Payday lenders and check cashers have never been more popular with consumers. There are more payday lenders in the U.S. than there are McDonald's locations and Starbucks combined. Yet their business practice of charging extremely high fees and interest rates is widely condemned.

Do alternative financial service providers merit their reputation as rip-off artists? Why do their customers choose to remain "unbanked?"

To better understand how these businesses operate and why people choose to patronize them, Lisa Servon took a break from teaching at the University of Pennsylvania to work as a teller in the South Bronx and Oakland. She discovered that traditional banks are neglecting the poor and bilking the middle class, leaving payday lenders and check cashers to fill a crucial need.

Reason's Todd Krainin spoke with Servon about The Unbanking of America: How the New Middle Class Survives, a first-hand account of what may be America's most widely misunderstood industry.

Read J.D. Tuccille's review of the book from our March 2017 issue.

Read Finance on the Fringe, our look at alternative banking services fifteen years ago.

Produced, edited, and hosted by Todd Krainin. Cameras by Meredith Bragg and Josh Swain.

Subscribe to our YouTube channel.

Like us on Facebook.

Follow us on Twitter.

Subscribe to our podcast at iTunes.

This is a rush transcript—check all quotes against the audio for accuracy.

Todd Krainin: The first thing that really struck me in the book is that there are more payday lenders and check cashers in the United States than McDonald's and Starbucks combined. Is that true?

Lisa Servon: Yes.

Todd Krainin: That sounds crazy.

Lisa Servon: It's actually just payday lenders, right?

Todd Krainin: Right.

Lisa Servon: Not even counting the check cashers, and that's an important difference because, in 13 states, payday lending is illegal.

Todd Krainin: That speaks to some incredible need for this, what you call, alternative banking services.

Lisa Servon: Exactly. Exactly. Particularly in the case of payday lenders for short term credit; small amounts of money for a small amount of time.

Todd Krainin: What gave you the idea to take a break from your Ivy League job and work, of all places, in the South Bronx?

Lisa Servon: I was interested in why so many people were using alternative financial services … Payday lenders, check cashers, pawnshops … when the story about them that you hear in the press, and even from consumer advocates and from policymakers, is that they're predatory, they're taking advantage of poor people, and yet, in the early '90s, you started to see an upward trajectory of use. These businesses are growing an incredible amount. Payday lending grew from a $10 billion business to a $30 billion business in about 10 years in the early 2000s.

The implicit message in all of that writing was that low income people who were presumed to be the primary users … I found out that wasn't exactly true either … were somehow making bad decisions, that they weren't informed enough. If only they had the information that wealthier upper middle class people had then they would choose differently. That's the whole implicit message, even in the FDIC's categorization of people who's banked, unbanked, under-banked.

By looking at the numbers, I couldn't really figure it out. I knew from working in poor communities for 20 years that low income people know where their money goes, probably more than people who have more of a buffer. I realize that if I wanted to really understand it, I had to get as close to the problem as possible. When you're a researcher, you have to match the method to the question. The only method I could really figure out was to get really close.

I knew that even just talking to people and interviewing them would not give me the full story. It turned out to be right. Really, by working behind the window for months and looking at the way that people manage their money, I learned a ton.

Todd Krainin: These check cashers are often targets of journalists and academics as people who do or organizations that do, pray on poor, minority clients. Did you go into it with that expectation? Because that's the dominant narrative that's out there.

Lisa Servon: It's certainly what I thought before I began to look into it more deeply. A pivotal moment for me was having this man, Joe Coleman, who runs a chain of check cashers in the South Bronx and Harlem, come to a class I was teaching. At the moment that he walked in the door, my students and I all thought exactly what you said: these are bad guys; now one of them is coming to our class. We get to really ask him the tough questions.

Joe came in and he made a very compelling argument for why he felt like his businesses were serving people in those communities the way they needed to be served, and that banks were not doing that and banks didn't really want their business. That made me think maybe there's more to the story. I tried to go in with a really open mind once I went to both of those businesses and worked at them.

Todd Krainin: You worked as a clerk behind the counter?

Lisa Servon: Yeah, a teller.

Todd Krainin: You weren't undercover?

Lisa Servon: No, I wasn't undercover. That seemed like it would be unethical to try to pretend to be somebody I wasn't. It made for a little bit of awkwardness in that the neighborhood I was working in in the South Bronx is a primarily Latino neighborhood. I'm not a Latina, the women who I worked with were younger than me, Spanish is not my first language, although I speak it, but we overcame that pretty quickly. When you're standing behind the counter, you're working with people on a common project. People in line need something, and if you can provide it for them, it works out.

