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Living in Pottersville

Book Review: Industry critique asks good questions, gives simplistic answers

The Unbanking Of America: How The New Middle Class Survives. By Lisa Servon. Houghton Mifflin Harcourt, 178pp. The Unbanking Of America: How The New Middle Class Survives. By Lisa Servon. Houghton Mifflin Harcourt, 178pp.

I began reading The Unbanking Of America with great interest. Given the forces buffeting the industry, I was looking forward to substantive analysis and insight on the changing nature of how consumers access, buy, and use financial services—and the threat that those trends pose to traditional financial institutions.

Unfortunately, I am still waiting.

Author Lisa Servon endeavors to explain why segments of consumers are either forced to use or elect to use financial services offered by someone other than a bank. The basis for her attempt, and many of the questions she raises, are valid. Servon’s choice of causes and her conclusions, however, I disagree with.

Too often, the author reverts to the simplistic “banks are greedy” as the reason why a growing number of consumers are utilizing nonbank financial services. This is unfortunate, as Servon does offer some interesting observations and the book does contain powerful lessons for bankers—although I’m not sure they are what the author intended.

This is a shame, as Servon took a unique approach in researching this book. Servon is a professor of city and regional planning at the University of Pennsylvania and a former dean of the New School. She didn’t simply interview consumers using these services, but immersed herself in that business. She worked at a check cashing and payday lending company to observe firsthand how and why consumers elected to use these services.

Apparently, we’re all Mr. Potter now

The main premise of the book is that big banks are greedy, resulting in practices which are driving consumers to alternative financial providers. As Servon claims, “banks are now catering more and more to the well-off, leaving the rest of us to pay too much at banks or to settle for imperfect alternatives such as check cashers and payday lenders.”

Greedy practices identified by the author include:

• Bank products are hard to understand.

• Banks are bigger and more expensive to use.

• Banks no longer provide good client service.

I agree with Servon’s first point, that bank products are hard to understand. Servon refers to the amount of fine print. She contrasts this to the easily understood and transparent nature of check cashing businesses. Servon implies that this is done purposefully, to confuse and deceive clients, resulting in the paying of unexpected fees.

It is true that there have been institutions that have used tactics designed to generate fee income. However, these do not represent the vast majority of financial institutions, who earnestly seek to provide products and services valued by their clients.

Only much later in the book does Servon, albeit briefly, concede that regulation might be a contributing factor towards making products hard to understand. However, she later claims that regulation has favored banks.

As for the charges of being more expensive and no longer providing good service, Servon offers no hard evidence at all. The sharing of anecdotes chosen to reinforce a position do not make that position true.

It is also true that, as Servon notes, the days of walking into a bank and everyone knowing your name are disappearing. However, this is not due to banks becoming big and no longer caring about customer service. Servon fails to acknowledge the impact of changing consumer preferences and the economic realities of maintaining branches as transactions decline.

Life in Bailey Park

I suspect that Servon’s primary villain in this book shouldn’t have been banks, but rather income inequality. Many of her stories have broader societal implications and her offered solutions go far beyond improving access and fairness in financial services.

Before offering specific solutions on how to improve banking, Servon prescribes what is needed overall to address inequities in financial opportunity: stable housing for all; affordable healthcare; stronger safety nets, including universal basic income; and a federal jobs creation program.

Specifically, to improve banking Servon offers these measures:

• Government subsidization of banks to serve customers who are not profitable.

• Federal enablement of mission-oriented banks.

• Direct provision of banking by the federal government, through the Post Office.

• Financial information boxes, modeled after nutrition labels.

• Ratings to inform consumers on how well financial service providers are performing.

• Creation of a universal, portable financial identity.

Politics and recent developments in Washington aside—the Trump budget would eliminate funding for Community Development Financial Institutions rants, for example— Servon unfortunately doesn’t offer much in the way of detail on how to achieve any of her goals. She offers no thoughts on what form they should take, how to fund them, nor any evidence on why these solutions are best positioned to address the problem as she defines it.

Clarence tried to warn us

Looking past the simplistic, “banks are greedy” theme, Unbanking Of America does contain insight that should raise several questions for bankers:

1. Why are consumers using non-traditional providers to fulfill their banking needs?

2. As an industry are we ignoring consumer segments deemed unprofitable, thus creating openings for new entrants to grab market share—and eventually steal our more profitable customers?

3. Has the banking industry let the actions of a small number of bad actors destroy consumer trust? If so, how can we regain it?

4. The vast majority of consumers still aspire to use traditional banking services. So why do they not see that as a viable option; something obtainable?

(I am especially worried about #2. A simple Google search can provide many examples of companies who failed to notice and act.)

As bankers, we can blame the suffocating cost and effect of regulation. We can blame the complexity of allocating capital between our existing branch channels and developing the digital tools desired by more and more consumers. We can even lament the not-so-distant past when banks were the only alternative.

Remaining relevant is our challenge to solve. The good news? I believe we are making progress.

It’s Bedford Falls, not Pottersville

In solving for the questions posed above, banks have many tailwinds:

1. Consumers love banking services, even if some don’t like banks or don’t feel that banks are right for them. People want what we sell.

2. Banks are catching up quickly in offering innovative digital tools and financial products and in many cases are taking a more active role in fintech. We’re growing in innovation.

3. Regulators are also catching up to the changing nature of how banking services are sold and consumed. Level-playing field coming?

4. Interest rates finally appear to be rising with the Federal Reserve’s recent statements and actions, providing banks an opportunity to have less reliance upon fee income. Time to invest (fintech) and divest (reliance on OD/NSF income).

5. Economic conditions and the financial health of consumers has improved dramatically since the Great Recession.

Evidence exists that banks are taking advantage of these tailwinds, and that progress is being made. For example, the number of unbanked and underbanked consumers has declined since 2011.

Additionally, trust in banks has risen. A 2015 Gallup poll showed that 28% of U.S. consumers had a great deal of confidence in banks (it was 21% in 2012) and that an additional 45% have some confidence in banks.

Agree to disagree

I fully share Servon’s concern about the inability of some consumer segments to participate in traditional banking and financial services. I disagree though, with her conclusion that this is the result of greedy banks.

The causes are much more complex and the potential impact on these families is too great. In taking such a simplistic position, Servon does the matter a disservice.

The overwhelming majority of banks strive to be trusted partners to the consumers they serve and to be valued members of their communities. While there are opportunities for the banking industry to do better, I’m encouraged by the progress made and for the future of this industry.

Brian Higgins

Brian Higgins is first vice-president–digital, payments & innovation for First Financial Bank, a $8.7 billion-assets community bank headquartered in Cincinnati serving Ohio, Indiana, and Kentucky. He is a frequent contributor to Since joining First Financial Bank in September 2012 Higgins has leveraged 20 years of financial services experience to bring a fresh perspective on the challenges faced by community banks. Previously Higgins worked for Vantiv Payment Solutions and Fidelity Investments, serving in a variety of roles in business leadership (Operations, Product, and Marketing) and strategic planning. Contact him at [email protected]
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