Rising Bank Fees Linked to Increased Payday Loan Vulnerability

Inside Subprime: April 3, 2019

By Lindsay Frankel

Alongside stagnant average wages, predatory banking fees are on the rise, CNBC reports. While banks make a killing from overdraft, maintenance, and other bank account fees, low-income consumers are hit the hardest. U.S. consumers paid a collective $34.3 billion in overdraft fees in 2017, a figure not seen since the Great Recession. And because there are no limits to what banks can charge customers for service fees, the problem could escalate.

What is most concerning is that banks are raking in fees from consumers whose financial health is most fragile. It’s much more difficult to maintain a minimum account balance on a modest income, but more banks are requiring customers to keep a certain amount of money in their accounts to avoid a monthly charge. Overdraft fees have also increased 50% since 2000 and now cost an average of $30. One modest-income consumer told HuffPost that banking fees regularly consume a portion of his income, creating a vicious cycle that makes it difficult to get ahead. “It’s a revolving cycle where I’m using my overdraft to get by and then paying it back and starting over again,” said the 32 year-old Harlem resident, who asked not to be named.

Furthermore, according to a recent study of 1,344 community banks, both the minimum opening deposit required and the fees associated with maintaining a checking account are higher in communities of color. Researchers found that “the average checking account costs are $190.09 higher for Blacks, $25.53 higher for Asians, and $262.09 higher for Latinos than they are for whites.”

These costs preclude many customers from banking with traditional financial institutions – and many more don’t have access to a bank at all, since low-income neighborhoods across the country have seen bank closures that leave residents with few options to meet their financial needs. That leaves low-income consumers vulnerable to the predatory high interest rates associated with payday loans and pawn shop loans and requires that they pay for basic services like check-cashing.

PBS Called it a “poverty tax,” noting that if you add up all the revenue alternative financial service providers rake in from predatory fees and divide it by the number of households earning less than $30,000 annually, that the result is about $2,500 attributed to each household. That’s a significant portion of low-income families’ income that is likely being put towards fees.

About 8.4 million households don’t have access to a bank account, and an additional 24.2 million households are “underbanked,” meaning that they rely on alternative financial services like payday lenders, according to the FDIC. Those “underbanked” households run the risk of being charged overdraft fees in addition to the exorbitant interest rates they pay when they need to take out a no credit check loan.

The bottom line is, low-income families are harmed the most by predatory finance fees, whether they come from traditional banks, credit unions, check-cashers, or payday loan storefronts. And this could have far-reaching consequences for everyone in the country. “What’s going to happen to the nation’s infrastructure? What’s going to happen to the nation’s retirement program?” said Devin Fergus, a history and black studies professor at the University of Missouri with expertise in mobility and finance fees. “The population which is relied upon to fund most public entitlements and infrastructure is also that same population which is targeted historically for the extraction of wealth.”

For more information on scams, predatory lenders and payday loans, see our city and state financial guides including states and cities like California, the District of Columbia, FloridaIllinois, South CarolinaTexas and more.