Guest Op-Ed by "Banker With A Conscience:" Keeping the Banking System Open for Low and Moderate Income Families

May, 2011

These weekly pieces are written by a very influencial "Banker with a Conscience," and submitted to my Blog as Guest Op-Eds. Gets you into the mind of someone at the very top of the financial services sector; how they see the current global economic crisis (the mess), as well as various government and private sector solutions to get us out of it.  Hope you enjoy reading them.  

In our last column we talked about some of the economic realities involved in offering checking accounts for free.  Basically, we tried to make the case that the fee revenue from checking accounts (primarily OD/NSF fees and debit interchange) had dropped precipitously due to changes in regulation that have been enacted (Reg E) or contemplated (Durbin Amendment).   In addition, due to very low interest rates, the value of checking accounts as a cheap source of funds to lend out at attractive spreads has been greatly diminished because of the very low interest rates in the economy.

So, it’s pretty simple supply and demand economics.  When the rewards for offering a product diminish, either the price has to change (go up) to induce the supply to remain static or the supply will contract to reflect the lower rewards.

The industry is in the early stages of rolling out new product and pricing packages.  The idea, of course, is to only apply monthly fees to accounts that lose money, but that is not as easy as it seems.  In considering which accounts “lose money”, banks have to look at the following:

  • The average balance in the account
  • The volume and type of activity—does the client take a paper statement and insist on paper checks being returned, does the client use the human labor at the branches frequently, does the client use the teleservices representatives frequently, how many checks does the client write, how many deposits to they make, and so on.
  • The volume of fees they pay.  Did the client opt-in for Overdraft payment and do they pay some OD/NSF fees?  Does the client use other fee based money transfer products. 
  • How big is the rest of their relationship?  Do they just have a checking account or do they also have savings, credit card, car loan, etc.

Estimates vary by bank and by methodology, but most observers think that somewhere between 10 and 20% off all checking accounts are truly a losing proposition for the bank—the bank simply loses money on the account and doesn’t make it up with profits on other products. 

What the industry is experiencing as they roll out charges for checking is pretty benign at this stage.  Accounts are closing for sure, but the huge majority of these accounts that are closing are low balance, low activity accounts that are, in effect, 2nd and even 3rd household accounts.  The result for the banks is loss of accounts but not loss of households or even substantial balances.

In addition, it also appears that clients are asking “what do I have to do to get a free account” and the answers vary by bank but are pretty straight forward—direct deposit your pay roll check, or keep a bigger balance in your account (typically $1000 or so) or shift some of your other financial business to your bank—savings account, CDs or credit card are the easiest and most frequent products used to “bundle up” and get a free checking account.

Interesting it also appears that a significant number of people understand that a checking account has value and are willing to pay $5-9 bucks a month to have an unrestricted checking account.

Actually, compared to many other services people routinely pay for (telephone, cable TV, utilities, automobile costs, insurance, etc.); a checking account is kind of a bargain.  The problem is that it has been free to quite a few people who were “subsidized” by the large number that were paying high overdraft fees.  Somehow politicians, bureaucrats and consumer activists got the idea that free checking was an entitlement.  Clearly it is not.

So, how do we keep the banking system open to low and moderate income communities? I would try to make the case that the focus should not be on fighting fees but on working with the fees to insure people get the best possible deal.  One observation when you go into low and moderate communities is that there aren’t a lot of community banks.  The community banks moved out.  Large banks remain and they offer lots of ways to get free or low cost accounts.  The other observation is that there are few if any credit unions in low and moderate income communities.  What there are, of course, are dozens and dozens of “alternative” financial institutions—rent to own, pay day lending, check cashing, etc.

If we all work together to encourage people to have a bank account—even at $9 a month—it is way cheaper and better than a check casher.  A savings account, which would usually make the checking account free, is a good idea for anyone and it’s a lot better to save for purchases than go to “rent to own” or take pay day loans to acquire things.

Working together and recognizing basic economics will work out best for everyone involved.


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