To find out, Servon took her field cultivate to an unusual level, actually taking a job as a teller at a check casher and then at a payday lender. She reports her startling findings in a fresh koran, “ The Unbanking of America. ” Chief among them : check cashers are much cheaper and about always more guileless than banks. In fact, low-income customers don ’ thymine faith banks, largely because they charge unexpected sustenance and overdraft fees. As it turns out, banks are making a bunch from such fees. Servon shares why below .
Watch our broadcast fib on “ The Unbanking of America ” on Thursday ’ s PBS NewsHour .
— Paul Solman, Economics Correspondent
In 2009, the Federal Deposit Insurance Corporation conducted the first of its biennial Surveys of Unbanked and Underbanked Households. The survey groups people into three categories : banked ( they rely only on banks and credit unions ) ; unbanked ( they have no bank account ) ; and underbanked ( they have a bank account but besides use alternative fiscal services such as check cashers and payday lenders ). This way of classifying consumers implied that banks are the best option for everyone. Policymakers, alarmed by the finding that about 8 percentage of Americans are unbanked and another 20 percentage are underbanked, began to devise strategies to move everyone into a bank account .
During my fieldwork as a teller at a crack casher in the South Bronx, I learned that many of my customers couldn ’ thymine afford banks. A holocene survey conducted by Pew Charitable Trusts found that the most common argue given for not having a bank bill was overdraft fees .
The average charge per overdraft went from $ 21.57 in 1998 to $ 31.26 in 2012. similarly, average ATM fees more than doubled between 2001 and 2014 .
Over the past 30 years, banks have become increasingly reliant on all kinds of fees. Bankers work with consulting firms to figure out how to turn services like overdraft protection and ATMs into cash cows. once bankers experienced this raw manner to profit from overdrafts, it was impossible to go back. Lyn Farrell, managing director at the bank advisory tauten Treliant, said that one bank CEO told her : “ It ’ s like a drug. once people get this, it ’ s like a drug. ” Joanne Barefoot, whose career includes stops at the U.S. Department of Housing and Urban Development, the Federal Housing Administration, the Federal Home Loan Bank Board and a time as deputy restrainer of the currentness, agreed : “ I ’ ve learn people say it ’ s like crack cocaine. ” In a Bank Director magazine article published in 2011, a Haberfeld Associates executive boasted that banks working with his firm render 86 percentage of their tip tax income from overdraft and other new fees, which the firm calls the “ aureate mine of checking. ”
And it wasn ’ thymine barely overdraft fees. Ellen Seidman, a aged boyfriend at the Urban Institute, explained that alleged free check, the ability to overdraw an report and variable interest rates on citation cards initially seemed to be commodity for consumers. But once banks began to see that these products and services could be profitable, she noted that “ badly things started happening. ”
The median cathexis per overdraft went from $ 21.57 in 1998 to $ 31.26 in 2012. similarly, average ATM fees more than doubled between 2001 and 2014. Some banks began to charge $ 1 or $ 2 for paper statements and up to $ 25 for a substitution debit card .
many consumers became excessively reliant on overdrafts. Some who lack other sources of funds use overdrafts like a short-run loan. unfortunately, a one overdraft can result in cascading bad checks and hundreds of dollars in charges .
Let ’ s take a count at precisely how this works : Say you have $ 100 in your account, and today you have an automatic student-loan payment of $ 110 scheduled. The automatic rifle payment will result in a deficit of $ 10. The bank will charge a $ 34 overdraft tip, which is typical for bad banks. You nowadays have a deficit of $ 44. think you besides use your checking-account debit card that day to purchase $ 25 worth of groceries. That purchase will trigger another overdraft, and you will be charged another $ 34. For $ 135 worth of transactions, you have been charged $ 78. But it may not stop there. If the account balance remains overdraw for five consecutive business days, the deposit will charge an extend overdraft tip per item, typically between $ 15 and $ 35.
READ MORE: Column: How much do the poor actually pay in taxes? Probably more than you think.
