Bank Fees Exploit the Poor

U.S. Banks have an obligation to provide alternatives to checking account fees and minimum-balance requirements, which exploit low-income Americans who live paycheck to paycheck. Pro or con?

Pro: Have Mercy on the Poor and Weak

We’ll be arguing for years about who and what drove today’s banking crisis, but we won’t be arguing about who’s paying the bill: the American taxpayer.

With the U.S. government mopping up the economic mess made by so many of them, U.S. banks ought to be open to changing their relationships with poor communities.

Banks can be better public institutions by offering products that don’t exclude major population groups. About 40 million Americans have no bank accounts. Banks’ high fees and exclusionary rules are a big part of the reason. It’s hard enough for low-income families to save—high balance requirements make it even harder.

When researchers asked low-income families why they don’t have a savings account, only 37% said it was because they couldn’t save, according to the 2006 Detroit Area Household Financial Services study conducted by the University of Michigan. Nearly 29% said that lower fees would encourage them to open a bank account.

By offering accounts with tangles of strings and fees, banks push families toward predatory financial institutions, where they pay about 2% to 3% of their checks’ value straight to check cashers.

Banks should think about services to poor communities as as investment in customers, which could pay handsome dividends in the future as these customers’ families turn to trusted sources for future financial services.

As banks work to get back on solid ground, they ought to keep the help they received from the American people in mind and accept the moral obligation to lower barriers to economic prosperity for the nation’s most vulnerable communities.

Con: Quit Regulating Banks to Death

Banks are not “obligated” to provide free checking account services to low-income people any more than McDonald’s (MCD), Starbucks (SBUX), and Toyota (TM) are obligated to give them free burgers, coffee, and cars. Those who advocate such a thing are perfectly free to pick up the bank fees of as many low-income people as they can. I would be the last person in the world to stand in their way. The problem is not bank fees; the problem is low income. Forcing banks to give away some of their services for free will not improve the income-earning ability of low-income earners.

If an expansion of the welfare state in this way is desired, one wonders why it should be funded in such a discriminatory manner by an implicit tax on banks and not through general tax revenues—especially at a time when many banks are, well, verging on bankruptcy.

Moreover, if such a thing becomes acceptable, there inevitably will be calls for government to force other corporations to give more freebies to “the poor.” Why, someone in government may even get the harebrained idea of forcing mortgage lenders to ignore traditional ability-to-pay requirements for mortgage loans to low-income people, known as “subprime” loans. (Oops, I forgot; this has been the policy of HUD, the Fed, and other arms of the federal government for some 30 years now and a contributing cause of the current economic crisis).

This is nothing more than backdoor welfare statism. Like welfare statism in general, it creates the moral hazard of weakening work incentives, creating even more poverty.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

Mike

I could not agree with Jonathan more. The recent economic downturn presents a tremendous opportunity to really examine how we prepare people to interact with mainstream financial institutions. Pushing low-income families to predatory lenders and to the margins of mainstream financial institutions only compounds the problem. We have to find reasonable solutions to ensure we are not exacerbating the economic hardships for already-struggling families.

Strategery

This is a weak debate. There are numerous banks and credit unions that offer free checking and savings accounts with no minimum balance requirements. The banks still make money by providing loans and through debit/credit fees charged to retailers. Credit unions also have lower fees for overdrafts, usually around $20 rather than $35+ at commercial banks. The reason that this group does not have access to traditional accounts is because of a poor credit history, not low income. Unfortunately, the low income group is also the group that is likely to have a poor credit history--often making poor choices like not paying their bills or opening accounts they don't understand the terms of. Poor credit equals higher interest rates. I know someone who cannot get a checking account because she will spend recklessly and overdraw it, and instead pays to have checks cashed and uses pawn shops and payday loans (not to mention the countless credit cards that have been sold to collection agencies).

sue

Think about it--banks are charging fees to hang onto our money, and then charging more fees to give us back our money. Something has always been wrong with this picture.

random

I don't understand DiLorenzo's argument. Banks have free checking accounts. They've had them for many years. The problem is trying to slam people with fees if something should go wrong or attach strings and provisions to their accounts to take more money out of the pockets of lower income customers who might not deposit as much money as the bank would like they to.

