Place yourself in the following scenario: You’re a working parent struggling to make ends meet. You’re looking forward to tax time, because you know you’ll be getting a sizable tax refund from the Earned Income Tax Credit (EITC).

But there’s a catch. You don’t have a checking or a savings account. And yet you know you need to find a safe, secure place to save the refund when it comes through. Your cousin recommends a bank across town. It takes some doing, but you finally get yourself to the bank to open an account.

As you approach the counter, you feel a sense of intimidation and dread from past experiences you’ve had with banks.

Focused on your mission, you take a deep breath and shake it off. You calmly explain you’re here to open a checking and savings account. After reviewing your information, the banker frowns and tells you that you don’t qualify because of your ChexSystems record. You have to ask them to explain and they say you owe another bank money. It amounts to a couple unpaid fees at another bank that were snowballed when you were in between jobs and couldn’t keep a high enough balance in your account to avoid fees; nothing outrageous but you walked away because you could no longer afford your bank account.

Still, your request is denied.

Or imagine that you’re Julie Stelzer, a Minneapolis woman working to put things back together after struggling with addiction, who ran into a different but similarly frustrating scenario. “I’m rebuilding my life,” Julie says. “I went to treatment. I went to school. And I started working.” But she had no bank account, and no reliable, affordable way to cash her paychecks. When Julie received a $25 check for one of her first paying gigs after treatment, she hit a wall as she tried to access that money.

“At all the places where you can get a check cashed, there’s a large percentage they cut out,” she says. “I went to cash it at the bank and they were still going to charge me $7 of the $25. I needed the $25. I couldn’t afford the $7 to be taken out,” she says.

“I felt angry. I felt ‘less than.’ Just because I didn’t have a bank account.”

The complexities of saving in an extractive financial system

Eva Song Margolis, previously the economic empowerment & employment services director at Lutheran Social Service of Minnesota (LSS of MN) and now with Greater Twin Cities United Way, has worked with countless people who find themselves in scenarios similar to the ones just described.

“It’s a really tough spot to be in,” says Margolis.

“You have this sum of money. You want to put it toward your kids’ future, but you can’t access a product that will let you do so safely. You have very few options.”

It gets more complex, she explains, if your family also happens to be on a cash assistance program like Minnesota Family Investment Program (MFIP). In such cases, there are limits on how much money you can keep in a savings account without reducing your monthly benefit.

Barriers to mainstream banking: A history of exclusion and extraction in U.S. financial markets

For people who grew up in a household that participated in the traditional banking model, a scenario of exclusion like the one described above can seem quite abstract. It can be tempting to assume everyone enjoys the privilege of a working relationship with a traditional bank and that everyone has the financial cushion to keep in their accounts to avoid monthly maintenance and overdraft fees but that’s not the reality for a large portion of the U.S. population, says Margolis.

“It never has been,” she says. “In the United States, financially poor people and people of color have historically been excluded from financial systems and markets. These same people are the ones whose labor, whose land, whose very bodies provided the backbone of the systems and markets they could neither access nor participate in.”

“The exclusion goes back hundreds and hundreds of years, and it’s an important context to consider. From the very beginning, only certain people could get a loan, or count on a secure place to store their money. Ours is a banking system of selective inclusion and purposeful exclusion.”

For those who find themselves on the outside of the mainstream banking system looking in, the mechanisms of exclusion are glaring. Equally glaring are the mechanisms of financial extraction.

“Even today, some folks are able to access basic financial products such as checking and savings accounts without getting gouged for them, while others simply cannot,” she says. “And then we see these sub-tier products emerge. I don’t believe the introduction of any of these products was roundabout or coincidence.”

People rightly wonder why they’re getting blocked at every turn, says Margolis. “I see people struggling to access a system engineered to exclude them. They think, ‘I’m just trying to do well for myself and right by my kids; why can’t I get the accounts and features I need? Why all the limitations on how much I can save without putting my income in jeopardy?’ People are smart. They know the model is flawed, but they can’t do anything about it. Their options are incredibly limited.”

The benefits and drawbacks of the “alternative financial market”

The mainstream financial market isn’t the only outlet for accessing funds or paying bills. Check cashing and payday lending establishments, as well as post office’s with money orders, fill in where banks won’t by offering their services to people who can’t meet the eligibility requirements of traditional financial institutions. “People need a way to access their own money,” says Margolis. “It’s as simple as that.”

To understand how the check-cashing process works, imagine your employer cuts you a $1,000 payroll check. There’s nothing you can do with a check until you can cash it. So you take it to your neighborhood check cashing place. You can count on them for their friendly service and to get your cash quickly. While transparent, the service costs between 2% – 4% of your income.

