- Paul Constant is a writer at Civic Ventures and cohost of the “Pitchfork Economics” podcast.
- Mainstream banks have created a host of fees and penalties designed to target their poorest customers.
- The truth is that banking in America needs a top-down reform, he writes.
In February of 2020, I wrote about the predatory payday lending industry, which offers very small loans at high-interest rates to desperate low-income people. But payday lenders aren’t the only institutions taking advantage of the lowest-earning quarter of Americans. Mainstream financial institutions have created a host of fees and penalties over the past few decades designed specifically to target and profit from their poorest customers.
One of the most common exploitative mechanisms big banks use to target the poor is the overdraft fee—a charge banks levy on customers who make payments that are larger than the amount of funds left in their account. Last week, new Consumer Financial Protection Bureau director Rohit Chopra announced that banks reported collecting an eye-popping $15.5 billion in overdraft fees in 2019, with nearly a third of that sum coming from just three banks: Wells Fargo, JP Morgan Chase, and Bank of America.
It’s easier than you may think to accidentally overdraft your bank account. When you’re one of the millions of Americans living paycheck to paycheck, a single unexpected expense—a child’s ear infection, say, or your car breaking down on a morning commute—can wipe out your bank balance, which means any outstanding charge like a regularly scheduled utility payment can easily push you into overdraft territory.
But over the years, banks have layered a number of financial complexities on top of their overdraft policies, further rigging the system in their favor. In his statement on overdraft fees, Chopra said that banks have capitalized on the timing gap between payment authorizations and settlements, “the use of one kind of balance over another for fee calculation purposes, or the order of transaction processing across different types of credit and debits” to increase customers’ chances of incurring the highest overdraft fee possible.
If you’re a middle-class American with three months’ worth of emergency savings on hand and automatic overdraft protection on your checking accounts, this all might sound unbelievable, like a missive from an alien planet. That’s because these exploitative overdraft fees are targeted to affect only a small portion of banking customers—specifically, the poorest few. The CFPB estimates that fewer than ten percent of all bank customers are responsible for nearly 80 percent of all overdraft fees.
Also last week, Capital One announced that they will officially end overdraft fees, making them the largest bank to do so. Capital One CEO Richard Fairbank issued a statement saying the move was intended to bring “simplicity and humanity” to banking, creating “an important safety net for families.”
Fairbank didn’t comment on why it took Capital One many years to finally decide to honor the “humanity” of its customers by eliminating overdraft fees. But it’s most likely not a coincidence that the bank’s action happened at the same time that the CFPB started to crack down on the practice.
Chopra praised Capital One for the move, but said his agency wasn’t going to wait for other large financial institutions to follow suit of their own free will. Instead, he said the CFPB “will be considering a range of regulatory interventions to help restore meaningful competition in this market, rather than allowing large institutions to rely on junk fees forever.”
Unfortunately, overdraft fees aren’t the only way that financial institutions prey on poor people in America. Even setting aside the payday loan industry, some of the largest and most reputable banks in the nation continue to penalize customers for not meeting minimum-balance requirements; pester them with tiny fees to keep and maintain checking accounts; and they fail to make loans available to low-income Americans, thereby denying them the opportunity to build a better future. The truth is that banking in America needs a top-down reform. It’s not enough to simply help the rich get richer anymore; our financial institutions must help all Americans build their wealth and invest in the future.