When Christopher Columbus needed a safe place to store his loot, he went to his local bank — the Banco di San Giorgio in his native city of Genoa, Italy. Not all famous explorers did this, especially if they weren't living in Genoa. That's because very few people had access to a bank back then.
Actually, almost nobody did, because the Banco di San Giorgio was the first bank. Ever.
Sure, people had been using banking practices before the advent of the Banco — in fact, banking itself is said to date all the way back to ancient Mesopotamia and the birth of civilization. But banking isn't the same as a bank.
Before the Banco, the Mesopotamians used clay tablets as receipts of exchange, ancient Egyptian farmers kept their grain in a "grain bank" and used it to pay debts and ancient Greek temples accumulated wealth, which they would loan out to rulers when needed at a prescribed interest rate. But just when the Romans were starting to develop more sophisticated banking methods, the barbarian hoards came a-pillaging and a-sacking, which put the kibosh on the whole endeavor for a couple of centuries [source: Armstrong].
When a group of wealthy Genovese merchants got together to form the Banco in March 1408, they weren't setting out to invent modern banking; they were trying to save the city of Genoa, which was completely bankrupt. Back then Genoa wasn't just a city — this was the age of the Italian city-states — it was a republic with a proud history. But a long war with its main rival, Venice, had bled its coffers dry.
The founders of the Banco created it with the idea of financing the repayment of the city-state's considerable debts. The bank would earn 7 percent interest and even be able to collect the city's taxes and customs in order to pay itself back. The scheme worked — Genoa recovered financially, and the bank lasted four centuries, becoming enormously powerful in the process.
The people who ran the bank followed a set of rules that inspired confidence in its integrity. Among these rules there was one stating that the treasurers who oversaw operations would be elected by lottery and deposit big chunks of their own funds into the bank (16,000 lire —hundreds of thousands of dollars in today's money). In other words, if they wanted to be in charge, they also had to have skin in the game [source: Boland].
Times have changed.
The Unbanked and Underbanked
In the modern age, banks are ubiquitous, and a bank account is one of those things, like a driver's license, that has become a vital part of being an adult. You need a bank account for just about every element of contemporary life. You require one to receive your electronic payments or wire transfers, to deposit or write your checks, to get a student loan or a mortgage or a car loan, or to pay your credit card bills — or any of your bills, for that matter. It's simply impossible to get by without a bank account, isn't it?
As of 2015, 9 million American households — about 7 percent of the total — didn't have bank accounts, which is actually the lowest that number has been since the Federal Deposit Insurance Corporation (FDIC) started tracking it in 2009 [source: White]. And that's just the tip of the iceberg. Nearly 25 million households are "underbanked," meaning that even if they have bank accounts, they can't or don't really use them. In such cases, people who need a loan don't bother applying for one from a bank either because they've tried before and have been rejected, or because they assume they'll be rejected because of their low incomes, debt load, poor credit scores or all three.
Underbanked people are often poor, black, or Hispanic and typically have received less education than the banked (to coin a term). Undereducated members of marginalized minority communities also might not want to use banks because they don't trust them. We don't have to look far back in history to find the reasons for this lack of trust — the subprime-credit crisis provides a superlative example of predatory lending [source: White]. If people feel that asking a bank for a loan is like treading the event horizon of a black hole, it's understandable that they might be a little gun-shy.
There are also people who choose not to have bank accounts because they just don't like them. Sick of all the charges that come with an account (especially the charges for overdraft or for having too little money in your account) more and more people are opting for alternative ways of handling their money. Still others avoid banks for philosophical reasons, preferring to opt out of mainstream society and all its trappings. However, the percentage of the underbanked population that's opted for that condition by choice rather than force of circumstance is probably a small minority.
Those who don't have bank accounts because they can't afford them rely on alternative sources for loans. The most notorious alternative is something known as a payday lender. A payday lender is an entity that provides small, short-term loans that typically take the form of an advance on your paycheck.
