Banking, Credit, and Debt

To save and invest, individuals need access to the banking system and credit. It is essential for financial independence.

In recent years, the banking industry has changed dramatically. Banks have consolidated and are using technology to a much greater extent. Some banks provide services entirely online and have no physical branches. Many communities have seen bank branches close, especially in rural areas. Lack of access to basic banking services in person may especially hinder older adults, people with disabilities, and people with low incomes who may not have reliable access to technology. It may also make banking less safe if it is more difficult to detect fraud or financial exploitation. These trends may increase financial exclusion and isolation, as more consumers are left out of the mainstream banking system. Instead, they may turn to costly alternative financial services. Public banking options can help expand access to these communities.

Fees: Banks increasingly rely on revenues from fees rather than from interest earnings. Between 1984 and 2015, their fee revenue more than doubled after adjusting for inflation. In total, banks earned half as much income from fees as they did from interest in 2015. By contrast, fees were only a tiny share of revenue in 1984. These fees include service fees on checking and savings accounts, overdraft fees, and charges for using automated teller machines (ATMs).

Banks must receive a consumer’s affirmative consent before they may charge overdraft fees for transactions at ATMs and points of purchase. Banks are still able to charge overdraft or insufficient funds fees for returned checks and electronic payments. Transactions that lead to overdrafts are often small, yet they result in an average fee exceeding $33 per occurrence. Some banks also charge fees to use an in-person teller. This can create problems for some older adults, particularly those living in less affluent neighborhoods. Such customers may need services from bank staff because of personal safety, disability status, literacy or language barriers, or a lack of familiarity with or trust in electronic banking.

This increased reliance on fees has raised costs to the point that banking services are beyond the reach of some people with low and moderate incomes, including older adults. In response, across the country, numerous local and regional organizations have worked with financial institutions to ensure that safe and low-cost account options are available to all residents through the BankOn initiative. As of 2021, 90 BankOn coalitions have formed across the United States. Participating financial institutions offer a checking account or prepaid card that meets certain consumer protection standards.

Electronic banking: Most banking transactions that Americans make are conducted electronically. More payments are made electronically than by check. Nearly nine times as many payments are made by debit and credit cards than by check. Two-thirds of the dollar value of payment transactions comes from electronic transfers. Check payments are second-largest at 27 percent, partly because checks are still used for larger payments, such as rent. Credit card payments are third, followed by debit cards. The overwhelming majority of paychecks, as well as nearly all Social Security benefits, are electronically deposited into a bank or credit union account or onto a prepaid debit card. Older adults are increasingly comfortable using electronic banking. According to data from the Federal Deposit Insurance Corporation (FDIC), in 2019, 65 percent of households headed by someone age 50–64. In addition, 45 percent of households headed by someone age 65 or older used a computer or tablet to gain access to their bank account in the prior year. Sixty percent of people age 50–64, and 30 percent of people age 65 and older, use an app or browser on their smartphone for online banking. Federal law requires banks to document electronic payment activity, limit consumer liability for unauthorized transactions, and create procedures for error resolution. Institutions are not required to provide periodic paper statements if account transaction information is available by telephone, electronically, or, upon the consumer’s request, in writing.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 created consumer protections for gift cards. (Prepaid cards, also known as general-purpose reloadable cards, are different from gift cards.) Gift cards cannot expire less than five years from the date that funds were first deposited on the card. They must print disclosures related to fees and expiration dates on the gift card. Dormancy, inactivity, and services fees can only be charged when the gift card has not been used for at least one year, and no more than one such fee can be charged per month.

Scams and fraud: The widespread use of gift cards and electronic payments has created new opportunities for scams and fraud to occur. Victims may be directed to send money urgently to strangers through these anonymous payment mechanisms as a form of ransom or extortion. Few regulations govern the fraudulent use of these cards. Payments may change hands quickly. In addition, they may not be traceable or reversible, making it difficult for law enforcement to prosecute and for victims to have access to redress.

Cashless businesses: As fewer customers use cash, some stores have moved away from accepting cash payments. Some stores have said that handling cash is burdensome or unsafe. Others have argued that cashless stores discriminate against certain populations, such as people with low incomes, who are more likely to be unbanked or underbanked. In response, some cities have required all businesses to accept cash.

Cashless businesses can still serve cash-preferred customers through a cash conversion kiosk, also known as a reverse ATM. This allows customers to deposit cash and convert it to an electronic payment instrument, such as a prepaid card. It can be helpful to cash-preferred customers, but only if it does not charge them a fee. New York City recently enacted a requirement that all businesses accept cash. However, it allows an exception where these kiosks that meet certain criteria are available.