A Skeptical View of Second Chance Checking Accounts

by
Adam Rust

With only a few exceptions, second-chance checking accounts are hardly worthy of their name. All too often, a better descriptor could be "punishment accounts" or "fool you twice accounts."

I say that because they combine very high fees with an overdraft, and in doing so, they demand a rethink of the nominal value of a branch bank relationship. I hear people opine that a traditional bank account of any stripe will serve a lower-wealth consumer better than a prepaid card would. I beg to disagree. Nowhere does that perspective seem more relevant than with the case of second-chance checking accounts.

While the high maintenance fees justify my skepticism, the overdraft fees packaged within these accounts concern me the most. In many cases, it was overdraft that pushed someone out of the payments system in the first place. Government surveys peg overdraft fees - specifically the desire to avoid them - as one of the main reasons for driving some people out of the banking system. They walk with their feet, as Tiebout might say, right out the door of the bank.

Banks contend that they want to do their part to address the problems posed by the unbanked. However, when an institution markets an overdraft-enabled account to people who are trying to re-start, it undermines the whole endeavor. In an era when regulators are working hard to protect consumers, the second-chance checking account stands out - and not in the right way.

Woodforest National Bank consistently ranks among the highest of all banks in their overdraft fee revenue. Even though they are a small institution, they collect more in overdraft fees than do some of the nation's largest banks. Reviewing the FFIEC's new data on overdrafts, I was surprised to see that such a small institution could place so highly when they have only a tiny fraction of the deposit base. There they are, having collected more in overdraft fees than did Capital One, Citibank, or Fifth Third. To make it more confounding, I found that Woodforest charges what would be considered to be a relatively low overdraft fee. So while the overdraft fee (on most of their checking accounts) is still not cheap, most banks penalize a consumer for more.

How does this happen?

Woodforest doesn't provide much leeway for people to make a mistake. In my review of over 100 checking account terms & conditions disclosures, I could not find another with such a small cushion.  
Woodforest's policy does not give its customers much of a second chance.

Not too long ago, I spoke with North Carolina housing counselor. She managed a shop that helped people restore their credit.
She told me that Woodforest sent a representative to her agency. "He was a nice young man," she said, "but he tried to get me to sign my clients up for their overdraft checking account!"

"Don't they have one of those second-chance products?" I asked. "It seems like that might be useful for some of your clients." As an HUD-certified counselor, she sees borrowers who are attempting to modify their loans in order to stave off foreclosure.

"Exactly," she said. "They do. However, guess what! It has overdraft fees! I dressed him down and sent him on his way!"
I have known this counselor for a few years, and I can attest that people rarely misconstrue her meaning. When she is not happy, everyone in the room knows it.
Second Chance Checking at Woodforest costs $11.95 month. The fee is reduced to $9.95 if the consumer can meet certain conditions. An overdraft, if approved for payment, costs $29.
However, was this a case of a bank with an outlier checking account? I decided to see what second-chance accounts looked like at other banks.
I was surprised. The typical second-chance checking account has a monthly fee of over ten dollars. Many have an account opening and an account closing fee. Paper statements cost three of four dollars. Sometimes there is a fee to get a debit card!

Consider BBVA Compass' Easy Checking account:

- It costs $13.95 per month.
- You have to pay a five-dollar fee if the account becomes dormant and another $25 if you close the account less than six months after it was opened.
- A paper statement costs three dollars.
- Each overdraft costs $38, and the consumer can be charged for as many as six overdrafts in a single day.
- There is also a stop payment fee of $25 and an NSF fee of $38.
- The bank processes chronologically throughout the day, but it is still the case that deposits are only credited on business days.
Bank of Texas' Opportunity Checking costs $14.95 per month. There is a fee for bill pay and additional per-transaction fees if the consumer uses online bill pay more than fifteen times in one month. Bank of Texas' Opportunity Checking clears its checks on a high-to-low basis.

High-to-low provokes overdraft. Additionally, Bank of Texas applies an extended overdraft fee after five business days. After that, the account is debited $6.50 on each business day where the account remains in the negative.

At Webster Bank, consumers of their second chance account will pay $37 for each overdraft. The monthly fee is $16.95. With direct deposit, the cost drops to $11.95. It also has a dormancy fee and an early account closure fee.

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