6/27/2012 5:55 PM ET|
Banks getting richer off the poor
As new banking regulations limiting debit and credit card fees take effect, some banks are recouping their money by targeting those least able to afford the cost.
It's not easy being a big bank these days. Consumers hate them, shareholders have beef with them, and regulators can't figure out what to do with them.
At the end of the day, though, a bank's gotta do what a bank's gotta do: make money. But how banks go about making that money is one way to differentiate them. The New York Times recently wrote about a few banks out there looking to boost business by offering products laced with loads of fees and plenty of interest to low-income consumers.
Some banks, namely U.S. Bank, Regions Financial and Wells Fargo, are luring low-income consumers to sign up for things such as prepaid debit cards and payday loans -- products that typically come with all sorts of fees and charges, The Times reports. Why are banks courting these customers with pricey products? Well, besides the obvious (fees), the products themselves weren't subject to the regulatory overhaul brought on by the Dodd-Frank reform act. That leaves more room for banks to make money in an environment where doing so has become more difficult.
The Times story features David Wegner. He makes about $1,200 a month and is looking for a checking account. He ends up at U.S. Bank, where he is offered all sorts of financial products geared toward low-income consumers. The branch offered him prepaid cards, check cashing and short-term loan options. He tells The Times that he felt he was being treated like a second-tier consumer.
The truth is that, when it comes to profitability, Wegner is indeed a second-tier customer compared with other customers with higher checking balances. And you know what? There are higher-tier consumers than the ones with bigger checking balances, too. Consumers with multiple mortgages, multiple checking accounts, savings, brokerage accounts and loans are valued more.
Nancy Bush, a bank analyst, puts it this way: "It goes back to the way some people have viewed banking. They treat banking like an electric utility, where, if you flip the switch, it has to be there for you. But the truth is banking is a business that aims to makes profits for shareholders."
Consider that 25% to 40% of checking accounts at the big banks are money losers. That's according to bank analyst Dick Bove, who says the way banks used to make money from those unprofitable checking accounts was through debit card swipe fees and/or overdraft fees. Regulations like the CARD Act and Durbin Amendment have dramatically shrunk the revenue from those activities. "In response, banks are either kicking out those unprofitable consumers by driving up fees or providing them with other products that are higher in cost," Bove says.
It's worthwhile to note that other big banks, such as Bank of America, JPMorgan Chase and Citi, aren't mentioned in the Times story. That's because they don't offer these so-called alternative lending products for low-income consumers, Bove says. Those banks don't rely as heavily on the retail banking sector for revenue and profits as banks such as Wells, Regions, U.S. Bancorp and Fifth Third Bank do.
The bigger problem here is that low-income consumers don't have much of an alternative when it comes to banking. There's a growing population of people who don't have bank accounts because they feel they can't afford it. They are called the "unbanked" and "underbanked," people who deal mostly in cash transactions and who say they can't afford bank fees. They are turning instead to things like prepaid debit cards, which the Federal Reserve says account for the fastest-growing noncash method of payment.
Unfortunately, those prepaid cards can also be laced with an alarming amount of fees and a lot less protection than a standard debit card.
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noone ever said you had to marry your bank...if you don't like what they offer, find another one, simple as that. It's your money that's being held there and noone can tell you what to do with it and as long as you're smart with what you have - you'll be fine without pre-paid this and payday loans...called a budget - we're paying off our loans as best we can (we have 2 car loans, school loans, and mortgage and a little bit of CC debt) and the way we are doing that is not eating out everyday, we cook at home, bring lunches to work...it takes a little while and some months are rougher than others, but you can do it.
all banks and credit institutions need to make money so it really doens't matter where you put your money - just find a place that offers decent rates on interest (WF has me earning a little bit on both my savings accounts and my checking too)...I'm still broke, but it's better than nothing.
This is one of the greatest points of the Movie "It's a Wonderful Life"...!!!!! Ain't it Mr. Potter?
Rich taking advantage of the poor? Can anyone say "Robin hood"...
Just sayin' there is enough literature out there to learn how to avoid this kind of Tyranny
Okay, for the folks at Forbes and the rest of you who agree with the position posited in the title of this article, try actually reading the article in an attempt to comprehend.
Banks would not exist if they did not make at least enough money to pay people to work at banks. Investors would not take the risk of investing in banks unless they actually get a return that make the risk they are taking worthwhile. Banks without investors do not have the ability to fund big projects - which will depress the economy even more (banks are already having to hold on to cash in order to meet capital requirements established after the TARP bailouts). Then, the Durbin Amendment limited "swipe fees". The loss of control of swipe fees eliminated bank control of a valuable revenue stream...they have to make that up or cease to exist (or I guess there could be only banks with less than 10 billion in assets since those banks are excluded from the fee control). Remember that banks were effectively limited in swipe fees by competition until this regulation was implemented...using a debit card was a completely voluntary act...if it cost too much, don't use the card.
Where can banks make up the lost revenue? They can either eliminate small accounts (those that cost banks money to maintain) or increase fees...which effectively does the same thing (raising fees on large accounts won't work because those accounts are necessary for banks to function and there will always be competition for those accounts).
Those things the banks are doing to 'get rich off the poor" (offering high interest short term("pay day") loans and prepaid debit ) are also voluntary. The "poor" don't have to use them. They don't have to give the banks money.
"The Poor" (if they are actually interested in not being poor) should look at local/regional banks which offer better deals on smaller accounts (because they can still charge sufficient swipe fees), go all cash, maintain small savings accounts at banks/credit unions which offer no fee savings (and use these banks for check cashing). There are lots of options.
Regardless, it is not the fault of banks for offering or allowing "the poor" to manage their money badly. "The Poor" should take care of themselves and stop making bad decisions.
I don't like the banks but I'm not seeing the issue. We now live in a world where everthing costs more and it will continue to as so much money has been printed it is next to worthless. We are all paying more for things. That includes the poor.
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