Image: Banker © Roy McMahon, Corbis

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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Products geared toward low-income consumers have typically been offered by payday loan companies, storefront lenders or even big retailers like Wal-Mart Stores. Consumer Reports analyzed the prepaid card industry recently, and here's what it found:

  • Fees can be high, multiple and confusing.
  • Not all prepaid cards provide adequate protection against theft of funds that involve use of either the cards or their account numbers.
  • Promised credit lines or features to build a credit record may be expensive and overstated.
  • Federal deposit-account insurance for prepaid cards applies differently than it does for bank accounts and may be capped at less than the value of all of the prepaid cards issued by a particular card program.

In its analysis the group sampled 16 prepaid cards and found 13 of the 16 charge monthly fees, ranging from $2.95 for the nFinanSe card to $9.95 for the Vision Premier card and the Univision card. It also found 12 of the 16 cards impose fees for checking your balance at ATMs that range from 45 cents to $1 per balance inquiry.

Now some banks are getting into the game in a bigger way. As The Times notes, these banks say they're providing services for customers who might not be able to get banking access without them. That might be true, but it's a weak argument and one that does nothing for the low-income consumer.

Indeed, it seems the costs of banking outside of the traditional methods are higher, and the alternatives for departing banking customers are not much better. In fact, it looks a lot worse according to some of those prepaid card costs.

Here's BB&T CEO Kelly King making the point in a letter to shareholders recently:

"Particularly during these uncertain economic times, the deep and enduring relationships we form with our clients are crucial to both our success and our clients' financial well-being. Unfortunately, the value of these banking relationships has been too easily discounted or even dismissed in recent years as banks have unfairly borne the brunt of blame for the financial credit crisis. We believe it's important for banks like BB&T to reaffirm the value of having a relationship to help our clients meet their financial goals. For example, a national news reporter recently wrote about her experience living without a bank for only one month. In addition to the hassle of trying to pay bills and handle other routine transactions without a checking account, credit and debit cards or direct-deposited paychecks, the reporter was charged $93 in fees during the month for money orders, paycheck-cashing services and the like."

So, the bottom line for now is that the sad state of banking for the low-income consumer is more about picking your poison than anything else.

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