Sometimes it costs more to be poor, and with few exceptions, that truth holds steady with regard to how people pay for things.
I do not mean that the poor pay more for their goods and services - although they do. I mean that the poor end up utilizing payment instruments with higher fees and interest. The poor pay more to use credit, to pay with a debit card, and to receive funds from other sources.
If you can qualify for a premium credit card, then your bank will pay you to spend. An applicant can pick from a choice of generous incentives. Standard cash back cards give 1 to 2 percent. At the top end of the spectrum, The Chase Sapphire Reserve card rewards spenders with all 4.5 percent back on all travel and dining expenditures. Some cards give bonuses for particular categories, enabling some shoppers to curate their spending into categories.
In a period where ten-year Treasury bonds pay less than 2 percent interest, subprime credit cards routinely charge an annual fee and interest of more than 27 percent.
In a period where high-profile consumers can receive signup bonuses of $1,000 to get a credit card, secured credit cards require people to set aside funds as a condition of receiving a card.
At a time when some banks will pay a checking account sign-up bonus of as much as $500, others will be turned away when they attempt to open an account and make a deposit.
Some people receive a reward for establishing a recurring direct deposit to a checking account. Other individuals give up three percent of their paycheck every two weeks.
How Much are the Poor Paying to Pay?
Consumers spent $2.1 billion to convert their checks into cash in 2016. Depending upon a consumer’s state and the type of check they present, fees can range from one to three percent of the item’s face value. Over the course of the year, a minimum wage worker will spend as much as $450 just to convert pay to a spendable form.
If they want to transform their cash into value on a card account, they probably have to purchase a “load” at a local store. Green Dot, the owner of MoneyPak loads, sells between $10 and $40 million in such devices every year. With a MoneyPak, a consumer can put up to $500 on a debit card. The service costs $5.95 – so at the very least it costs 1.2 percent to convert cash.
A banked or unbanked person can use bill pay by going to a licensed money transmitter. Were I to pay my monthly car payment through Western Union WU Pay , I would pay a transfer fee of $9.99.
Providing payments to the unbanked is a multi-billion dollar industry.
Why Are They Moving Away from Accounts?
Banks find it much more difficult to make a profit on low-income
workers. Banks value checking accounts for two reasons. First, banks love the
chance to acquire deposits at a low cost. Today, most checking accounts do not
pay any interest. If they do, the rates are probably less than ½ of 1 percent.
Banks can capture those funds and loan them out at much higher rates of
interest. Second, banks earn money when consumers use their debit cards. A
swipe produces at least 25 cents in revenue for the bank and sometimes even
Unfortunately, low-income households are unlikely to do much
of either. Add in the fact that banks have fixed costs (branches, ATMs),
substantial costs for following rules, and it begins to make sense that they would be cautious about fighting to
take business away from check cashers.
Still, having so many
unbanked households creates additional costs for society. Even if individual
banks do not want to serve them, the public will benefit when more employers
can pay workers by direct deposit.
The first step is to
understand whom we are talking about when we discuss the “unbanked.” When
the FDIC set out to learn more about who
was opting out of the banking system, they found two common features about
One) they tended to have below average incomes.
Two) their incomes tended to ebb and flow. Living with cash flow volatility
correlated to being unbanked, even among those persons with average or
The problem they face, and the reason that they walk away
from accounts that other consumers would keep, is because of balance minimums. Minimum
balance requirements create systematic hurdles to financial inclusion.
So, it is not surprising that
when the FDIC asked unbanked consumers why they avoid banks, the most common
reason was “I do not have enough money to keep in an account.”
Low-balance habits trigger
minimum balance fees. They can also lead to expensive overdraft charges.
In 2015, account holders paid more than $15 billion in overdraft fees. In a 2008 report, the FDIC established that 80 percent of overdraft fees were paid by only 20 percent of all bank
while many people can swallow a $37 cost
and chalk it up as a foolish mistake, lower-wealth households may fall into a
short-term financial crisis. An overdraft fee
of that magnitude amounts to five hours of work for a minimum-wage worker
(North Carolina) in my state.
Low-income workers conclude
that the risk is not worth it. They opt
The Banks are Opting
Out as Well
Most banks – particularly those with significant branch networks – are still shy about taking on these
When Bank of America announced plans to cancel its eBanking checking account, it spoke to that tendency. B of A will move those
accounts to a new one that will impose a monthly of $12. Holders of those new
accounts can avoid a fee, but there are conditions: they must either maintain a
balance of more than $1,500 or have direct deposits of $250 in the prior month.
While eBanking accounts had fees, they could be
avoided by not using a teller and receiving electronic statements.
Online and prepaid debit card bank accounts are one fix.
Since they do not have the expense of
paying for bank branches, they can pass on the savings to their customers. Their
motive is interchange, and with their reduced operating expenses they can still
derive a profit without the benefit of so many low-cost deposits.
I am optimistic that we will
see more consumers opt back into banking
through these lower-cost accounts.