Last year, after five years with no bank account, 40-year-old single-mother Stacey Downer took the advice of her financial coach and opened a new bank account – for the third time in her life. This time, she felt confident she was on the road to financial stability.
A few weeks later, after paying her electricity bill and car insurance online, Downer, who is African-American and lives in New Haven, Conn. with her three children, realized she’d overdrawn. She’d deposited her paycheck but it hadn’t cleared before the payments had gone through. Now she owed a $35 fee.
Determined to avoid this happening again, she arranged for her salary to be direct-deposited into her account. But within weeks, she got another overdraft fee -- when her daughter’s preschool cashed a check later than expected. She’d sent it in a couple of weeks earlier and had forgotten that it was pending, so didn’t have enough in her account to cover it. It was downhill from there. She struggled to spend less in order to climb out of the hole she was now in, but she couldn’t manage. After triggering still more fees, the account drew close to $800 overdrawn, and she finally gave up. Downer asked her employer to start paying her salary by check again and stopped using her account.
Unfortunately, the immense problem of bank overdraft fees, which cost consumers over $15 billion annually, has gone largely unnoticed. Instead, politicians have focused on more well-known abuses by the financial service industry, like payday loans. But as welcome as this is, it will do nothing to protect people from overdraft fees, a punishing practice that affects far more Americans: Around 18% of account holders pay three or more overdraft fees a year, half of that group pays 10 or more fees a year .
Additionally, bank overdraft fees disproportionately burden low-income customers and are one of the main reasons why people decide to live without an account. People like Downer, living on tight budgets and without access to credit, have little room for error. When there’s no extra to use as a financial cushion, the chance that a math error or late-cashed check will send your balance below zero -- if only briefly -- increases. The result is often spiraling fees.
Downer isn't alone in shunning banks: 9.6 million U.S. households manage their finances without a bank account. That’s seven percent of all Americans, but it represents 18.7% of families earning under $30,000, compared to only 1.1% of families earning over $50,000. Eighteen percent of African-Americans are unbanked, compared to only 3% of whites.
Like others without a bank account, Downer now uses non-bank products to manage her money. She cashes her paycheck, pays her utility bills and purchases a money order for her rent at the check casher, then loads the remaining cash onto her prepaid debit card. Most of these transactions involve a fee of between $1 and $5. Small amounts, but they add up. Every so often, if she runs short towards the end of the month, the check casher, Alex, will give her an advance from his own pocket, which he’ll take from the check that Stacey cashes at the beginning of the next month. Sometimes she’ll borrow from her brother, but he is often short at the end of the month too. Neither Alex nor her brother charge her for the loans, but Downer hates asking them for money. She’ll occasionally pawn her laptop for a week or two, and sometimes borrow from a local man she describes with a wink as the ’neighborhood lawyer', but tries to avoid this, as she has to repay him double the amount she borrows. None of this comes cheap, but it’s more manageable than the bank overdraft fees that took her $800 into the red in less than six months.
The response of the government and non-profits seeking to help people like Downer has long been to sign them up for financial literacy classes that teach budgeting skills and how to open a bank account, understand credit scores, and make a savings plan. The trouble is, this approach has little impact. One-on-one financial counseling, like Downer had, is more effective, but is fundamentally limited by the fact that it only targets individual behavior.
But it’s not simply a matter of decision making. Struggling Americans like Downer really don’t have many good options. She already holds down two jobs. With low wages, childcare costs, and student loan repayments, she simply can’t make ends meet, whatever decisions she makes. She recently started evening classes to improve her qualifications, but it cuts into her work hours and adds to her childcare costs. Her family can’t help. Like many minority families, they are asset poor; recent research finds that even middle-income minority households own 8-10 times less wealth as similar white households, with the gap growing over time.
It doesn’t have to be like this. It’s true that banks are for-profit enterprises, and fees may be the only way they can make money from people with low balances who sometimes spend more than they have. Even customer owned credit unions charge high overdraft fees. Until the economy recovers, wages rise and people earn more, what can banks and credit unions do about it?
The fact is, they can do something. In the U.K., for example, after a 2014 agreement with the government, most major banks agreed to offer basic, no-fee accounts. Here in the United States, the BankOn Movement is working with banks around the country to encourage them to offer similar accounts, based on a set of standard account features, one of which is that the accounts cannot incur an overdraft fee. These accounts may not be as profitable as accounts that incur fees, but they will prevent losses from the many customers who, like Downer, are not able to repay what they owe in fees and simply leave the banking sector.
What's more banks profits have been climbing steadily since the 2008 crisis. Let's face it, they can afford to do this. Five of the largest US banks have already signed on, including Wells Fargo, Bank of America, and JPMorgan Chase, and smaller banks and credit unions are beginning to follow suit. These accounts won’t solve the problem of low wages, or access to affordable, short term credit, but it’s a start.
There is also a legislative effort to change the way that banks charge overdraft fees, which would help consumers avoid excessive and repeated charges. With the current make-up in Congress, however, other than signing up for a BankOn certified account, the best way to avoid going overdrawn is to make sure that you do not ‘opt-in’ for overdraft protection. Until 2010 banks could allow any payment larger than available funds to go through and charge an overdraft fee. Since then, regulatory reform requires banks to only do this for customers who opt-in to overdraft protection. Customers who have not opted-in will have such payments refused, and no fee charged. However, online payments, and payments by paper check can still lead to an overdraft, as Downer discovered.
The history of bank practices, from redlining in the post-war years to reordering transactions to maximize overdraft fees, which continues today, should give us pause. It’s all very well to make a profit, but surely it’s possible to offer a fair banking service to all Americans. Doing so would help us all to make ends meet.
Annie Harper is a cultural anthropologist in the Yale School of Medicine and a Public Voices fellow with the OpEd Project.