The rich are getting richer, but everyone else is basically stuck.
Despite a strong labor market, for example, wages have remained stagnant for decades. In fact, today’s real average wage has about the same purchasing power as it did 40 years ago, according to the Pew Research Center.
One thing that has been on the rise? Bank fees. JPMorgan Chase, for instance, made $1.9 billion from overdraft charges alone in 2016. At some large regional banks, fees accounted for almost 40 percent of revenue that year, CNBC reports; U.S. consumers as a whole paid $34.3 billion in overdraft fees in 2017. And there’s no end in sight, since regulatory limits on deposit account service fees don’t currently exist.
But that’s really just the tip of the iceberg. The high costs associated with financial services from banking to borrowing eat away at many Americans’ incomes, kill their credit and stunt their ability to build wealth. It’s a cycle that seems to have no end ― unless we make some major changes.
The High Cost Of A Modest Income
While the top-earning 1 percent of households have an average of $2,495,930 saved in bank and retirement accounts, the bottom 20 percent have an average of $8,720. Forty percent of U.S. adults don’t have the cash on hand to cover a $400 emergency expense. And that’s costing them.
Sure, some people might prioritize Netflix and pumpkin spice lattes over student loan payments and retirement contributions. But for people like David (not his real name), a 32-year-old living in Harlem, New York, banking fees eat up a good chunk of his income.
“It's a revolving cycle where I'm using my overdraft to get by and then paying it back and starting over again.”
David, who preferred not to use his real name to protect his privacy, said he has to have a minimum balance of $1,200 in his checking account at the end of the month to avoid a maintenance fee. That’s a tall order considering he earns between $23,000 and $31,000 per year, depending on how many hours his employer lets him work.
“Every bit adds up [with fees]. It’s $15 if you don’t have that minimum in your account, and then if you overdraft anything, it’s like $34 to $40,” he said. “I’m at a credit union, so it’s a little bit better. But if I don’t have a certain amount of money in my account, it’s always a fee for this and a fee for that. You count on your money, but there’s always something else [you are charged for].”
Indeed, more banks are requiring customers to maintain minimum balances in order to avoid monthly maintenance fees, and the average overdraft fee at a bank is $30, a 50 percent increase from $20 in 2000. A recent study of 1,344 community banks also found that minimum opening deposit requirements and checking account fees are significantly higher in communities of color than in white neighborhoods. To avoid fees or account closure, the average white customer needs to maintain a checking account balance equal to 28 percent of a paycheck; that amount nearly doubles to 54 percent for Latinos and 60 percent for African-Americans.
“It’s a revolving cycle where I’m using my overdraft to get by and then paying it back and starting over again,” David said.
As banks leave low-income communities and jack up the cost of basic financial services such as checking accounts, many Americans instead have to rely on expensive and often predatory “fringe banking” institutions, such as check-cashing businesses, payday lenders and pawnshops.
Check-cashing businesses process 150 million checks a year and generate about $790 million in fees. In fact, it’s estimated that an “unbanked” worker who earns $22,000 a year spends $800 to $900 a year in check-cashing fees alone, according to research cited by PBS. If you include additional fees for money orders and bill-paying services that the unbanked rely on, that amount rises to about $1,000 annually.
According to the FDIC, just under 19 percent of U.S. households are underbanked, which means they have a checking or savings account but also use financial products and services outside the banking system, like those outlined above. Another 6.5 percent of households are unbanked, meaning they don’t have a bank account at all. Half report it’s because the fees are too expensive.
Many people turn to payday lenders for short-term bridge loans when their income isn’t enough to cover the bills since it’s also incredibly difficult for anyone with a credit score under 700 to qualify for a loan, especially at an affordable rate. In 2013, the median payday loan was $350 with a 14-day term and charged $15 per $100 borrowed ― the equivalent of a 322 percent annual percentage rate.
What’s surprising about this type of predatory lending is that it doesn’t really exist on the fringes of society at all. There are two major requirements to borrow from a payday lender, and both are considered markers of the middle class.
“As the name suggests, a payday lender requires that you have a paycheck ― a job. The second thing that a payday lender requires is that the borrower also has a bank account,” said Devin Fergus, a professor of history and black studies at the University of Missouri who specializes in mobility and the rise of consumer finance fees. “Payday lenders are for the banked and for working Americans.”