Note, this isn't lower-income customers getting loans. This is people depositing their hard earned money and banks having a maze of rules that drain more and more cash out of them for no other reason than to drain cash. And this is especially true because many banks are in financial trouble. They might see boosting fees or attaching new strings to new accounts as a way to quickly raise millions.

Finally. this bit of commentary is downright absurd:

"someone in government may even get the harebrained idea of forcing mortgage lenders to ignore traditional ability-to-pay requirements for mortgage loans to low-income people, known as "subprime" loans. (Oops, I forgot; this has been the policy of HUD, the Fed, and other arms of the federal government for some 30 years now and a contributing cause of the current economic crisis)."

I see someone's been reading too many of his own historical revisions which forgot to mention that while banks were encouraged to lend to minorities and people with lower income, they were still supposed to be generating A quality paper and banks were free to take as much or as little risk as they wanted. The whole point was to prevent rampant discriminatory practices by numerous banks who assumed that because you were a minority, you were going to default on a loan in a few weeks.

Oddly enough, huge rates of defaults came from the 2005 and 2006 vintage of mortgages rather than the ones given between 1995 and 2000. What created the subprime industry were companies like Countrywide, not a government program that tried to slightly boost home ownership rates.

Then again, I can't say I would expect anything different from the Ludwig von Mises Institute, which is best known for countless articles of revisionist history and invocations of red-baiting.

Mr. Goldfinger

Banks are not MacDonalds or Starbucks. They are private companies that provide a public service: financing. They are the backbone of our economy and should have the obligation to provide low income people with low cost savings and checking accounts, but not credit or financing to people with poor credit history.

Liz

Why shouldn't we give freebies to the poor? We've been giving them to Wall Street for years.

Mark

I think "random" hit it right on its head. Dilorenzo's arguments just don't follow. Banks have to do more. Claiming that not taking advantage of low-income people is akin to "welfare statism" is exceptionally absurd.

jj

More of the tired old con games:

"This is nothing more than backdoor welfare statism. Like welfare statism in general, it creates the moral hazard of weakening work incentives, creating even more poverty."

Backdoor welfare includes taxpayer money to bail out Wall Street banks.

Think the poor were leveraging 100 to 1? Maybe if some poor could get paid million-dollar bonuses for driving a business into the ground

DL

Oops, you caught me Thomas. Just as soon as my bank dropped the minimum balance fee, I just lost all desire to do anything but sit around and watch my work incentive weaken. Quit my job, went on welfare, and got mired in moral hazards. It's a damn good thing the bank didn't drop those ATM fees or it would have been lights out for me. Let's see if I get this right: When you give special considerations to the poor, it's called welfare. When you give them to banks, it's called strengthening the economy even though they brought it down in the first place. Sure, glad there are people like you around to remind us that Bush may be gone, but the smell lingers on.

R.Will

I arranged overdraft on my Citi checking account. Ten years later, during the financial crisis, I'm suddently getting hit with overdraft charges.

I query Citibank as to why I'm now getting hit with fees, despite the "protection."

Their answer: 1) their "policy" changed in September; 2) they claimed to have informed me (where/when I'm unclear); 3) the fee I'm getting charged is reduced by the "protection."

Bottom line: 1) the "protection" is Soprano-like: instead of breaking both legs, they break one; 2) the reduced protection is useless (binary) because at the absolute level, I could simply use poole resources as a pool...with partial "protection" I'm forced to hold idle balances, but can't quite project the needed size, so I'm leaving them more float.

Translation: The linked account theory at Citi is useless, overpriced, and the change is disclosed in print fine enough to require a microscope.

Citi is allowed to change their terms of service, and I'm free to walk away, but while their change was legal, I wouldn't dignify it as ethical.

Markets depend on trust and transparency, and, in a crisis, Citi showed that they are undeserving of my trust.

Lou

If someone cannot understand the terms and conditions that they have voluntarily accepted from the bank, then maybe they should not have signed up for the service. No one is forced to have a bank account, and if you don't understand the repercussions of your actions, then use cash and only spend what you have. I don't mean to sound cold, but if you keep incurring fees you cannot afford, then don't.

random

"If someone cannot understand the terms and conditions that they have voluntarily accepted from the bank, then maybe they should not have signed up for the service."

