How does the average consumer get by without a basic checking account? How does someone without a checking account pay the bills that arrive each month – drive around to each creditor and pay in cash? Where do you keep your savings – under the mattress or buried in the back yard?
As incredible as it may seem, millions of Americans have neither savings or checking accounts and the problem is getting worse as banks tell troubled customers to get lost by closing their accounts or refusing to open new accounts. For those of you who don’t know, a bank is not obligated to grant a checking account to every customer that applies for one.
According to the FDIC, 30 million consumers have had their checking accounts closed and are unable to open an account anywhere due to information sharing by the banks.
Consumers who frequently write bad checks or otherwise overdraw their account may find that their bank or credit union decides to close their account. In fact, between 2000 and 2005, financial institutions closed roughly 30 million checking accounts for these reasons, according to a 2008 Harvard Business School report.
You also may have trouble opening a new checking account elsewhere if your financial institution sent your name to a consumer reporting service that keeps track of negative information relating to how consumers use their deposit accounts, such as writing bad checks to merchants or having a checking account closed because of mismanagement. (The consumer reporting service receiving the information most likely will be ChexSystems, the dominant company in this field.)
Under the Fair Credit Reporting Act, a bounced check or other covered problem reported to a consumer reporting agency may stay on your record for as many as seven years. “Being on a check reporting system’s list means you may have a hard time opening a checking account for quite a while,” said Luke Brown, an Associate Director in the FDIC’s Depositor and Consumer Protection Division.
What can consumers do to avoid getting into this predicament? Use your checking account responsibly. That includes closely monitoring what money goes into and out of your account, including deposits, fees, debit card transactions, automatic payments and other withdrawals.
It is not clear why the FDIC’s information on closed checking accounts is so dated. The FDIC cites statistics from the period 2000 to 2005 which was prior to the banking crisis and prior to the implementation of thousands of new regulations under the Dodd-Frank Act and other laws which have compounded the problem of “unbankable consumers”.
According to analyst Meredith Whitney, the “unintended consequences of ill-planned and ill-timed regulatory reform” has made the problem substantially worse. Regulations which prohibit banks from collecting fees for bounced checks and other costs associated with an irresponsible customer have made it impossible for banks to cover the costs of problem accounts and, as a result, the number of Americans who are “unbankable” is soaring.
Fewer Americans have access to traditional banking services such as checking accounts, consumer loans and credit cards than they did five years ago. Part of this has to do with the housing bust severely damaging the finances of U.S. households. But millions more have lost access to credit or essential banking services due to regulatory reforms imposed over the past four years.
When I first began researching this trend back in 2005, the number of “unbanked” Americans was closer to one in four. At the current rate, that number will reach one in three in the near future.
But importantly, banks are not to blame for the unintended consequences of ill-planned and ill-timed regulatory reform. The Credit Card Accountability, Responsibility, and Disclosure Act (CARD) essentially restricted a bank’s ability to quickly reprice credit-card interest rates. It was passed in 2009 after the peak of the credit crisis, with most of the provisions going into effect in February 2010.
Since mid-2008, over $1.6 trillion in credit lines have been expunged from the system. Under the new law, banks could no longer use other credit bureau information to reprice, as decisions had to be based upon the credit experience of the issuer alone. These restrictions made it far more difficult to effectively price for the evolving risk of a consumer.
Overdraft protection (“Reg E”) reform has had a similar impact on retail bank customers. By limiting the fees banks can charge customers, regulators have in effect made the expense of servicing some customers greater than the revenue they generate. In many cases, regulations have made the overall economics of branch banking uneconomic. Consequently, many bank branches have shuttered, nearly 1,500 since 2009.
Ms. Whitney says that excluding millions of Americans from the traditional banking system will result in negative consequences to the economy, including lower savings and higher costs of transactions. In addition, since consumers need a means of conducting commerce without having to carry around a lot of cash, the use of pre-paid debit cards has soared.
Pre-paid debit cards are not the ideal manner in which to make purchases or pay bills since numerous fees are involved. Ms. Whitney theorizes that well meaning but clueless regulators may next turn to “reforming” the pre-paid debit card business by prohibiting fees from being charged. Since no business can sustain the cost of offering debit cards without covering the costs of providing service, regulators may wind up eliminating the only viable option left for many consumers.
MEMO TO WASHINGTON – PLEASE STOP HELPING US
Wouldn’t it have just been better to allows banks to recover the costs of providing checking accounts to consumers who constantly write bad checks and overdraw their accounts? The Card Act and overdraft protection legislation resulted in the banks losing billions of dollars in revenues. In many cases, banks simply recovered the lost revenue by imposing a slew of fees on people who handled their checking accounts and credit cards responsibly. In addition, the banks dumped the millions of customers who couldn’t balance their checking accounts and wound up writing bad checks.
The end result of omniscient regulatory action to protect consumers from high overdraft fees and credit card charges resulted in aggravation and higher costs for everyone. The customers who bounced checks have lost all checking account privileges. Consumers who had their credit cards revoked are now at the mercy of loan sharks and payday loan companies, and the customers who never bounced a check are now stuck with steep monthly fees.