Published in 21 Yale Journal on Regulation 121 (2004)


Low-income households often lack access to banking accounts and face high costs for transacting basic financial services through check cashers and other alternative financial service providers. These families find it more difficult to save and plan financially for the future. Living paycheck to paycheck leaves them vulnerable to medical or job emergencies that may endanger their financial stability, and lack of longer-term savings undermines their ability to improve skills, purchase a home, or send their children to college. Additionally, high cost financial services and inadequate access to bank accounts may undermine widely-shared societal goals of reducing poverty, moving families from welfare to work, and rewarding work through incentives such as the Earned Income Tax Credit. This Article calls for the transformation of financial services for the poor. The Article first explores the dual financial services market in which insured depository institutions largely serve middle- and upper-income persons, and check cashers and other alternative service providers largely serve low- and moderate-income households. The Article argues that the social benefits of breaking down barriers between these markets exceed the costs of doing so. The Article also contends that network externalities in electronic payment systems help explain why some technologies that would help low-income consumers have not been as rapidly adopted as would be socially beneficial. In response to this problem, the Article recommends governmental incentives for private sector financial and technological innovation to help lower banking and savings barriers for the poor. Better access to financial services is critical for low-income persons seeking to enter the economic mainstream.


Banking and Finance Law | Economics | Law and Economics

Date of this Version

March 2004