But what if part of those conditions is the ubiquitous "we can change our terms at any time, with or without notification and for any reason" clause that invalidates anything and everything you agreed to above at the whim of the bank?

Today's contracts with banks and credit cards are pretty much useless and if you hope to do little things like have a car or a place to live with money you already have, the lack of a bank account or a credit card will not let you get any loans or rental agreements because having no credit history is even worse than having a mediocre credit history for rental companies and lenders.

The average American consumer is sort of stuck dealing with entities that don't understand what it means to hold up their end of the bargain.

Stuart

While I agree that bank behavior is less than ethical, it is incumbent on the consumer to become educated about their service providers, and if necessary, change providers. The real problem here is not that some people are poor and incur fees they can't afford; it is that people do not get some basic education about managing their finances. Solve that problem and the other problems will be solved.

Root Causes

Forcing banks to lower fees for the "poor" may make one feel good about oneself, but it will do little to getting the poor out of poverty permanently. Besides, there are alternatives to banks like Wal-Mart's $3 check-cashing program.

Until the root causes of poverty are openly acknowledged and addressed, free stuff are only band-aids.

By the way: Does anyone have an update on the plight of the poster child for Obama's war on poverty and homelessness?

John

Normal bank fee are low, and free or not is the not the problem. Fees for overdrafts is. The banks have programed their computer to rearrange the order money is taken out of your checking account to maximize the fees they receive if you overdraft your account.

Jeff B

It stinks being poor. It always has and it always will. The list of disadvantages to being poor is endless. Having said this, it is utterly absurd to say that bank fees target the poor unfairly. Having spent my entire career in financial services, I can tell you that whether you are talking banks or insurance, most Americans actually end up subsidizing the poor in providing services because it is always more expensive to do business with customers who have small accounts, are frequently overdrawn, or who may have higher claim rates because of higher crime rates. I don't like bank fees either. So I voted with my dollars. I don't use a traditional bank.

Rachel L.

Can't afford a minimum balance? Fine, find a checking account without one. Many bank offer free accounts, free checks, free debit cards, and other freebies in some variation or other. Shop around and find one that fits your needs. There are options out there.
The fact is, though, that banks are businesses. They need to stay in business and need to be profitable. There are going to be charges for certain "perks" like fancy checks, money orders, interest-bearing accounts, etc. And there are fees when the accounts are abused. Overdraft fees are one of the more notorious. Yes, 30-some dollars a pop is a lot, but once your balance dips negative it is no longer your money you're spending; it's the bank's. If $30 is the fee the bank wants to charge for lending you that money, then so be it. Treat your account like it's cash--once it's out, it's out.

Squeezebox

Banks used to make their money on the spread between the rate of interest they paid their depositors and the rate of interest they charged on their loans. Then the Federal Reserve started lending money to banks at 0.25% interest. All of a sudden, banks don't need depositors anymore because it's more profitable to get money from the government. They started charging outrageous fees to make depositors as profitable as the Federal Reserve is.

James H.

I’m appalled at this horrendous display of naiveté. Nothing is free; someone somewhere pays for it. I don’t make a lot of money and did not grow up with much of it either. I’m 29 now and I have had a checking/savings account for about 15 years--never have I been charged a fee for maintaining them, regardless of the balance. The fees that people can’t afford are the ones that they pay for failing to balance their check books correctly. Banks usually don’t penalize people with no credit (teenagers, immigrants, etc.) but they do tend to charge people with bad credit. This, however, is completely understandable since these folks have shown themselves to be financially irresponsible. Of course sh-- happens, but that doesn’t mean you are entitled to anything. This country’s entitlement complex is overwhelming. Get this through your thick skulls--you do not deserve anything. If you do not like the product you are offered you don’t have to take it. There are many branches competing for a responsible person's business. Banks are not charitable organizations; they are there for a profit. Why are folks struggling with this concept? Furthermore, the last thing we need is the government sticking their nose in the matter; they are too large as it is and they are not here to coddle us at any rate. It’s time to be accountable for your own actions people. Quit making excuses for why you aren’t one of the "haves."

Richladyboy

The poor are an easy target to exploit, so why not do it?

applicity

I am poor, yet I have both checking and savings accounts. I do not incur overdrafts. I do not pay any fees. I am proof that poor people can get bank accounts for free. As for the free account melting my will to work for a living or achieve anything in my life isn't only the dumbest thing I've ever heard but also one of the most offensive, considering the ten hour shifts I work to care for myself and my child.

