Millions May Join 'Unbanked' Over Fees


Plans by major banks to largely eliminate free checking accounts could push millions of American households outside of the traditional banking system, bankers and experts warn.

To recoup lost revenue from sweeping new bank regulations, the nation's largest banks, including Wells Fargo & Co., Bank of America, Citigroup and J.P. Morgan Chase, have introduced monthly fees of $5 to $25 on checking accounts that previously had none. Smaller banks are expected to follow suit -- effectively ending the era of "free checking" that began in the early 1990s.

The result: Many people who were accustomed to getting bank services for free are now asking themselves if it's worth paying a monthly fee for a checking account.

J.P. Morgan chief executive James Dimon has predicted that up to 5 percent of banking customers may be pushed out of the banking system as a result of higher fees. If this occurred, it would increase the ranks of unbanked Americans from 17 million to nearly 23 million people, based on government data.

"There is a large segment of the population that simply won't pay $10 or $20 a month to keep a bank account," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. "The fees will drive them away."

Such an outcome would deal a big blow to efforts by federal regulators and community activists to reach out to the unbanked. Over the past two decades, the Federal Reserve, U.S. Treasury and Federal Deposit Insurance Corp. have launched initiatives aimed at getting Americans, particularly minorities and low-income households, to feel more comfortable with banks, and to discourage them from turning to high-cost alternatives such as check cashing outlets.

The FDIC estimates that 7.7 percent of U.S. households are unbanked, though the numbers vary dramatically by region. Just 2.6 percent of Minnesota households do not have bank accounts, the third-lowest rate in the nation, according to the FDIC.

Ruckus over 'interchange rule'

Some consumer advocates say predictions of a large exodus from the banking sector are overblown, and may be part of an organized lobbying effort by the banking industry to stir up opposition to government regulation.

The nation's large banks and their lobbyists have recently launched an all-out assault on Congress to weaken or repeal a new Federal Reserve rule that would reduce by 80 percent or more the amount of so-called "interchange" fees that banks collect from retailers each time a consumer swipes a debit card. For the banks, an estimated $48 billion in annual fee income is at stake.

The American Bankers Association recently issued a series of talking points, entitled "Stop the Federal Reserve's Interchange Rule From Being Implemented," to hundreds of its members. The document warned that higher fees resulting from the new rule would "drive millions of people who cannot afford the new costs of services to check cashers and other nontraditional players."

Jean Ann Fox, director of financial services at the Consumer Federation of America, accused the banks of exploiting public sympathy for the unbanked in an effort to push an agenda. "The plight of the unbanked makes for a nice talking point on Capitol Hill, " she said. "But by fighting major consumer protection reforms, the big banks may actually be increasing the risk of being unbanked."

The reasons households go without bank accounts are complex and have always been about more than just fees, bank regulatory experts say. More important than fees are factors such as household income, check usage and comfort level with banking.

A recent survey by the Federal Reserve Bank of Kansas City also found that multiple overdraft charges fueled mistrust of banks, and played a significant factor in why people chose not to have bank accounts. Many banks engage in a controversial practice known as "high-to-low" check clearing, in which they process large checks and debit card payments before smaller ones, rather than in their actual order. The practice often results in people getting hit with hundreds of dollars in unexpected overdraft charges.

"It's not the dollar amount of fees that's the determining factor" of whether people choose to have bank accounts, said Steven Shepelwich, senior community affairs adviser at the Federal Reserve Bank of Kansas City. "It's whether the fees are transparent, and if people feel like they have control over their money."

For people already frustrated with their banks, the introduction of new monthly service charges on accounts once marketed as "free" may prove too much to bear.

Kenisha Wilson, an assembly plant worker in Brooklyn Center, said she recently began exploring alternatives to a bank account after she discovered that her bank, TCF Financial Corp. did away with its "totally free checking" account and started charging her a $9.95 monthly fee. Wilson said she was already angry at the bank after she discovered last year that about $900 in overdraft fees had piled up for small items without her realizing it.

Wilson, 36, said she recently calculated that it would be cheaper and more secure to cash her paycheck twice a month at Wal-Mart, and use money orders to pay her bills, than to maintain a banking account. "I'd be better off just buying a personal safe and putting my money in there than keeping it in the bank," Wilson said. "I'm not going to pay a bank to take my money."

No one knows how many consumers will react like Wilson and drop their bank accounts. Many institutions, such as Minneapolis-based U.S. Bancorp, have said they plan to introduce monthly fees and other charges on checking accounts, but not until later this year. Other banks are contemplating plans to charge consumers for debit cards -- a product that's long been offered for free.

Richard Bove, a bank analyst with Rochdale Securities in Florida, estimates that 15 to 20 percent of Americans with bank accounts will close them over the coming year. "When Americans finally come to grip with the full impact of these new fees, millions will head for the exits," Bove said.

Alternatives emerge

Already, the prepaid debit-card industry is seizing the opportunity to tout itself as a consumer-friendly alternative to bank accounts.

The cards, which often are associated with celebrities and sold in racks in retail stores, aren't linked to bank accounts. However, because they can be loaded and reloaded with cash payments, they have emerged as a popular way for people to manage their money without bank accounts.

Payments with prepaid cards are growing at more than 20 percent a year, reaching a total of 6 billion transactions in 2009, and are growing faster than any other payment method, according to the Federal Reserve. Green Dot Corp., the largest issuer of prepaid cards, has seen its stock soar nearly 75 percent since its initial public offering in July -- partly on investor hopes that consumers will flock to the cards to avoid new bank fees.

Elizabeth Davidson, 35, a nurse from Montevideo, estimates that she's saved $150 a year in bank fees since she closed her bank account three years ago and started using a prepaid MoneyCard from Wal-Mart instead. The card has no overdraft fees because it can't be overdrawn. She loads money on the card electronically through direct deposit and uses it everywhere.

"The prepaid card is simpler and safer," she said. "I'll never set foot in a bank again."

However, prepaid cards lack many of the protections offered by bank accounts, and often include a bevy of fees that can erode a person's balance, consumer advocates warn. These include activation fees of $3 to $40, monthly charges of $2.95 to $9.95, and ATM withdrawal fees ranging from $1 to $3, among other charges.

The high fees of prepaid debit cards disproportionately hurt lower-income and minority Americans, since they represent an outsized share of the unbanked, consumer groups argue. African-American and Hispanic households account for 65 percent of the unbanked, though they represent just 24 percent of the population, according to the FDIC. And households with earnings below $30,000 account for 71 percent of the unbanked.

Consumer advocates have likened the explosive growth in the prepaid debit-card industry to the boom in high-priced check cashing outlets in the late 1990s. Both industries benefited from a lack of regulation while charging hidden fees, advocates argue.

"People need to be careful," said Gail Hillebrand, a senior attorney at the Consumers Union in San Francisco. "What can seem like a convenient alternative [to a bank account] can really cost you."

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