The Banks Don’t Want Everyone's Business

by
Adam Rust

When Bank of America announced that it would eliminate free checking accounts, it only underscored how many big banks don’t want to provide services to low-wealth consumers.

Bank of America says that starting this month, it will charge customers a monthly fee of $12 unless they make a direct deposit of at least $250 or maintain a monthly balance of $1,500. While some lower-income workers will still be able to avoid that fee by using direct deposit, others will most probably not have that option. Some employers – particularly smaller companies – are yet to implement direct deposit.

Why did Bank of America make this decision? I believe that their logic goes back to the costs of providing accounts.  

Picture of card
Picture of card
Picture of card

The cost of providing an account is a lot higher than you might think.

According to the American Bankers Association, it costs at least $250 to acquire a new customer. The ABA says that banks spend more than twenty dollars each month after that. 

The chart below explains the overall proposition.

Cumulative revenue and expense to a bank (1 year) of offering a checking account.

Costs include:

·         Advertising for new customers

·         Vetting their applications.

·         Creating and mailing a debit card to their address.

·         Providing a branch, complete with tellers and safe deposit boxes.

·         Building out and servicing a network of ATMs.

·         Staffing a call center.

·         Ensuring privacy and data protection.

·         Creating and maintain their IT systems.

·         Compliance with laws and prevention of fraud.

·         Mailing statements.

·         Processing payments.

The net result: only a small percentage of checking accounts turn a profit for the banks. In most cases, the checking account is a loss leader. The bank keeps an unprofitable customer in the hope that he or she will apply for a credit card, get a car loan, or get a home mortgage loan.

A few years ago, the prospects for earning a profit dimmed when a new rule put caps on the amount of interchange that banks could receive from swipes. It was a political battle between the large retailers and the banks. The retailers won.  

Because nothing about how checking accounts make money changed, retail banking lost some of its steam. Not coincidentally, this was about the time when banks stopped advertising about their debit cards and instead began a full-court press to get us to come back to our credit cards.

Most of the revenue from a checking account comes from two sources: the amount of “interchange” that banks earn when you swipe your debit card at a store and the fees you incur when you use the account. Interchange is the name for the charges that retailers pay to the card networks (VISA, MasterCard, AMEX, et al.) when you swipe a card at a store. Banks get a portion of those fees. Even lower-income customers use their debit cards frequently, but because of changes to interchange rules, the total revenue per swipe is lower than it used to be.

While swipe revenues might have dropped, banks still benefit from overdraft fees and minimum balance fees. They tend to enjoy more of those from lower-wealth households. However, that’s not an ideal system. We don’t want a payments ecosphere that derives most of its income from the most impoverished customers. If you don’t think that sounds fair, you are not alone.

But modern online or app-driven prepaid debit cards don’t face the same challenges.

According to one card provider, it costs about $6 per month to provide an online bank account. Suddenly, customers who weren’t profitable as users of a checking account become attractive to companies that have prepaid debit cards or payroll cards.

WiseWage is trying to move more workers into bank accounts. That’s our fundamental goal. It’s what we do. Knowing what we do about the interest – or the lack thereof - that many banks have for unbanked households, we knew that we had to partner with prepaid debit card companies, with payroll card programs, and with checkless overdraft-free bank accounts.

We’ve produced a site where anyone can get an account, regardless of their credit score and even if they don’t have enough money to cover a minimum average daily balance requirement. We have debit card accounts that don’t rely on overdraft fees to cover expenses. None have – or will ever have – an overdraft fee. If one of our partners decided to introduce overdraft, we would cease to work with them. We are taking a stand for you – the consumer!

 

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