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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Everything your talking about I've experienced. You here things like you need overdraft protection. Overdraft protection just makes it easier to swipe the card for an interest rate, rather than a bank penalty. With the Overdraft fee, you can drive up one hell of a debt to the bank, with the end result, that you close your account, and are not able to open another bank account unless you pay the amount owed. The bank in turn writes off the loss, so they make more money from taking the loss than keeping the account active, ofcourse they need the consent of the individual to close at $5.00/ day it's understandable, and if the individual doesn't have credit, it's because they are irresponsible.
People that make above average incomes don't seem to acknowledge the fact that they set the stage for creating demand, by creating a dependence for a product, or a service, this in turn becomes distorted, taken for granted and blame gets pushed around. Want to blame somebody, stop, look, listen, then look in a mirror and say I love myself today.
banks charge fees to people with low income. its simple than for low income people. If you don't want to be charged those fees, then don't borrow money from those banks.
Whats funny is that banks don't normally give loans to low income people to begin with because they usually don't have the means to pay the loans back. So if you want to borrow the banks money, then you pay a fee, or choose not to borrow it and pay those fees.
Noone is making anyone borrow money from the banks.
I don't really like the banks at all. That being said, this is another case of the government meddling in pivate business, in this case Barney Frank and Chris Dodd, creating regulations on the banking industry, especially regarding fees they could charge to businesses regarding debit card transactions. When those debit card processing fees were dramatically reduced, the banks did what any business will do, figure out a way to offset those losses. In this case, it was on the backs of those who can least afford it. It's the same story every time. When the government imposes more regulations on the oil companies, they just raise the price at the pump to offset the losses. The rich guy driving the Ferrari doesn't care; it doesn't change his lifestyle. But the little guy trying to commute back and forth to work is the one who gets hosed. It's the law of unintended consequences.
Interestingly, almost all of the 412 banks that closed since 2008 were small local or regional banks because they could not continue to operate at a profit due to all the government regulating. So they were really forced out of business by the government. This eliminated much of the competition for the big national banks which in turn allowed them to charge additional fees to the little guy who has the least options.
Yet this article paints the banks as the villains (which they ofter are) and paints the government, (who really caused the problem) as the savior, which they're not. Another campaign piece for Obama.
Screw the bank and join a credit union. I am very close to dumping Wells Fargo for a variety of ethical and moral reasons. Credit unions have better rates on everything. I think if more people pulled their money from the big, fee-laden banks and put their money in credit unions, we might see a market-induced turn around on the part of big banks.
Ashleymalagant, you talk like a politician? The US gov has bailed out some of the banks. Bankers take huge risks ( JPM for example ) to pad their balance sheet. They make tons of money and and still want to jab you more. We hear about new unethical events almost weekly from banks and you want to defend them. You must be a politician!
I guess then I must be one of the "dumb" and uneducated 50% you refer to because Bank of UNAmerica charged *ME* an overdraft fee of $25.00 when THEY overdrew my account by one PENNY when I went to close it.
I walked in knowing exactly how much I had in my accounts. When I got there, the rep told me I had a few extra "pennies" of interest that had not yet posted to my account. She wrote down the new figure (first person) and then filled out the withdrawl slip for a bank check. She took that slip up to the TELLER (second person) who processed the transaction and gave her the bank check. Then, she went to the bank manager (third person) who reviewed the process and signed the check.
The check was made out for $.01 MORE than what I had. This cauesd an overdraft condition of one PENNY when I deposited the check in my credit union. That created a $50.00 advance on my overdraft line of credit (first time it was EVER used). They charged me a $25.00 fee and interest that started computing the DAY the overdraft occured.
How did I find out? Almost 30 days later when I got a credit card statement for almost $80.00 for the overdraft, the FEE and the finance charges.
Yup, another stupid American living off the government tit who is claiming banks are big fat thieving CROOKS who are out to get the average American.
And remember... THREE BANK EMPLOYEES all reviewed and APPROVED the dollar amount of the withdrawl that was one penny more than my account.
Go ahead and explain that one away.
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