While payday lenders often have brick-and-mortar locations helpfully advertised in neon, they've also gone online. CashNetUSA's website, for instance, promises a quick application process that won't affect your credit score plus an instantaneous decision and money available the next business day.
This sounds good until you click on "Rates and Terms," where you'll find that if you want to borrow, say, $300, you'll need to pay a fee of $25. That's a hefty bite — in fact, as the website notes, if paid back within eight days, it works out to an annual percentage rate (APR) of 380.21 percent.
As many as 12 million Americans use payday loans to get by, and most of them have annual incomes of $30,000 or less. If they had access to loans from banks or credit unions, the rates could be six times less than what payday lenders charge. Regulators are making noises about ensuring the underbanked have fair access to affordable credit. That's because it's becoming overwhelmingly clear how unfair it is that a person could be forced by circumstance to apply for a $500 loan that ends up costing him $1,300 in fees [source: Bourke].
Say you can get by without a bank account and manage to never need loans. You could, of course, rely on that old standby, cash. But keeping the necessary amount of cash on you (or in your house for that matter) isn't exactly safe. It also means you can't receive electronic paychecks and, more importantly, can't bid on that porcelain terrier you've been coveting on eBay.
For these reasons and more, some unbanked or underbanked people use pre-paid debit cards, which are just what they sound like — cards that can be loaded and reloaded with small, medium and large sums of money (typically at an ATM) and then used for electronic payments (at the gas pump, at the grocery store, online, etc.).
Again, in principle, they sound like a good idea, especially if you don't have a bank account. Many people who are underbanked — by choice or by force of circumstances — use pre-paid debit cards as a way to carry on living in the material world. Some claim that it's also a useful way to avoid exorbitant account fees for things like overdraft.
However, pre-paid debit cards often have a suite of hidden fees that ding users for everything from using an ATM to loading a card to checking your balance and even for overdraft [source: White]. Here again, regulators are stepping in to try and correct some of the unfair practices deployed by pre-paid debit card companies.
The alternatives listed here are two of the most prominent ways in which the underbanked deal with money, but there are still other ways of living without a bank account.
Despite the attempts of concerned regulators to ensure the unbanked and underbanked have better access to affordable bank accounts, many people who use payday lenders and check cashers (a business where you pay a fee to cash a check) have no interest in having a better relationship with banks.
Even if they have to pay large fees to alternative lenders, some people argue that at least they know what the fees are upfront. By contrast, the disclosures they receive with a bank account can be so confusing and long (some run to more than a hundred pages) that customers are often taken by surprise by the number of fees they must pay, especially for overdraft, which is a chronic problem when you're living hand-to-mouth [source: Servon].
For a variety of reasons (the venality of banks being one of them) communities around the world have created what are known as "alternative currencies." Although these are non-governmental currencies, it's not illegal to use them. Currencies such as BerkShares, the Lewes Pound, Toronto Dollars, Salt Spring Dollars, Ithaca HOURS and Bitcoin are growing in popularity. Some, like Bitcoin, can be used internationally, whereas many, like BerkShares, can be used only within a very localized community. Bitcoin users are drawn to its fast, cheap, anonymous and untraceable nature, whereas those who use local currencies often do so in an effort to keep resources within a given community. For a currency to work, it's simply a matter of people trusting that it has value [source: Gross].
One remarkable example, the M-PESA in Kenya, demonstrates how an alternative currency can not only help people without bank accounts, but actually threaten to completely disrupt the banking industry.
Most Kenyans don't have a bank account. That means there's a heavy reliance on cash. This can present challenges. Say a person from a village moves to the city to find enough work to send money back to her family. Because of her new job's schedule, she doesn't have time to personally ferry the money back to her village on a regular basis, so she has to put the cash on a bus and hope it makes it home. Often it mysteriously disappears. At least this used to be the case.
