The Poor Pay More to Bank

by
Adam Rust

Sometimes it costs more to be poor.

Paying is one of the cases where this is true.

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.

Unfortunately, it is the opposite for people at the other end of our economy. The working poor frequently have to pay to spend. Sometimes they even pay to hold money.

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.

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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 more.

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 their finances: 

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 higher-than-average incomes.

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 customers.  However, 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 out.

The Banks are Opting Out as Well

Most banks – particularly those with significant branch networks – are still shy about taking on these customers.

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.  

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