Mike from Texas

DiLorenzo worships at the altar of the self-proclamined athiest Ayn Rand, his unnamed god. Hey, I support freedom of or from religion. However, political and economic positions flow directly from one's value system. Rand dismisses the value of connectedness to others, of citizenship, of the common good, of "we the people," and justifies radical individualism and exploitation of the weak. DiLorenzo writes as if Rand's ideology is self-evident, when in fact it is a deliberately chosen world view.

Pay Day Lender

There should not be more regulation because by regulating, competition is hurt and competition is the invisible hand that drives down prices and fees for loans, which helps the consumer. By regulating, fees will rise and those in need of a loan will have higher interest fees and will end up not being able to pay back their loan, which will then lead to banks and pay-day lenders being blamed for the crisis.

Ned

Banks are given a charter that allows them to make great money simply by being prudent and offering good service. When they wish to act like usurious monsters they become immoral and employ counterproductive business practices.

Von Mises needed a shot of Jesus in his brain. Grow up, wise up, and start being moral money lenders, you thugs.

Little Dorrit

The intrinsic nature of banks and their relationship to their communities can in no way whatsoever be compared to that of McDonald's, Toyota and Starbucks. A bank is not one brick more than a state or federal charter, a clearing house operation outsourced/privatized by a government via charter. Banks have inherent public duties that when breached are recognized by all as criminal and immoral and of a nature critical to a community such as safekeeping deposits, and clearing checks. A burned burger is not in the same league. Banking, however, is in the public sphere, an arm of the government, as surely as law enforcement, public education, air traffic control, our military, and so on. Much is made of individuals walking away from abusive banking contracts, fees, etc. and establishing another banking relationship is daunting for an uncertain individual and a roll of the dice for a small business. It is possible, however, for our governments, state and federal, to expect a chartered core public entity such as banking to embrace the letter and spirit of what is generally a powerful and profitable contract with the state. A bank charter's 'letter and spirit' are part and parcel of the "stress test" when reviewing the fitness for such a critical role in the financial life of a state and nation. Of course, banking lobbies, as Sen.Durbin stated, in reaction to the failure of his bill to restore bankruptcy to the federal bankruptcy code,"own the place." He further declared in an interview with PBS that the only remedy for banking reform is campaign finance reform. Campaign finance as we know it is the root moral hazard of our time. Poor folks can never compete with our bank owned Congress in a race to the basement of moral hazard.

Little Dorrit

Little Dorrit's Addendum:

Please accept the clarification of a couple of clumsy lines in my prior submission to read: "Much is made of individuals walking away from abusive banking contracts, fees, etc. and establishing another banking relationship. Many would do just that were it not so daunting for an uncertain, unsophisticated individual, and a roll of the dice for a small business.

My last sentence is better stated: "Individuals and small businesses, whatever sharklike mortgage or credit card terms they agree to, can never compete in the arena of moral hazard with 'too big to fail' and our bank owned Congress in a race of the treacherous to the basement of moral hazard."

Thank you...if you are still tuned in.

Danielle

The banks do not care for their costumers. We have been for ten years with Keybank, and they have never been so eager to collect fees. All of our accounts are with them, and they do not offer overdraft protection. As a result, you are getting charged $500 dollars a month in overdraft charges. This is a good paycheck for somebody who works there. Everytime we try to defend ourselves by showing them a copy from the online-banking statements, they always have a good ways to turn things around.

Who is to blame? Of courese the custumer. Things did change around for the past couple of years.
Thank you, Danielle

john

The real problem today is just plain greed and selfishness--this is why we're in the mess we're in today. Reasonable fees are understandable, but when someone bounces a check for $1 and you charge them $35 in fees and your profit is in the millions, that's scabbing off people. We all have an obligation to care for the next guy and we're not doing that, which is why there's more trouble comming. I really believe that in a another year or so this whole system is going to collapse. I'm not religous, but we lost our sense of morality. We pushed God out of the picture and we're paying the price.
Regards
john

don

The real problem today is just plain greed and selfishness. I don't know how they can be broke--fees for everything, credit card markups bailouts--they're saving it all so we won't have any.