It ’ sulfur quite possible that the chain reaction started with a common miscalculation : You presumed that a check you had deposited into your account would clear before the student-loan payment came due. But your confirmation took a sidereal day longer than usual to clean. Banks depend on these miscalculations. In 2014, Americans paid about $ 32 billion in overdraft fees .
Dodd-Frank, the 2010 legislation passed in the wake of the fiscal crisis, took a big bite out of banks ’ ability to generate overdraft and other fees, but banks have figured out how to get around it. In May 2014, Haberfeld Associates presented a webinar showing participants how overdraft protection could continue to function as an income stream for banks, even after Dodd-Frank required banks to get customers to opt in to the serve. The paperwork for setting up an history was so opaque that closely half of all consumers who overdrew their accounts didn ’ triiodothyronine remember opting in to overdraft protection .
In February 2015, Adam Griesel, the current CEO of Haberfeld, wrote an article titled “ Add Customers, Grow Profits, ” in which he advised banks to market release checking accounts to customers and then turn those customers into fee generators. Checking accounts, Griesel wrote, are the gateway to a range of other bank products — debit cards, paper checks, overdraft protection — that beget fee income. Having a check account is typically a consumer ’ mho main rationality for working with a bank. sixty-four percentage of consumers entirely use a debit calling card from that report, and free-checking customers use an average of 4.75 products and services, all of which generate tip income. Haberfeld Associates found that customers with debit cards generated more fees per annum, $ 336, than other customers, who generated only $ 260 .
Another big-bank practice is called “ debit resequencing ” ; the bank processes the debits and credits to an account in a way that causes bill balances to fall faster, thereby boosting likely overdraft fees. In February 2012, Chase settled a class-action befit accusing the bank of charging excessive overdraft fees. In November 2011, Bank of America was ordered to pay $ 410 million to customers for wrongfully charging excessive overdraft fees resulting from debit resequencing. Despite these two huge suits and subsequent regulative military action, 44 percentage of banks included in a recent study still engage in this practice. The numbers are decreasing, but not enough .
here ’ s how debit resequencing works. Let ’ s say that on a given go steady you send two checks — one to your credit card company for $ 150 and another to your local electric party for $ 75 ; the credit poster company and the electric company try to get their money from your account on the same date. An automatic withdrawal you ’ ve set up to pay your rent besides hits your history, and your rent is $ 500. On the date that those three things hit your account, you have a balance of $ 100. The bank could clear the $ 75 charge beginning, resulting in two overdraft fees. rather, many use software that reorders the transactions. This software presents the $ 500 load foremost, then the $ 150 appoint and ultimately the $ 75 cathexis, and you end up paying three overdraft fees alternatively of two. Banks make this choice in order to maximize profit rather than do right by their customers .
Worn down by escalating fees, errors in their accounts and endless hours on hold with customer “ service ” representatives, they ’ ve merely had it.
In their book “ Phishing for Phools, ” the Nobel Prize–winning economists George Akerlof and Robert Shiller argue that the unblock marketplace encourages handling and deception. “ The economic system, ” Akerloff and Shiller write, “ is filled with trickery. ” Manipulation and magic trick, from opaque fees to unethical debt-collection practices, run through the entire consumer financial-services organization .
Banks lodge funds into customers ’ accounts merely five days a workweek, but seclude funds seven days a week. How can you plan when you don ’ thymine know when you ’ ll get access to your money ? The lag between depositing checks and being able to entree cash explains why so many working people who get paid at the end of the workweek go to the check casher — they need that money to buy food and to pay bills. They can ’ thyroxine wait for their checks to clear .
With practices like overdraft fees and debit resequencing, it ’ sulfur hard to argue that banks are working in their customers ’ best interests. When I travel around the country talking about my oeuvre, people mob me, telling stories of how their banks have wronged them. Worn down by escalating fees, errors in their accounts and endless hours on hold with customer “ serve ” representatives, they ’ ve merely had it .