Today, there are now more payday storefronts than McDonald’s. And according to Prosperity Now, a nonprofit dedicated to expanding economic opportunity for low-income families and communities in the United States, debt problems disproportionately affect people of color. More than 1 in 4 black households report they sometimes miss or are late on their debt payments, compared with approximately 1 in 7 white households. That has long-lasting consequences, including restricted access to affordable insurance, jobs, housing and more, contributing to a growing racial wealth divide.
“Often, the cure is worse than the disease.”
Alarmingly, the Trump administration wants to take the reins off payday lenders. Shortly after Kathy Kraninger was voted in as the new director of the Consumer Financial Protection Bureau in December ― despite having no experience in banking, finance or consumer protection ― she announced plans to reverse parts of a rule that requires payday lenders to verify whether a borrower can afford to pay back a loan before approving it. In other words, the agency responsible for protecting consumers now wants to make it easier for them to get stuck in a cycle of debt they can never repay.
According to Fergus, borrowers are actually better off if they are denied a payday loan, since they’re more likely to file for bankruptcy if they’re approved. “A good way to think about a payday loan is like financial bloodletting,” Fergus said. “You go to this bloodletter, but often, the cure is worse than the disease.”
But even those who take steps to better their financial situation often end up stunting their opportunities in the long run thanks to the high cost of financial services. College offers a prime example.
“The increasing costs of fees and tuition are really saddling generations, particularly communities of color and historically marginalized populations, in debt,” Fergus said. Prosperity Now also found that of the main expenses that financially insecure communities face, for-profit college tuition costs top the list.
Americans generally think of access to post-secondary education as a means of upward mobility; an oft-cited study “proved” that attending college is worth it overall because the average college graduate earns about $1 million more over their lifetime than someone with only a high school degree. However, what isn’t highlighted is that those who are forced to take on student loans in order to pay for college are significantly disadvantaged when it comes to accessing credit and other financial tools at a low cost in the future.
“The average borrower takes about 20 years to pay off a college student loan. And what we see over that 20-year span is that you have a lower credit score because there’s a strong correlation between higher student debt and lower credit,” Fergus said. So for the next several decades, a borrower whose credit suffered as a result of that debt will pay higher rates on everything from auto loans to credit cards to insurance premiums.
And once again, debt is held disproportionately by people of color, especially women of color. The National Center for Education Statistics estimates that 86.8 percent of black students borrow federal student loans to attend a four-year public college, compared with 59.9 percent of white students. Women hold almost two-thirds, or $900 billion, of the outstanding student debt in America.
“The way in which the system works now is that it actually exacerbates wealth inequalities,” Fergus said.
How did the banking system get to this point? There are a lot of complex reasons, but banking deregulation is a big factor.
Decades ago, federal and state governments held tight control over how banks could operate. For example, following the Great Depression, President Franklin Roosevelt implemented a number of banking reforms as part of the New Deal. One of those provisions was the Banking Act of 1933, better known as the Glass-Steagall Act, which created a separation of commercial banking from investment banking, among other important measures.
Later, the Bank Holding Company Act of 1956 was established to prevent bank holding companies from acquiring banks in states outside of where they were headquartered, unless that other state’s laws allowed it. In other words, bank mergers and acquisitions were controlled at the state level in an effort to prevent the collection of financial power among a few institutions.
And up until the 1970s, most states still followed usury laws that were established during earlier decades. These laws imposed interest rate ceilings on deposit accounts to prevent rate wars among banks and protect smaller institutions that couldn’t compete for deposits.
Beginning in the 1980s, however, many of those banking regulations were reversed. As a result, banks were able to offer many more products and became more profit-driven.
Deregulation allowed banks to become a “one-stop financial shop,” said Pamela Capalad, a certified financial planner and founder of Brunch and Budget financial coaching. “They were able to offer credit cards that have their branding. They were able to sell insurance.”
That meant anyone walking into a branch with a certain level of assets instantly became a target for multiple offers. Customers with lower incomes were less of a priority, increasingly treated as little more than a source of fee harvesting.
