Anyone who has had a stint outside the “normal” banking world -- in the shadowlands of money orders, pawnshops, payday and vehicle title loans, and check cashing outfits -- knows that it is an expensive place. About 8 percent of American households exist in this netherworld without bank accounts. By one estimate, the fees they end up paying could amount to $40,000 over the lifetime of a full-time worker. Credit for those at this end of the income spectrum is very, very expensive -- and it’s not simply a matter of greed on the part of those who sell them financial services. Credit is expensive for them because of the risk involved -- and that is simply a function of market participants behaving rationally.
Prepaid debit cards are one potential answer -- but they too often have high fees attached to them. Mobile banking presents another possible solution. However, in spite of high smartphone penetration, it is only 50 percent among workers whose income is less than $30,000 per year, and even those who do have smartphones often experience service interruptions when they are unable to pay the bill.
We do not have a solution to this problem, but we will simply note that any solution must have two components: there must be jobs available to those looking for them, and there must be workers with the skills that employers need. Neither of those components will come from an edict -- not even from rising minimum wages, which will do nothing to address the disconnect noted in the article above on Udacity and Sebastian Thrun’s attempts to make technical education cheaper, more effective, and more accessible. As an entrepreneurial friend noted to us, it is useless to compel employers to pay more than a job is worth -- they will simply not hire anyone to do the job, if they are rational economic actors.
Investment implications: Superficially appealing top-down policies are unlikely to solve the wealth disparities and heavy financial service fee burdens experienced by workers at the bottom of the income scale. Again, we look to the restructuring of education, and to tax regimes and other public policies that are favorable to job creators, for solutions. We believe that those solutions will come -- particularly if policy is aimed at liberating ambition.