The U.S. banking system “has become a reverse Robin Hood, taking money from those with less and giving to those who already have.”[1] A recent survey by the Federal Deposit Insurance Corporation (FDIC) indicated that over seven million unbanked individuals live in America, “meaning that no one in their household had a checking or savings account[.]”[2] Considering the rise of cashless businesses[3] and the difficulty in paying bills without a bank account[4]—it seems imprudent that people would voluntarily choose to remain unbanked, as banking is generally “viewed as the safe, stable, and proper way to manage one’s finances[.]”[5] Why do so many individuals remain unbanked when the lack of banking access constrains their abilities to lead financially secure lives?[6]

The answer: impoverished individuals tend to view bank accounts as a luxury that they cannot afford.[7] While critics may cite other reasons for individuals choosing to remain unbanked, data from the FDIC demonstrates otherwise. The data shows that over half of the unbanked respondents previously possessed bank accounts, and 34.2% of respondents reported that they are unbanked because account fees are too high.[8] Moreover, roughly half of the respondents did not have enough money to cover minimum balance requirements.[9] Additionally, over a third chose to remain unbanked because fees were unpredictable.[10] Given the foregoing reasons, it is no surprise that unbanked rates are 488% higher among lower-income households making less than $30,000 annually, compared to households making more than $30,0000 annually.[11]

 

Understanding Account Maintenance Fees

Critics may contend that individuals should pay for the services they use. A fair point, but in actuality, the preponderance of banking fees are paid by low-income individuals[12] while banks wave fees for individuals with middle-class incomes and above.[13] For example, account maintenance fees are charged when bank customers do not meet certain account requirements. Account maintenance fees can range more than $200 annually for a basic non-interest-bearing checking account that does not have check writing or the ability to be overdrawn.[14] While middle-class consumers can avoid maintenance fees by retaining a minimum monthly balance or meeting monthly direct deposit amounts, low-income depositors are unlikely to meet these thresholds considering the maintenance requirements are a significant portion of their income.[15] To put this in perspective, consider individuals earning the federal minimum wage of $7.25 an hour.[16] To meet the $1,500 minimum balance requirement posed by banks such as J.P. Morgan, Wells Fargo, Citibank, and Bank of America,[17] minimum wage earners would have to save over 200 hours of pay before taxes.[18] Two hundred hours is more than an entire month’s wages, as the typical work month is only 160 hours.[19]  How likely is it for someone to save more than a month’s wages when they struggle to make ends meet? Exceedingly improbable at best, considering the median savings account balance for the lowest earners was $800 in 2019.[20] As a result, those with money experience “free checking” while those without must pay fees to maintain bank accounts.[21]

Some may point to savings accounts as a low-cost alternative to checking. While it is true that some saving accounts offer slightly lower fees, the vast majority of banks do not offer free savings accounts.[22] Several banks charge more than $72 annually to individuals that do not maintain a balance high enough to meet minimum deposit amounts for savings accounts.[23] Moreover, under the Federal Reserve Board’s Regulation D, individuals are limited to six penalty-free withdrawals from their savings accounts every month.[24] Some banks further limit that amount to three withdrawals per month.[25]  When individuals exceed their withdrawal allotment, banks impose up to $15 in fees for each subsequent withdrawal,[26] and in some cases, banks will even close customer accounts for excessive withdraws.[27] Even though savings accounts are slightly cheaper than checking accounts, current banking policies frustrate using a savings accounts to pay bills. Therefore, when considering the rise in cashless businesses,[28] higher-cost checking accounts are likely the most practical way for low-income individuals to pay bills.

 

Why Do Account Maintenance Fees Exist?

Still, the question remains: why are account maintenance fees structured so that they fall disproportionally on low-income account holders instead of the individuals who can afford them? The only fair and logical reasons are (1) account maintenance fees are needed to capture costs associated with low-income account holders, or (2) banks use account maintenance fees to supplement income because low-income account holders are not profitable.