Deregulation also changed two major things about where and how banks could operate: It eliminated the need for approval to merge or close branches, and it spurred competition among banks so that they favored high-income communities where they could raise profitability. This helped to create what are known as “bank deserts,” where even those who can afford traditional banking services have no access to them.
Fringe institutions were eventually able ― and more than willing ― to fill that void.
The Long-Term Consequences Of High-Cost Banking
If you are one of the fortunate few able to maintain $1,200 in your checking account or qualify for a low-interest loan, this all might seem like a problem for other people. Why worry about it if it isn’t something that affects your life?
Aside from having empathy for your fellow man, of course, the unfortunate reality is that at some point, it will affect you. If things keep moving along the same trajectory, Americans will continually be pushed into one of two groups: the wealthy elite and the working poor. And as the name suggests, the 1 percent is an exclusive club with a limited number of seats.
“I think this is why the United States essentially subsidized a middle class right after the Great Depression. ... Having a middle class leads to a more democratic population. People feel like they have a voice,” said Capalad, who is from the Philippines and has witnessed firsthand what can happen when the wealth divide becomes too great.
“There is virtually no middle class there,” Capalad said. In fact, 86.6 percent of adults in the country have less than $10,000 to their name. “Seeing what poverty does to people and the voice that it takes away ― I think that with a lack of a middle class, countries are more susceptible to dictators who say they’re going to fix the situation or that they’re going to clean things up,” she said.
It’s true: The more inequality that exists, the more likely it is for a nation to move away from democracy. Even so, the idea that the United States could fall into a Duterte-esque dictatorship because of our dysfunctional financial industry might seem a bit far-fetched. And maybe it is. But there are other implications that are equally as concerning.
“It’s going to have much greater implications in the future than it does today,” Fergus said. “What’s going to happen to the nation’s infrastructure? What’s going to happen to the nation’s retirement program? The population which is relied upon to fund most public entitlements and infrastructure is also that same population which is targeted historically for the extraction of wealth.”
And if you do hit hard times at any point, it’s clear that the cycle of less access to credit, more fees and higher interest rates makes it hard to pull yourself out.
Providing Access To Quality Financial Services For All
The growing U.S. wealth divide, which is exacerbated by the banking industry, almost seems like too big a problem to solve. It’s not something that can simply be regulated away.
Bringing quality financial services to consumers of all income levels will help but will require fundamental changes to how the banking industry operates. Even today, though, there are a couple of potential solutions in the works.
One potential banking solution that’s been gaining traction lately is the reinstatement of postal banking. Mehrsa Baradaran, an associate dean at the University of Georgia School of Law and author of How the Other Half Banks and The Color of Money: Black Banks and the Racial Wealth Gap, has often said this could be the answer to reversing inequality within the banking industry.
And now, a handful of 2020 presidential hopefuls ― including Sens. Kirsten Gillibrand, Bernie Sanders and Elizabeth Warren ― have made postal banking a key component of their platforms.
Why postal banking? The U.S. Postal Service is backed by the government but isn’t controlled by shareholders. It actually offered banking services between 1911 and 1966; often referred to as “poor man’s banks,” post offices offered savings accounts with modest interest rates that were meant to complement ― not compete with ― commercial banks.
Though banks have fled many low-income communities, there’s a post office for almost every ZIP code in the country. Postal banking could offer services at much lower costs than commercial banks and without the commercial interests that tend to trap low-income people in cycles of fees and debt.
Community Development Credit Unions
Back in the day, credit unions were established as a low-cost alternative to banks. These financial co-ops are owned and operated by members, and therefore, are able to offer higher dividends on deposits and lower rates on loans. But thanks to increased competition within the financial industry, many credit unions have become just as expensive to bank with as, well, banks.
Enter community development credit unions, which are specifically designed to serve low- and moderate-income people and communities. They offer low-interest loans to members who have poor or no credit, financial counseling and other services that help people escape predatory financial products like payday loans.
To join a credit union, you have to fit within its field of membership. Usually, this means living, working, worshiping or going to school in a certain region. However, there are CDCUs across the country; check out this list of CDCUs by state to find one near you.
It remains to be seen whether any other major overhauls to the banking industry will happen. But one thing is for sure: Something has to change.