You still have $960 cash left from which to pay your monthly rent of $500. But your landlord doesn’t take cash. So you spend $10 on money orders to pay rent and bills. Now you’re out $50 for these two services. That’s 10% of your paycheck.

You’ve got other bills, too. Utility payments, maybe car payments … medical expenses. And what about emergencies? If your car breaks down, you might not have the funds to cover the repair — especially if you don’t have a savings account or strong credit score to draw from.

“A lot of folks can’t access a traditional loan or credit card,” says Margolis.

“They don’t have the option to walk into a bank and ask to borrow $500 – $2,000. Payday lenders fill a huge need in terms of creating access so people can pay bills and take care of their basic needs.”

Still, she says, the steep fees and interest rates that accompany payday loans often make them a last resort. According to the Consumer Financial Protection Bureau (CFPB), a typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%.

“We see people getting stuck in a cycle of loans that flip multiple times,” says Margolis. “Check cashing and payday lending services can be convenient and friendly. But the potential consequences of not meeting the payment schedules can also be crippling.”

A better path forward with FAIR

Years ago, Prepare + Prosper (P+P) envisioned a financial services model that could sustainably serve customers who found themselves shut out of the mainstream financial markets — while keeping them out of the piecemeal solutions and the cycle of high fees that characterizes the nonbank markets. P+P wanted to create access to federally backed checking and savings products, as well as credit building instruments, which will position them to access affordable credit, lessening their reliance on predatory lending.

P+P imagined a new model for the financial markets; a cross-sector effort shared by banks, nonprofits and community access points, including employers and government agencies. But first, they wanted to know what their customers would like to see from a community bank. With the help of experts and leaders like Margolis, P+P organized and facilitated listening sessions with community members to learn what kinds of features, products and fees to incorporate.

From these listening sessions, the blueprint for the FAIR Solution emerged. P+P partnered with Sunrise Banks to create checking, savings, and credit building accounts with the fees, features, and access their customers said would serve their needs.

FAIR delivers the convenience and safety customers seek

After experiencing so many roadblocks while working toward a brighter future, Julie found a new path in FAIR. “My coach told me about FAIR. I said: ‘That sounds great!’” She was excited by the opportunity to set up an account with low fees, and easier access to her new income. “ I am too stingy to go to a check cashing place and have them take 10%,” she says.

“When you already have little money, you don’t want to give it away.”

“With the FAIR checking and savings accounts, customers save time, money, and worry,” says Margolis, who formerly served as financial manager for P+P.

“If I’ve been excluded from the traditional banking system and relying on predatory ‘fringe’ products, the FAIR model changes so much for me. Now I can direct deposit my paycheck; no fees for cashing. I can tell my employer I want $10 from every pay period to go to my savings account. I can pay my bills online for free; no money orders to mess with. And no more looking over my shoulder as I leave the check-cashing place with $1,000 in my pocket, worrying if I’ll get robbed.”

Unlike banks and credit unions, which typically aren’t willing to work with customers with less-than-great credit or who walked away from other banks because of fees, “FAIR wants to serve these customers, and to help them create healthy financial practices. That’s why FAIR checking was designed with no overdraft capability or minimum balance requirement. Customers pay one predictable, flat, low monthly fee that never changes.”

Community relationships form the foundation of the FAIR financial solution

With her long history of leadership and innovation in nonprofit organizations, Margolis views the community distribution model as the secret sauce of the FAIR suite of products and services.

“Whether it’s LSS of MN, EMERGE, or BuildWealth MN, these distribution partners are well-known organizations with deep ties to neighborhoods and communities,” she says. “People already have relationships with them, or know someone who does. At LSS of MN, for example, a client can access or apply for these products right with their employment coach. They don’t ever have to walk into a situation or environment that feels unfamiliar or biased against them.”

The relationship-centered model also gives customers access to financial coaching opportunities. “We want people to have success using the FAIR products. We also want them to create sustainable financial habits that will serve them for a lifetime, no matter where they choose to keep their money.”

Finally, the FAIR model lets a customer address important financial considerations in context. “As we help folks access training and get placed into employment here at LSS of MN, we can have conversations such as, ‘Ok, you’ve got this new job. Should we open a FAIR checking account and set up your direct deposit while we’re at it?’”

The future of FAIR and a new way of banking

Margolis imagines a world in which the FAIR model is the norm, instead of the exception. “I would love to see employers at some point making FAIR-style products available to their part- and full-time employees,” she says.

In the meantime, she celebrates the progress already underway.

“FAIR serves a very unique function in making these products and services available. It gives people the chance to make smart, safe decisions with their money that will help them support themselves and their families — now and into the future.”

Julie Stelzer has her eyes firmly set on that future with FAIR. “They’re helping me build back into a responsible life,” she says. “I really like that.”