Direct-deposit helps city workers enter the financial mainstream

tishaurajonesFrom the department of good government practices: St. Louis’ City Treasurer Tishaura Jones is helping city workers escape the high-interest, payday loan world and gain the advantages of having bank accounts. She’s doing it with a simple, commonsense measure: paying city workers via direct deposit.

“St. Louis is near the top of the nation in the number of “unbanked” minority households. We are third in the nation right now, and just a few years ago, we were number one,” said Jones in an interview with Republic 3.0, an organization that highlights practical governmental solutions to issues. “This means that more than a third of our minority residents don’t use a traditional bank or credit union for financial services. Instead, they’re using payday loans or check cashing services or title loans.”

Jones started looking into a direct-deposit payroll system in 2013, soon after she was elected City Treasurer.

I found that we could take our city employees to mandatory direct deposit. Out of 7,000 employees we manage payroll for in the treasurers’ office, 1,600 of them weren’t on direct deposit.

We held three banking fairs for people to choose a traditional bank or credit union, and if they didn’t choose one, they were assigned their benefits on a [pre-paid] card. Eight hundred people chose that option, although another 800 people chose a traditional bank or credit union. Going to direct deposit not only saves the employees money, we saved over $100,000 for the city each year [in fees] by going to direct deposit.

Jones’ policy addresses an issue that affects workers everywhere, not just in St. Louis. According to a report by the FDIC [Federal Deposit Insurance Corporation]:

  • As many as 10 million American households – or 1 in 12 – lack a bank account.
  • As many as a quarter of U.S. households rely on non-bank financial service providers, such as check cashers, payday lenders or title loan companies, for all or part of their banking needs.
  • These services can be expensive – check cashing typically costs up to 4 percent of the value of the check – and offer no options for consumers to save.
  • Low-income people are the ones most likely to be underbanked. Among households with annual incomes of less than $15,000 a year, 28% have no bank account and another 22% have less than a full range of services.
  • Rates of underbanking are similarly high among the unemployed, people without high school degrees and those under the age of 25.
  • In addition, African Americans, Native Americans and Hispanics have higher rates than whites and Asians.

Why do so many people remain outside of the financial mainstream of banks and credit unions? Jones says:

One reason is lack of trust in traditional banks or credit unions. We also find that people have had a bad experience – [they’ve] bounced several checks and as a result have an outstanding balance with the check system that they have to pay off before getting access to another account.

Another reason is that banks and credit unions just aren’t located in their neighborhoods, whereas payday lenders are. The same relationship you may have with a banker or a financial institution, they may have with a payday lender.

The consequences of being unbanked are that the average family could save over $40,000 over a lifetime or over $1,200 a year by using a traditional bank or credit union.

There are many arguments to be made against the way our banking system works: That our financial system is rigged in favor of banks and against consumers; that the banking lobby has successfully blocked many needed regulations that would help consumers get a fair deal; that banks themselves have created the payday-loan/checking cashing industry that deliberately preys on low-income people; and that banks have abandoned low-income neighborhoods, forcing residents to use high-cost check-cashing services.

With all that, it’s understandable that some people distrust banks and have opted out. But despite these legitimate concerns, the fact remains that people who are “unbanked” are at a distinct economic disadvantage, and many “unbanked people” aren’t outside the system by choice. Without a bank account, it’s hard to establish a credit rating. Not having a bank account often means that you can’t get a loan at a reasonable rate—you are forced to go through payday lenders, whose interest rates are often extremely high. Without a bank account, you can’t get a credit card. The list goes on.

St. Louis is not the only city that uses direct deposit to pay its workers, and Tishaura Jones didn’t invent this idea all by herself. But kudos to Jones for bringing this practical approach to St. Louis, bucking the ugly nationwide trend of punishing public workers, and instead, trying to improve their lives.