For many Americans, a checking account is the basic building block of assets building and establishing a long-term financial history. Although the consumer benefits of full-service checking accounts are well known by banks, the country’s top five banks (Chase, Bank of America, Citibank, U.S. Bank, and Wells Fargo) are making it harder to maintain these accounts by attaching fees to the most basic banking transactions.
Prior to the collapse of the economy, banks focused heavily on building relationships with customers by offering incentives such as free checking. Free consumer checking accounts were issued with the expectation that they would develop into deeper banking relationships with customers who also needed mortgages, loans, and credit cards. However, the recent trend among big banks has been to try to recoup lost revenue, resulting from the government restrictions promulgated under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, by increasing the amount and type of fees on checking and other accounts. This is despite the fact that annual reports from each of the five major banks show a steady increase in profits since the $700 billion bank bailout in 2008.
A closer look at the new checking account fee structures adopted by the major banks shows that they provide incentives only for the most profitable account holders. According to Moneyrate.com’s 2012 rate survey, the average amount required to open a checking account was $408.76, up from $391.41 in 2011. The higher this minimum becomes, the more low-income customers are forced to go unbanked. In fact, the 2011 FDIC survey of the unbanked and underbanked showed that the number of unbanked households increased from the results of the 2009 survey. It also noted that, of those households that are underbanked (meaning that they have at least one account with a financial institution but also use alternative financial services), 29.3% do not have a savings account, while about 10% do not have a checking account.
Banks have also increased monthly fees. Among banks that charge a monthly fee, the average cost was $12.08, up from $11.28. Yet, all major banks waive monthly maintenance fees if a customer has direct deposit, has multiple financial relationships with the banking institution, or has high account balances—the 2012 survey data showed banks required an average balance of $4,446.57 to get a monthly fee waived, up from $3,590.83. Most low-income account holders, however, do not qualify for fee waivers and can spend up to $145 a year just to maintain their accounts. Thus, banks are simultaneously making the fees harder to avoid for low-income clients, while offering wealthier account holders free full-service checking accounts.
Unsurprisingly, customers who do not have enough cash assets to qualify for a fee waiver or who cannot afford the new monthly fees associated with basic banking accounts are looking to new ways to manage their money. This has resulted in many low-income consumers switching to prepaid cards as an alternative to traditional banking. In 2001, an estimated $57 billion was loaded onto prepaid cards, and this figure is projected to grow 47% to $167 billion by 2014. Prepaid cards work like debit cards, except they do not require a bank account. Although originally offered by non-bank entities, four of the five major banks are now marketing prepaid cards as an attractive alternative to full service bank accounts, and advertising them as a low-cost alternative to traditional checking accounts. What most customers do not know is that prepaid cards are not as regulated as banks and leave customers vulnerable to financial insecurity. According to a study by the PEW Foundation, most of these cards carry between 7 and 15 different kinds of fees. Additionally, depending on how they are structured, many of these cards may not have FDIC insurance, which protects deposits up to $250,000.
The current state of customer-bank relations further highlights the need to provide low-income consumers with low-cost alternatives to traditional banking, while also providing the financial protections missing from prepaid cards. In response to these needs, in 2011 the FDIC launched a Model Safe Accounts Pilot. This pilot was a case study designed to evaluate the feasibility of financial institutions offering safe, low-cost transactional and savings accounts that are responsive to the needs of underserved consumers. Safe Accounts are checkless, card-based electronic accounts that allow withdrawals only through automated teller machines, point-of-sale terminals, automated clearinghouse preauthorizations, and other automated means. The final report on the pilot, which was released in April of this year, showed that most institutions reported that the cost of offering Safe Accounts was roughly the same if not lower than the costs of offering other accounts because the pilot accounts do not have any paper check-related costs.
More recently, the California Reinvestment Coalition designed the SafeMoney account as another template for use by banking institutions across the country. SafeMoney accounts are geared toward low-income households and offer safe and affordable full-service checking account services for a flat monthly rate. SafeMoney accounts provide customers access to a debit card, money orders, bill pay, and remittances so that customers can do all of their financial transactions through one account, while also providing the necessary consumer protections missing from prepaid cards, such as liability from theft, fraud, or unauthorized use. SmartMoney accounts also prohibit overdraft fees and provide customers with real time information on account balances.
Unfortunately, “free checking” is likely a thing of the past; however, if the major banks utilize models such as the Safe Account or the SafeMoney account, low-income customers will have access to one of the basic building blocks of financial stability and economic mobility.
This blog post was coauthored by Stephanie Patterson.