has the right to open a bank account. It does not offer any credit facility or credit card, unless you request one and qualify for it, but it is very handy. Through your bank account, you can pay and get paid fast, digitally, online without having to visit any branch, and you can also effect international payments. As there is usually no minimum deposit requirements, it is by no means a luxury.
A bank account becomes even necessary once you start working, since employers typically request you to share your bank account details in order to pay your salary digitally. Employers would usually not accept to pay salaries differently than through straight bank transfers. As more and more European countries want to ban cash in order to promote digital money as a way to combat tax evasion, money laundering and terrorist activities, this is surely not going to change any time soon.
When we arrived in the US, we naively thought that we would wire money from any international account to pay bills, rent, etc. Nothing was less certain. For instance, when you sign your rental contract, you cannot wire money internationally to pay for your accommodation. You also cannot withdraw cash from an ATM and pay your rent in cash. You can only pay from a local bank account, or with so-called money orders.
In the US, around 25% of Americans have either no bank account or use alternative finance channels. That does not mean they are unable to work and collect their wages. To the opposite, if you have no bank account, you can receive your wage through for instance an old-fashioned paper paycheck. There is actually a significant number of US employers that pay their employees by checks.
Once you get you paycheck, you can cash in it. There are several ways to cash in a check if you do not have any US bank account. You can go to the bank where that check was issued, to major retailers or to payday lending stores (see later). For that, you will pay a fee for the service, usually a percentage of the check’s value that you cash in. Fees usually amount from around 1% at banks and retailers up to 5% at payday lending stores.
Once you get your cash in hand, you can use it in stores to buy goods. But there are services you will not be able to pay in cash. For instance, as mentioned above, it was not possible to pay for our accommodation by international wire transfers, nor in cash. You need to turn your cash into so-called “money orders” to pay your rent. Money orders are a kind of check to the order of a third-party, the beneficiary of your payment. You can have money orders issued at some retailer shops or at US post offices. In order to get a money order issued, you will pay yet another fee of around USD 1 for each money order.
So in short: you incur fees in order to cash in your wage check, and you pay yet other fees each time you need money orders to pay your bills. But it does not stop here. If you need money for more important transactions like buying a car, which you may very well need in order to get to work, you may require a loan. If you have no bank account, you have no credit history. The problem is that the US banking industry is based on credit history and the so-called credit scores.
The logic behind a credit score is that it shows your ability and willingness to service your debt based on existing borrowings. In Europe, if you need a mortgage loan or a car loan, you are more likely to get one from your bank at good conditions if you can demonstrate a stable source of income and no debt because it shows you have no financial obligations. Having no financial obligations actually increases your financial flexibility.
In the US, the absence of debt, hence of a credit score, prevents you from accessing any bank loan, irrespective of your proof of income and details of expenses and obligations. Without credit score, you are left only with very expensive options in the market.
There are many expensive borrowing options in the US. To name a few, some car dealership for instance will charge exorbitant monthly installments in order to offer you a car on credit, often charging triple-digit APR. Another form of controversial borrowing option are the so-called pay-day loans, which often end up charging very high triple-digit APR for a loan that is supposed to be extremely short-term, sometimes only 2 weeks.
At the end of the day, from the moment you cash in your wage until you pay your bills and eventually contract some loans in order to afford so major purchases, being unbanked forces you to pay extra fees and bear often exorbitant interest charges. As we found out, it is definitely expensive to be unbanked in the US.