Bank fees are not just bad for consumers, they're bad for the economy.
A growing number of Americans are unable to afford a bank account -- a situation that in turn puts a strain on the economy because those same people can't access credit, Bloomberg's chief economist Joseph Brusuelas warned Thursday in an economic report. The rise in the number of Americans who don't have a bank account has "hindered consumption and overall growth in the current weak recovery," Brusuelas wrote.
Between 2009 and 2011, the number of households that went off the banking grid -- called the "unbanked" -- increased by 800,000, according to the most recent data from the Federal Deposit Insurance Corporation. Overall, more than 40 percent of low-income households, those earning between $15,000 and $50,000 annually, have a very limited relationships with banks, according to the FDIC data.
One reason for the spike in households that don't use a bank: they simply can't afford it. A checking account at a retail bank costs an average of $144 per year and overdraft fees can add hundreds of dollars more to the cost, research from Pew Charitable Trust has showed.
At the same time, banks have been nudging out customers whom they consider unprofitable by raising fees and increasing balance minimums. Banks say they are trying to make up for lost revenue as a result of increased regulation. According to financial consulting group Oliver Wyman, U.S. banks lose money on 37 percent of consumer accounts, The Economist reported.
Yet financial experts agree that a traditional FDIC-insured bank account is a primary building block for wealth and access to low-cost credit. "The [banking] relationship offers an account as a gateway to other products to help consumers meet financial needs and goals, whether it is to borrow money to buy a car or house," Mark Pearce, director of Depositor and Consumer Protection at the FDIC, told The Huffington Post last fall.
Brusuelas notes Americans without a bank account are unable to borrow money. That lack of access to credit is now slowing consumer spending, which makes up 70 percent of the American economy. "The ability to tap lines of credit to smooth consumption during periods of reduced after-tax income and slower growth are critical to the outlook for overall economic activity," he wrote in his report.
Even more Americans have had some relationship with a bank but remain on the fringes and "underbanked." For many underbanked households, a hodgepodge of alternative financial services, including prepaid cards and payday loans, make up for the lack of a traditional bank account. In 2011, at least a quarter of all U.S. households tapped one of these products, according to the FDIC, and the sector saw more than $320 billion in transactions.
The government's consumer watchdog group, the Consumer Financial Protection Bureau, has warned consumers these alternative financial services lack the same regulations as services offered by the banking industry, leading to a huge variation in costs and financial protections.