KG

If you go overdrawn on your account, it is pretty safe to assume you don't have much money and therefore probably can't afford the service fees. It's like charging the poor for being poor. I think the average person doesn't go overdrawn purposely and when they do, they try and get money into the account ASAP. There are tons of "stupid" reasons that well intended people make small mistakes with their finances. A few examples: You deposit $100 at an ATM machine at 4:08 pm, go to the store at 5:00 pm, and pay $50, and put $35 gas in your car at 6:00 pm. It turns out that any deposit at that ATM after 4 pm is posted on the next business day, so next morning stop at the coffee store only to have the card rejected because you have a balance of minus-$55. You don't get another check till next week and the bank charges you $5 a day for each day that your account is overdrawn, so by the time you get paid, the account is over by minus-$85, which leaves you with a whopping $15 till you get paid next week. In this scenario, it was easy for the bank to see what had happened. They technically had the money in their possession, but they were unwilling to wave the charges. Why? Because it was policy and it "clearly stated" on the ATM. So what? Was I trying to do something sneaky or deceptive by using my money? Just because I didn't say "Mother may I?" they are actually taking the power to reduce or refund service fees away from the banks because they know that some employees are too nice and they will try and help people. Figuring that if they take away the ability to help customers then they might save money. Or the branch manager is able to waive one or two fees regardless of what the reason is, and then any more after that, no matter the reason, they aren't allowed. Give me a bank that doesn't operate like that and actually cares about people, and it would be the biggest bank in the world, because we, the struggling masses, are the majority. I won't name names, but it starts with BofA. They got my $70, but they lost my account. Take the $70 from the folks that don't need it. Not from the folks that need it to feed their kids. They get our tax dollars thrown at them and I don't even know how much they must get from all their "fees." Enough is enough.

KRC

My complaints are with Chase Bank. They have charged my son with $1000 in OD fees over the course of 1 year. Only $70 has been refunded to him. They continually approve debit charges even if his account is in the negative. On one account, because they process high amounts to low amounts, they charged him with 5 overdraft fees instead of 2. Their response: "Sorry, that is the way our system is set up. It helps the consumer avoid embarrasement by approving the charges. I thought there was a law in the banking regulation that states the bank cannot approve charges if the account shows a negative balance. It infuriates me because we will make a deposit to cover the negative balance (according to his on-line statement) and then the following day, they will charge him overdraft fees for the previous day (even though a deposit was made). My God, this has to be illegal somehow, someway. Chase Bank is stealing money from hardworking individuals (including me).

Rob

The fact of the matter is that consumers can easily avoid most of the fees simply by changing to a bank that does not charge any overdraft fees ever.

Steven

Wells Fargo locked my ATM card, so I could not make a deposit after a client gave me a bad check, then proceeded to drain my account of an additional $285 in fees as they continued to process ACH transactions. Apparently their stock ticker WFC stands for "We f___k Customers." Yet my small 6-person credit union will call me to let me know if something goes wrong with my account so I can avoid fees. Let these crooks die the death they deserve.

LDB

TO KRC and Danielle:

Step away from the debit card. Your problem is not the banks; it is, apparently, self-control over your personal finances. Getting charged that much in fees is just plain stupid on your part. If you don't have the money, don't spend it. Don't let the banks take advantage of you. Go somewhere else if you are upset about what's happened. As the saying goes, "A fool and his money are soon parted."

hunter3351

All the comments are great but what most forget is that being poor is not the only thing here but the banks changing tihe order of recieveing checks or debits to creat more fees for them selfs. As we get closer to the date that FDIC will make bank changes what we need now is to stop the check changing to create for fees programs that the banks use.All banks that have used this should be charge with a crime against humanity and starting at the top down. We bailed the banks out and now we get punished.This doesn t affect the rich because they have enough money no matter what the banks does. One mistake last year by $1 could cost thousands in fees today,so sit their on your safe chair and say "to bad" but the people will get to the point of no return and then we will see the total collasp of the private banking business and those vultures will have to prey on the rich,and good luck.Open your eyes America,write the news , Write to the President forget about congress they are happy with their life we need change in that department so show it in your vote next election. I did not vote for President Obama,but I remember what he said"I'am your President too",I want to believe that he is sincere in his beliefs and I feel he is for all the people.

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