Asbury Park Press

Poor Often Can't Afford Bank Fees

Asbury Park Press — Saturday, August 28, 2010


Each week, Kwan Maxie takes his pay from his job at Kentucky Fried Chicken in Neptune City, crosses the parking lot to United Check Cashing and exchanges his check for cold, hard cash.

Maxie, 19, of Asbury Park, said he knows it's not ideal. He pays a fee of more than 2 percent of his c heck for the service. And with cash in his pocket, he said he has a tough time saving money for a car or for education.

"You can't touch money you don't have," Maxie said of the merits to having a savings account. "When you do have it, you end up spending it."

Banking regulators are searching for ways for Maxie and thousands of other New Jersey residents to set up bank accounts, save money and climb the economic ladder.

It isn't an easy task. Low-income customers aren't very profitable to banks. And banks are warning that financial reform could cause them to raise prices on some products that formerly were free.

It threatens to keep low-income residents living in a shadow banking system that widely — but not universally — is viewed as an expensive alternative.

"It's important that households have access to mainstream financial services because insured banking and credit union accounts can provide a gateway to financial security," Barbara Ryan, deputy to the vice chairman at the Federal Deposit Insurance Corp., said in an interview.

The FDIC this spring introduced a year-long pilot project, hoping to cut into the 9 million, or 7.7 percent of U.S. households, and 233,000, or 7.4 percent of New Jersey households that it has found not to have bank accounts.

Experts think the recession and tighter regulations will cause those figures to increase, reversing a two-decade-long trend.

The number of families without checking accounts fell from 1989 to 2007, the government found, mainly because the strong economy during the 1990s gave workers a leg up, said John Caskey, an economics professor at Swarthmore (Pa.) College, who studies the use of financial services by the poor.

Caskey said banks also faced government pressure to offer low-cost checking and savings accounts.

For banks, serving low-income customers can be a money-losing proposition. They profit by paying for deposits and then lending the money at higher interest rates. Low-income customers, however, don't maintain much money in their accounts and still require services — from tellers to bank statements mailed home, Caskey said.

So banks turned to fees, some of which hit low- income customers hardest. For example, customers could be charged upwards of $35 to cover a purchase on which they didn't have enough money in their account.

A 2006 FDIC survey of almost 1,200 banks found that 86 percent had a so-called overdraft protection program that generated about $2 billion for those banks, or 74 percent of all service-related charges.

Consumers, who were not always alerted they were overdrawn at the time of the purchase, became increasingly angry; a $2 cup of coffee could become $37. In response, the Federal Reserve Board this summer issued new rules: Banks need to get permission from customers before enrolling them in overdraft programs.

Some banks trying to maintain that revenue. A brochure at Wachovia Corp., the Shore's biggest bank, says, "We want you to be aware of this change so that you are not caught in a situation where you do not have an alternative form of payment to complete your purchase."

Others are re-evaluating their fees. Bank of America customers can open a checking account for $25. The bank charges $8.95 a month, unless customers sign up for direct deposit or maintain an average daily balance of $1,500.

"We certainly are looking at all of our products," T.J. Crawford, a company spokesman, said. "Those products are creating a value to our customers and we want to make sure moving forward, as is the case today, our customers have options on how to pay for those values."

It means, in short, customers who use more products — checking, savings, credit cards, mortgages — face fewer fees. It has left consumer advocates to wonder what will happen to the unbanked.

"It's a huge problem," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, a consumer group. "All you have to do is drive by a check cashing station and you know we have an unbanked or underbanked population in New Jersey."

For that population, the financial system can be costly. New Jersey Assemblywoman L. Grace Spencer, D-Essex, found ATMs in low-income neighborhoods that only offer withdrawals of $20. It means customers needing $60 make three separate transactions and are charged fees for each one.

She co-sponsored a bill that would require ATM operators to allow customers to withdraw at least $200. The bill passed the Assembly in June.

The FDIC's program is designed to make it profitable for banks to do business with low-income residents. Among the features: Customers would mainly bank online and through ATMs, avoiding trips into the branch. And they would not be charged overdraft fees.

Meantime, others think the unbanked population will only grow, leaving more people visiting check- cashing stores.

Caskey warned that's not necessarily a bad thing. New Jersey prohibits stores from charging more than 2.21 percent to cash a check and 1.5 percent to cash Social Security and disability checks. And there is little evidence that having a bank account helps people save.

"You'll hear it said the poor pay more for their payment services," Caskey said. "Others argue it's harder to save if you don't have a bank account. Those are two popular explanations for why we should push for that.

"The counter argument is, having a bank account can be very expensive if you bounce checks."

All things being equal, Ivonne Robinson, 35, of Asbury Park, said a bank account at least would let her know her money was safe. She closed her account two years ago after she stopped working. Now she uses check-cashing stores.

What if she had enough money to open a checking account?

"If they stop the free checking, I just won't bank there," she said. "I'll do what I've been doing the past two years."

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