First, individualized transaction costs and data from the FDIC undermine the assertion that account maintenance fees are needed to capture costs associated with low-income account holders.[29] For example, most individualized costs are captured by transaction fees. Specifically, banks charge around $3 for non-network ATM withdrawals, $36 annually for paper statements, $20 monthly for inactivity, and $35 per overdraft transaction.[30] On top of that, banks have fees for returned checks and deposits, foreign transactions, new and reissued debit cards, and account closing fees.[31] Therefore, what individualized costs are not already captured by transaction fees, perhaps branch visits? The marginal cost of branch visits seems unlikely to explain why such fees are imposed, because the FDIC’s data shows that individuals with family incomes under $30,000 are less likely to visit bank branches than those who make over $30,000.[32] Therefore, banks likely do not need account maintenance fees to offset costs because individualized transaction fees already capture most costs associated with low-income account holders.

Second, even if low-income accounts are not as profitable or unprofitable for banks, it is unjust for banks to offer free or reduced-fee accounts to studentsand not offer those same breaks to those living in poverty. [33]  Many banks offer students free accounts or accounts with reduced minimum balance requirements.[34] So why do banks not offer those same concessions to those living in poverty? Sure, banks may offer concessions to students with the hopes that student accounts will become profitable after students graduate and experience wage and savings growth. However, is it not fair and equitable for banks to take the same chance on those living in poverty? Do those living in poverty not deserve the chance for their accounts to become profitable?

 

Final Thoughts & Conclusion

Here, the issue is that banking fee practices seem to fall on poverty-stricken individuals for no apparent reason other than not meeting an arbitrary balance requirement. Low-income people deserve access to bank accounts to store their hard-earned dollars and pay bills because America is becoming a cashless society. If banks can provide banking services free of charge to those with money,[35] they should afford those same luxuries to individuals who struggle to make ends meet. Anything less is unjust and deleterious to those who already have so little. Frankly, it is uncanny that such common-sense banking measures do not exist already. Even the American Bankers Association is calling on banks to “reduce the number of unbanked and underbanked Americans.”[36]

Two hundred dollars in savings may not seem like much to those reading this, but it is close to thirty hours of work before taxes to those earning the federal minimum wage.[37] With $200 in savings, a single parent may then be able to take off work and spend time with their children or celebrate a holiday/birthday that would have otherwise gone unobserved. Whatever the use, eliminating regressive banking fees would allow low-income individuals to keep more of their hard-earned income.

While proponents of income and wealth equality propose a myriad of controversial and cumbersome regulatory measures to bridge the wealth gap—how effective are such measures when banking fee practices continuously drain money from the disadvantaged who are simply trying to save and pay bills? Stated differently, can those in poverty escape inequality without first being empowered to save? It is time for Congress to take action. Banking fee practices should be consistent across all income levels. Everyone—regardless of income level—should have a free and secure means to store their money and facilitate bill payments. If Congress continues to stand idly by, current banking practices will continue to charge low-income individuals for being low-income.

[1] Aaron Klein, Top 5 Financial Regulatory Priorities for the Biden Administration, Brookings (Nov. 9, 2020),  https://www.brookings.edu/opinions/top-5-financial-regulatory-priorities-for-the-biden-administration/.

[2] Federal Deposit Insurance Corporation (FDIC), How America Banks: Household Use of Banking and Financial Services, 2019 FDIC Survey 1 (Oct. 2020) [hereinafter FDIC], https://www.fdic.gov/analysis/household-survey/2019report.pdf (emphasis added).

[3] Jay Stanley, Say No to the “Cashless Future” — and to Cashless Store, Am. C.L. Union (Aug. 12, 2019, 3:30 PM), https://www.aclu.org/blog/privacy-technology/consumer-privacy/say-no-cashless-future-and-cashless-stores.

[4] Planet Money, Biden Time, National Public Radio (NPR), at 03:12 (Nov. 13, 2020), https://www.npr.org/transcripts/934678095.

[5] Banking and Poverty: Why the Poor Turn to Alternative Financial Services, Berkley Econ. Rev. (April 15, 2019), https://econreview.berkeley.edu/banking-and-poverty-why-the-poor-turn-to-alternative-financial-services/

[6] Charles Davidson, Lack of Access to Financial Services Impedes Economic Mobility, Fed. Reserve Bank of Atlanta (Oct. 16, 2018), https://www.frbatlanta.org/economy-matters/community-and-economic-development/2018/10/16/lack-of-access-to-financial-services-impedes-economic-mobility.