Todd Krainin: What was the first thing that you discovered when you were working there?

Lisa Servon: I think the very first thing I discovered was how service-oriented the businesses were. After I did my stints as a teller, I came out from behind the counter and I talked, I did interviews with people. The three things they told me that were the reasons why they chose the check casher were cost, which was incredibly surprising that it was cheaper than using a bank; transparency, they felt like they knew exactly what they were getting and how much they were paying; and service, which I already mentioned.

Todd Krainin: Basically, really old fashioned values in.

Lisa Servon: Exactly, exactly.

Todd Krainin: Why have banks forgotten those?

Lisa Servon: Banks became very regulated following the Great Depression with the passage of Glass-Steagall, which is a law that many people heard at least mentioned during the presidential campaign, which once the crash happened, lawmakers said, "Look, we have to prevent banks from taking these risks." They really curtailed what banks could do. That led to decades of what people call the 3-6-3 era of banking, where you'd get 3% interest on your savings account, you'd pay 6% interest on a loan, and bankers could go to the golf course by three o'clock in the afternoon. I lived across the street from a banker, so I saw that happening all the time.

What happens in the '80s and '90s is that policymakers start chipping away at that regulation and eventually pass Gramm-Leach-Bliley, which pretty much eviscerates Glass-Steagall. Banks are then able to grow and merge. Many people probably experienced being at one bank that then gets gobbled up by a slightly bigger one that gets gobbled up until we now have four banks that hold more than half of all the deposits in the country.

They get bigger, they merge, and they begin to get to do other kinds of things, to engage in different kinds of business practices, work internationally, create sophisticated products, like credit default swaps that ultimately led to the financial crisis, and they're less dependent on their consumers for their income. That's part of it. They realized that there are people that were making money off of and there are people that were not making money off of.

They also, and this then bleeds into the bank practices piece of the answer to your question, they start relying much more on fees than on interest, partly for logical reasons. The savings and loan crisis led interest rates to be very volatile. Regulators say you have to figure out a better, more stable way to make money, and banks discovered fees.

Most people have probably experienced changes in their monthly service charges. Overdraft fees were nonexistent when I was a kid growing up. Now banks are making close to $33 billion a year on overdraft fees. That's a huge driver in terms of driving people out of banks and toward alternative financial services.

Todd Krainin: Take me through some of the people who go there, because of them are really fascinating. For instance, Carlos is one of the really fascinating characters in your book. Who is Carlos? Tell me about him.

Lisa Servon: Carlos was a small business person. He's a small contractor. He does carpentry and painting and sheetrocking and all that kind of stuff. He would come into the check casher regularly to cash a check that he got from a client. I saw him come and go.

Then one day he brought in what I thought was a rather large check. It was about $5,000. He puts it under the window, under the slot, and I cashed it. The fee for cashing that check, they differ around the country, from state-to-state, but, in New York, the fee at that point was 1.95% of the face value of the check. It was almost $200.

I'm looking at that money, or looking at what I gave back to Carlos, and saying, "That's real money." He could, I don't know, save for his kid's education, he could take his wife out to dinner, he could put it into a retirement account, all of the kinds of things that people are saying when they're saying check cashers are expensive.

Carlos leaves, and I ask the teller who trained me … This was really one of the benefits of not being undercover. I'm saying like, "Why is he doing that? He's got to have a bank account." She said, "It's Thursday. Probably he's paying his guys tomorrow." If you're in any city, and probably not just cities, a lot of workers are maybe undocumented and/or don't have a bank account, and so you'll see these contractors going around and paying them in cash.

If Carlos deposited that check on Thursday in his bank, he wouldn't have the cash until Tuesday or Wednesday. That time lag, the banks are getting what's called the float, it's huge for people that are living very close to the edge. He needed his money right away, and he was willing to pay for it.

Another reason why he may have done that is that he got a job where he needed paint supplies, materials to start, so that if he couldn't have started the next day, he wouldn't have gotten the work. Again, he's paying for access to his own money right away.

Todd Krainin: You do address this idea that people take out loans, and it becomes addictive. They take out loans, they need to take out another loan to pay back the previous loan, and they get stuck in this endless cycle. That's a reason that people have said, [no 09:03], to close down a lot of these banks.

Lisa Servon: The payday lenders.

Todd Krainin: A lot of these payday lenders, I'm sorry.

Lisa Servon: Right. Payday loans, in case people don't know what they are, they're small, short term loans ranging from, say, $50 to $300 usually that carry fees. The place that I worked, Check Center in Oakland, California, you'd have to pay $15 per $100 borrowed. That adds up to a pretty hefty amount of money.