Although they might not have bank accounts, most Kenyans have cellphones. In 2007, the country's largest cellphone company decided to try and remedy Kenya's underbanked situation by creating an alternative currency, which they called M-PESA ("pesa" means "money" in Swahili, and the "M" is for "mobile"). You can charge up your phone with M-PESA by buying it from a person staffing one of the company's kiosks (there are close to 100,000 of them throughout the country). You can then send and receive money by, essentially, texting it. As long as she has the phone number of a relative in her home village, the woman with the new job can send M-PESA home electronically with her cell. And in the village, her relatives can use M-PESA to buy everything from groceries to cows to water from a well with a digitally controlled meter that can receive the money via text.
M-PESA is now ubiquitous throughout the country and has had an enormous effect on people's lives. For instance, a farmer who once relied on dangerously flammable and toxic kerosene lanterns used a small and affordable loan through the M-PESA system to pay for solar-powered lighting. This improves the health of his children (no more toxic kerosene fumes), reduces the risk of fire and allows him to do some of his farming chores at night. To pay for the $180 unit, the farmer came up with a down payment of $35 and then paid 40 cents a day for a year.
Because M-PESA has such low overhead, loans have much more affordable credit rates than those offered by banks. In fact, M-PESA has been so enormously successful in Kenya that worried banking industries elsewhere have been lobbying hard to block the introduction of mobile money to their markets [source: Stahl].
No Money, No Bank, No Problem
Aside from alternative currencies, there's another intriguing mode of exchange known as "timebanking." Timebanking is a way of giving and receiving services by quantifying those services in terms of time. The core principle of timebanking is that all hours of work are equal. According to this principle, an hour of work that is often underpaid or, for that matter, unpaid (such as childcare) is recognized and rewarded with the same value as, say, carpentry.
Timebanking requires a network of people who all agree to its basic principles. They keep track of their credits via paper notes or online software. Proponents of timebanking say the system promotes a stronger sense of community by fostering networks of participants who agree to recognize one another's time as equally valuable, no matter what kind of service they're providing.
Timebanking, like M-PESA, is still a form of money. A truly radical way to live without a bank account is to forswear money altogether.
That's what author Mark Boyle did. For three years he adopted a moneyless lifestyle, and although he eventually returned to the world of financial exchange, he reports that the experience changed him profoundly.
According to Boyle, living without money forced him to rely on his own character and behavior as his primary asset, which he believes made him a better person. The experience also brought him into a more direct and intimate relationship with the natural world, which he was obliged to rely on completely for sustenance and habitat [source: Boyle].
Boyle supported himself through farming, foraging and barter. He maintains that he had more fun, not less, living without money. Instead of buying booze at his local pub, he made hard cider from wild apples, organized parties for neighbors and attended free cultural events, which in turn helped him get to know his community better.
In his books, and in newspaper articles, Boyle continues to advocate reducing dependence on the monetary system. He gives endless tips on how to live without soap (or make your own from foraged ingredients); how to farm, forage and barter for the food you need; and how to build your own home, all without spending a penny. He's even founded a "Freeconomy Community," which advocates, among other things, for the right to pay taxes in the form of labor.
So while living without a bank account might be a condition brought on by necessity (as in, your bank account was closed because of too many overdrafts) it's entirely possible that being cut off from the normative world of monetary exchange could end up being a liberating experience.
Author's Note: How Living Without a Bank Account Works
Many years ago I moved to a new city and found work before I found a bank to put my paycheck in. For several weeks I relied on check cashing outlets that charged me 3 percent of my check amount for the transaction. That was a lot more than what was charged by the credit union where I eventually opened an account, but I was grateful that such an outfit existed, otherwise I would have been wandering around town with a useless piece of paper in my wallet.