[7] See infra notes 8-11 and accompanying text.

[8] FDIC, supra note 2, at 3.

[9] Id.

[10] Id.

[11] See id. at 13 (Showing that 33.7% of unbanked respondents make less than $30,000 compared to 6.9% of unbanked respondents who made over $30,000) (37.7 divided by 6.9 = 4.88 or a ∆ of 488%).

[12] See generally Julie A. Hill, Transaction Account Fees: Do the Poor Really Pay More than the Rich?, 15 Univ. Pa. J. of Bus. Law. 65, 68-9 (2013) https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1426&context=jbl.

[13] See infra note 14 and accompanying text.

[14] Theresa Kim, Checking Account Fee Comparison at Top U.S. Banks, MyBankTracker https://www.mybanktracker.com/news/checking-account-fee-comparison-top-10-us-banks (Feb. 7, 2021).

[15] Compare id. (stating the average minimum balance to wave fees is $1,000 and the average direct deposit amount to wave fees is $468), with Chris Moon, Average U.S. Checking Account Balance 2021: A Demographic Breakdown, ValuePenguin, https://www.valuepenguin.com/banking/average-checking-account-balance (Jan. 20, 2021) (illustrating that those with under 25,000 in income have a median account balance of $500).

[16] Minimum Wage, Dep’t of Lab., https://www.dol.gov/general/topic/wages/minimumwage. (last visited Apr. 26, 2021).

[17] Kim, supra note 14.

[18] $1,500 divided by $7.25 equals 206.90.

[19] Work month hours are based on 4-week month at 40 hours a week.

[20] Lauren Perez, Average U.S. Savings Account Balance 2021: A Demographic Breakdown, ValuePenguin, https://www.valuepenguin.com/banking/average-savings-account-balance (March 15, 2021).

[21] Aaron Klein, A Few Small Banks Have Become Overdraft Giants, Brookings (March 1, 2021), https://www.brookings.edu/opinions/a-few-small-banks-have-become-overdraft-giants/.

[22] See Stephen Brobeck, Saving Accounts: Their Characteristics and Usefulness, Consumer Fed’n of Am. 5-6 (June 2013), https://consumerfed.org/pdfs/Traditional-Saving-Report.pdf; see also infra note 26.

[23] Id. at 6.

[24] Id. at 6-7.

[25] Id. at 7.

[26] Id.

[27] Amy Fontinell, Understanding Federal Reserve Board Regulation D, Investopedia, https://www.investopedia.com/this-government-regulation-restricts-how-often-you-can-move-money-out-of-your-savings-account-4589978 (Jan. 15, 2021).

[28] See Stanley, supra note 3.

[29] See infra notes 31-33 and accompanying text.

[30] Emily Birken, 5 Common Bank Fees and How to Avoid Them, Forbes: Advisor https://www.forbes.com/advisor/banking/5-common-bank-fees-and-how-to-avoid-them/ (Aug. 2, 2020, 5:02 PM).

[31] Dan Allen, The Top 10 Most Common Banking Fees & How to Avoid Them, LendUp (Jul. 06, 2015), https://www.lendup.com/blog/top-10-common-banking-fees-avoid-them.html.

[32] FDIC, supra note 2, at 21-3.

[33] See Checking Accounts, Wells Fargo, https://www.wellsfargo.com/checking/ (last visited April 24, 202) (stating that fees are waved for college students); See generally Robert Farrington, Best College Student Checking Accounts, The College Investor,  https://thecollegeinvestor.com/24044/best-college-student-checking-accounts/ (April, 1, 2021) (showing various accounts that are free to college students or have reduced fees).

[34] Id.

[35] See supra notes 12-21 and accompanying text.

[36] ABA Urges America’s Banks to Offer Bank On-Certified Accounts, Am. Bankers Ass’n, (Oct. 19, 2020) https://www.aba.com/about-us/press-room/press-releases/aba-urges-americas-banks-to-offer-bank-on-certified-accounts.

[37] 200 divided by 7.25 equals 27.59.