US banking regulation: Poor relations

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Regulations designed to protect US banking consumers may instead be pushing the poor out of the system altogether.


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In 2010, US federal government regulation took effect requiring that banks and credit unions obtain a consumer’s consent before charging fees for allowing overdrafts on ATM withdrawals and most debit card transactions. According to the Consumer Finance Protection Bureau (CFPB), some banks saw opt-ins of about 40% while for others it was single-digits. The impact on revenues was dramatic. 

In 2006 overdraft fees made up 6% of bank revenue. By 2015 that had dropped to just 2%, according to research from Jefferies. However, not every bank suffered.

For the first time last year, banks with more than $1 billion in assets were required to break out their earnings for overdraft and non-sufficient fund fees. Over the entire year those fees produced $11.16 billion in revenues for the banks reporting – accounting for 8% of the reporting banks’ total net income and 5.5% of the reporting banks’ pre-tax profits. Clearly the larger banks are doing a better job of getting clients to opt-in than the smaller banks.

It has not gone unnoticed at the CFPB, which is looking at overdraft practices among different banks and is pushing for further regulation. 

Potential buffer

While curbing over-the-top bank fees that target those with the least money who are therefore likely to fall into an overdraft is clearly a positive, what it has also done is spell the end for hundreds of credit unions and community banks that served in areas of low income. Anecdotally, heads of these small financial institutions will tell you that yes, regulatory cost has put them under pressure, as have low interest rates and greater competition due to technology, but the increased scrutiny over fees has taken away a potential buffer. 

With fewer small banks serving low income areas has come a rise in the number of unbanked. In 2009, before the overdraft regulation, 9 million households were unbanked. By 2011, one year following the regulation, that had increased to 10 million. The number of unbanked households fell slightly in 2013, to 9.6 million, but was still higher than in 2009. 

While the establishment of the CFPB post-financial crisis was an important step towards fairer treatment of consumers, further regulation of overdraft and NSF fees may need to be better thought out or it may have the unintended consequence of sending even more households into the arms of payday lenders and out of the system that is supposed to protect them. 

It is not without irony that the world’s most prosperous nation – with its leading global banks – should be increasing the numbers of unbanked in the population just as the importance of financial inclusion is finally grasped in developing countries across Latin America, Africa and Asia.