More Great Links
- Armstrong, Martin A. "The Origins of Money." Armstrong Economics. (Nov. 9, 2016) https://www.armstrongeconomics.com/research/monetary-history-of-the-world/historical-outline-origins-of-money/money-and-the-evolution-of-banking/
- Boland, Vincent. "The world's first modern, public bank." Financial Times. April 17, 2009. (Oct. 28, 2016) https://www.ft.com/content/6851f286-288d-11de-8dbf-00144feabdc0
- Bourke, Nick. "Regulators Should Let Banks Get Back to Small-Dollar Loans." American Banker. Sept. 16, 2015. (Nov. 2, 2016) http://www.americanbanker.com/bankthink/regulators-should-let-banks-get-back-to-small-dollar-loans-1076693-1.html
- Boyle, Mark. "Living without money: what I learned." The Guardian. Sept. 15, 2015. (Oct. 27, 2016) https://www.theguardian.com/environment/2015/sep/15/living-without-money-what-i-learned
- CashNetUSA. (Nov. 2, 2016) https://www.cashnetusa.com/
- Fontinelle, Amy. "An Introduction to Complementary Currencies." Investopedia. (Oct. 27, 2016) http://www.investopedia.com/articles/economics/11/introduction-complementary-currencies.asp
- Gross, Jessica. "10 alternative currencies, from Bitcoin to BerkShares to sweat to laundry detergent." TEDBlog. July 25, 2013. (Oct. 27, 2016) http://blog.ted.com/10-alternative-currencies-from-bitcoin-to-berkshares-to-sweat-to-laundry-detergent/
- Kawa, Lucas. "How the Rothschilds Created Modern Finance and a Vast Fortune That Has Lasted for Centuries." Business Insider. Dec. 23, 2012. (Oct. 28, 2016) http://www.businessinsider.com/the-early-rothschilds-built-a-fortune-2012-12
- New, Catherine. "Josh Crawford Has Not Had a Bank Account in More Than a Decade and Likes It That Way." The Huffington Post. May 7, 2012. (Oct. 27, 2016) http://www.huffingtonpost.com/2012/05/07/josh-crawford-underbanked-prepaid-cards_n_1479300.html
- Off the Grid News. "3 Simple Steps to Surviving Without a Bank Account." (Oct. 27, 2016) http://www.offthegridnews.com/financial/3-simple-steps-to-surviving-without-a-bank-account/
- Safdar, Khadeeja. "No Bank Account: Huffington Post Readers Respond About Living off the Financial Grid." The Huffington Post. June 7, 2012. (Oct. 25, 2016) http://www.huffingtonpost.com/2012/06/07/no-bank-account-huffington-post-readers_n_1574192.html
- Servon, Lisa J. "The High Cost, for the Poor, of Using a Bank." The New Yorker. Oct. 9, 2013. (Nov. 3, 2016) http://www.newyorker.com/business/currency/the-high-cost-for-the-poor-of-using-a-bank
- Stahl, Lesley. "The Future of Money." 60 Minutes. Nov. 22, 2015. (Nov. 3, 2016) http://www.cbsnews.com/news/future-of-money-kenya-m-pesa-60-minutes/
- Timebanks.org. "What Is Timebanking?" (Oct. 27, 2016) http://timebanks.org/what-is-timebanking/
- White, Gillian B. "Payday Loan Rule: Progress, but Still a Long Way to Go." The Atlantic. June 2, 2016. (Nov. 2, 2016) http://www.theatlantic.com/business/archive/2016/06/cfpb-payday-loan-rule/485294/
- White, Gillian B. "The Millions of Americans Without Bank Accounts." The Atlantic. Oct. 20, 2016. (Oct. 28, 2016) http://www.theatlantic.com/business/archive/2016/10/fdic-underbanked-cfpb/504881/
- White, Gillian B. "The New Rules of Digital Cash." The Atlantic. Oct. 5, 2016. (Nov. 2, 2016) http://www.theatlantic.com/business/archive/2016/10/cfpb-prepaid-venmo/503000/