The way they're designed, the reason they're called payday loans, is that they're due on the next day that the person gets a check, whether it's their paycheck or a government check. That usually were paid either by [monthly 09:39] or monthly.

What happens is that a lot of the time the reason somebody comes and gets that loan is that they've had an expense that they didn't expect, maybe a medical bill, a car repair. They need the money right away to deal with the problem, and sometimes the consequences are dire. If I don't fix my car then I can't get to work and I'll lose my job.

The problem becomes when it's two weeks later and you haven't had an income bonus to pay for that loan. What happens is that people roll it over. They continue to borrow that $100, but they pay another $15 fee. If people continue to do that then they're paying much more than they originally borrowed. That's where people get troubled.

Todd Krainin: Critics of this exact scenario, they look at this and they say, "This is why payday lenders need to be either regulated or shut down entirely." They're banned in, what, several states, right?

Lisa Servon: Yes. Yes.

Todd Krainin: Six states, seven states?

Lisa Servon: 13 states.

Todd Krainin: 13 states, but you have a very different take on it, and I think very rightly you say that shutting down payday lenders like that doesn't eliminate the underlying problem, which is the need, the basic need, and the basic demand for these services.

Lisa Servon: That's right. I think if you got rid of every payday lender on the planet, you'd still have this need and people needing to get the money.

Todd Krainin: Clearly, some of this spills over from financial issues into just basic …

Lisa Servon: For sure.

Todd Krainin: …poverty issues, right?

Lisa Servon: Exactly. Exactly. If we're not paying attention to that problem also, no matter what we do in the financial services industry, and we need to do a lot, don't get me wrong, but it's not going to solve that problem.

Todd Krainin: You paint a very darkly pessimistic view of the American economy, frankly, in the beginning. It makes sense, given some of the locations you were working in, but you switch very quickly to the innovators section to what seems like a very rosy picture for the future, which is based in apps and technology, and people really trying to shake up the way the whole network of finance works in a very deep way. Can you talk about that and how that gives us a much better outlook for this?

Lisa Servon: For sure, yeah. The good news is that two things. One is that we don't have to just look to banks for solutions to the financial services problem. I don't think we should let banks off the hook, but we don't have to look only to them.

We have two kinds of people in the innovative space. One are people who I think are doing really interesting work on that infrastructure of banking. Two that I really think are doing terrific work. One is called Ripple in San Francisco. Ripple is creating what it calls an internet of value, making it easy to move your money without cost and immediately, the same way that we move information using email on the internet.

What that would do is that when Carlos goes to the bank and puts his check in, the money would be available to him immediately. If somebody is sending money to their relatives in Mexico or Guatemala, instead of having it stopped five times between Western Union and the bank in Mexico City, it would move immediately and free and cheaply, without cost.

Todd Krainin: At rock bottom, though, I think what these apps do and I think what you mentioned later on your book is ultimately about the question of do we trust individuals to make decisions with their own finance, even if they're poor, even if they're in desperate circumstances? I think you talked about. You talked a little bit about that ultimately we have to respect people's judgment without judging them and without judging their choices.

Lisa Servon: I think there's a lot of judgment, and even … I mentioned before this, the way that we think about people now is in terms of whether they're banked, unbanked, or under-banked. I think that that was a useful framework for talking about people for a long time, but there is an edge of being derogatory in that. If you're unbanked then there's something wrong with you.

It assumes that banking is the one and the best and only way to manage your finances, and that people who don't do that are somehow deficient in some way. We need to unpack this whole category of subprime people or unbanked people and look at the specific populations within those larger categories.

Todd Krainin: The old idea of the rite of passage of your first bank account at Pulaski Bank, is that dead? Is that something of the past?

Lisa Servon: My kids don't have bank accounts at Pulaski. I recently opened them bank accounts at the bank I go to now, but I think it's a little bit different now. We have to teach them the habits of spending and saving and being able to give money away, if they're fortunate enough to have more money than they need, to do some charity work, but I think it's a very different world now.

Todd Krainin: That was a hallmark of middle class life, right?

Lisa Servon: That's right.

Todd Krainin: If you've got a bank account, welcome to America, the American.

Lisa Servon: That's right. I know people who still have those passbooks that they saved from when they were kids.

Todd Krainin: I remember not being able to get money out of the bank after 3 p.m.

Lisa Servon: That's right. We organize our lives that way. It's not that way anymore.

Todd Krainin: Thanks a lot for talking to us.

Lisa Servon: Thank you so much. Thanks for having me.

Todd Krainin: For Reason TV, I'm Todd Krainin.