How Banks Are Getting Richer Off the Poor
It’s not easy being a big bank these days. Consumers hate them, shareholders have beef with them and regulators can’t figure out what to do with them.
At the end of the day though, a bank’s gotta do what a bank’s gotta do: make money. But how banks go about making that money is one way to differentiate them. The New York Times today writes about a few banks out there looking to boost business by offering low-income consumers products laced with loads of fees and plenty of interest.
Some banks, namely U.S. Bank, Regions Financial and Wells Fargo, are luring low-income consumers to sign up for things such as prepaid debit cards and payday loans-products that typically come with all sorts of fees and charges, the Times reports. Why are banks courting these customers with pricey products? Well, besides the obvious (fees) the products themselves weren’t subject to all the regulatory overhaul brought by the Dodd-Frank reform act. That leaves more room for banks to make money in an environment where doing so has become more difficult.
The Times story features David Wegner. He makes about $1,200 a month and is looking for a checking account. He ends up with U.S. Bank where he is offered all sorts of financial products geared toward low-income consumers. The branch offered him prepaid cards, check cashing and short-term loan options. He tells the Times that he felt like he was being treated like a second-tier consumer.
The truth is that when it comes to profitability Wegner is indeed a second-tier customer compared with other customers with higher checking balances. And you know what? There are higher tier consumers than them too like the ones with bigger checking balances. Consumers with multiple mortgages, checking accounts, savings, brokerage accounts and loans are valued more.
Nancy Bush, a bank analyst, puts it this way, “It goes back to the way some people have viewed banking. They treat banking like an electric utility where if you flip the switch it has to be there for you. But the truth is banking is a business that aims to makes profits for shareholders.”
Consider that 25% to 40% of checking accounts at the big banks are money losers. That’s according to Dick Bove who says the way banks used to make money from those unprofitable checking accounts is through debit card swipe fees and/or overdraft fees. Regulations like the CARD Act and Durbin Amendment have dramatically shrunk the revenue from those activities. “In response, banks are are either kicking out those unprofitable consumers by driving up fees or providing them with other products that are higher in cost,” Bove says.
Note that other big banks like Bank of America, JPMorgan Chase and Citi aren’t mentioned in the Times story. That’s because they don’t offer these so-called alternative lending products for low-income consumers Bove says. Those banks aren’t relying so heavily on the retail banking sector for revenue and profits while banks like Wells, Regions, U.S. Bancorp and Fifth Third Bank are much more retail banking consumer for business.
The bigger problem here is that low-income consumers don’t have much of an alternative when it comes to banking. There’s a growing population of people who don’t have a bank accounts because they feel they can’t afford it. They are called the un-banked and under-banked; people who don’t have enough funds and/or mostly deal in cash transactions and who say they can’t afford bank fees. They turn to things like pre-paid debit cards which according to the Federal Reserve is the fastest growing non-cash method of payment.
Unfortunately they can also be laced with an alarming amount of fees and a lot less protection than your regular old debit card.
Products geared toward low-income consumers have typically been offered by payday loan companies and storefront lenders or even big retailers like Wal-Mart. Consumer Reports analyzed the pre-paid card industry recently and here’s what it found:
Fees can be high, multiple, and confusing
Not all prepaid cards provide adequate protection against theft of funds using the cards or card account numbers
Promised credit lines or features to build a credit record may be expensive and overstated
Federal deposit account insurance for prepaid cards applies differently than i does for bank accounts and may be capped at less than the value of all of the prepaid cards issued by a particular card program.
In its analysis the group sampled 16 prepaid cards and found 13 of the 16 prepaid cards charge monthly fees, ranging from $2.95 for the nFinanSe card to $9.95 for the Vision Premier card and the Univision card. ATM withdrawal? Twelve of the 16 cards impose a fee for checking balances at ATMs, ranging from 45 cents to $1 per balance inquiry.