I recently spoke at an Osgoode Hall LLM course on Banking and Law, talking about how low-income people interact with banks. This was my own observations, not presenting research or hard data. (For those interested, some research has looked at low-income people’s access to bank accounts, a measure on which Canada scores remarkably high. An overview on some findings is here.)
One thing that I wanted to bring the students’ attention to is what I call a “taxonomy” of how low-income people interact with the banking system. I’ve seen clients range along two primary criteria: level of “engagedness” with financial systems, and what I call “thriving”, which is a loose measure of quality of life. It looks something like this:
| Highly Engaged & Thriving: This is more common than many people think. Lots of people have very little income, but (at least in Canada) are well-connected to the banking and credit systems and are doing well. They may have debt or may not, but aren’t overwhelmed by it. | Disengaged & Thriving: This quadrant reflects a lot of newcomers, and some other groups. These people often have bank accounts, but otherwise don’t deal with the financial system: no credit, no loans. This is the unintuitive quadrant, because it’s the people who defy the accepted wisdom that “you HAVE to have credit”. I try to reassure clients that it’s fine if they choose not to, as long as they know the pros and cons. |
| Highly Engaged & Struggling: This is the stereotype that people often think of: poor people with credit cards they’ve overspent. This demographic definitely exists, but isn’t the whole picture. Bear in mind as well that a lot of low-income people who have debt aren’t actually spending capriciously; the lack-of-income issue may be more central. | Disengaged & Struggling: Typical profiles here are people with MH/addictions issues, some who are chronically homeless, or others who have disconnected from the banking/credit systems. Some here have had accounts/credit at one time, but may have overdrawn accounts or bounced checks and are now “hiding” so their limited funds aren’t seized. |
I want to really highlight that there are a lot of low-income people who are thriving (relatively), but more importantly that there are a lot of people who are doing pretty well despite being disconnected from mainstream financial systems. This isn’t generally the message we send people, and being disconnected from the formal credit market has consequences, but I do think it’s a totally reasonable choice to make. We tell newcomers and young people that they MUST get a credit card to start building credit, but we rarely clarify that the primary reason to build credit is to make it possible to access more credit in the future. Yet some people do quite well, either temporarily or more long-term, without any credit. Many immigrants who’ve come from cash-based economies in their home countries are quite able and happy to continue using cash only. Does that maximize their ability to grow their wealth? Maybe not. But that may be a tradeoff that people are very comfortable with.