Access to the banking system and credit are essential to an individual’s financial independence and ability to save and invest. The banking industry’s consolidation, the greater use of technology, and the increasing importance of noninterest revenue—such as service fees on checking and savings accounts, overdraft fees, and charges for using automated teller machines (ATMs)—have dramatically changed the industry. Some of these developments are raising costs to the point that banking services are beyond the reach of some people of low and moderate incomes, many of whom are older.
Fees—federal regulations require banks to obtain 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 fees for returned checks and electronic payments. A 2016 analysis by the Center for Responsible Lending found that bank customers paid $14 billion in overdraft fees and another $3 billion in nonsufficient funds (NSF) fees in 2015. A 2014 Consumer Financial Protection Bureau (CFPB) report on checking account overdrafts found that overdraft and NSF fees constitute the majority of total checking account fees that consumers incur. In addition, transactions that lead to overdrafts are often small, with a median debit card transaction amount of $24. The CFPB’s rulemaking agenda indicates that it may propose additional regulations of overdraft services in the future.
The closing of bank branches (especially in low-income areas and neighborhoods including racial and ethnic groups that have experienced discrimination), stagnant incomes, discriminatory lending practices, credit card debt, personal bankruptcies, and the increasing number of households in poverty have taken their toll. As a result, many households use high-cost alternative financial services such as check-cashing outlets, payday lenders, auto-title lenders, pawnshops, and consumer finance companies (see this chapter’s section Banking, Credit, and Debt—Consumer Credit Protection).
Garnishment—creditors and debt collectors try to garnish, place a lien on, or otherwise freeze bank accounts in order to collect money they claim they are owed. Federal and some state laws or rules prohibit in most instances the garnishment of Social Security, Supplemental Security Income, and veterans’ benefits. The Department of the Treasury has issued final rules requiring financial institutions to protect Social Security and other benefits from garnishment. Nevertheless, some banks continue to seize exempt funds. Customers frequently do not know their accounts have been frozen until they are assessed overdraft and other fees.
Electronic banking—electronic banking (e.g., the use of direct deposit, ATMs, debit cards, and computer or mobile transactions) is now the primary form of banking for most Americans. The Federal Reserve Board’s 2016 Payments Study estimated the value of noncash payments in 2015 to be $178 trillion. The vast majority of the dollar value of these transactions came from electronic direct deposits, while the highest number of transactions were completed using non-prepaid debit cards with credit cards being a distance second. Checks were used in 46 percent of noncash transactions in 2003 but in only 12 percent of noncash transactions in 2015. Even when they are deposited in paper form, many checks are converted to electronic payments. Other forms of noncash payments include credit cards, debit cards, and prepaid cards.
Currently, nearly two-thirds of all employees in the US and most Social Security recipients have wages and benefits electronically deposited into a bank or credit union account, or onto a prepaid debit card.
The 1978 Electronic Funds Transfer Act (EFTA) establishes the basic rights, liabilities, and responsibilities of participants in electronic funds transfer (EFT) systems. It is implemented by the Federal Reserve Board’s Regulation E. Examples of covered transfers include those initiated through an ATM, point-of-sale terminal, automated clearinghouse, telephone bill-payment plan, or remote banking service. The EFTA and Regulation E require banks to:
- disclose the terms and conditions of an EFT service,
- document EFTs by means of terminal receipts and periodic account activity statements,
- limit consumer liability for unauthorized transfers,
- create procedures for error resolution and certain rights related to preauthorized EFTs, and
- restrict the unsolicited issuance of ATM cards and other access devices.
Most recently, the Federal Reserve Board (FRB) amended Regulation E for payroll card accounts. The FRB ruled that institutions are not required to provide periodic paper statements to consumers if the institution makes account transaction information available by telephone, electronically, or, upon the consumer’s request, in writing. In 2011, the Consumer Financial Protection Bureau (CFPB) issued rules enforcing the EFTA.
Technological advances in electronic banking can make banking more convenient for consumers and more cost-effective for financial institutions. Consumers, regardless of age, seem to be increasingly comfortable using electronic banking. The 2015 National Survey of Unbanked and Underbanked Households from the Federal Deposit Insurance Corporation (FDIC) found that 60 percent of banked consumers had used online banking in the past year. Online banking is less popular for older consumers: only 24 percent of people age 65 and older used online banking compared with 46 percent of those age 35-44. A 2016 Federal Reserve Board report found that among adults age 45-59 who have a bank account and a mobile phone, the percentage using mobile banking increased from 12 percent in 2011 to 34 percent in 2015. For adults age 60 and older, use of mobile banking increased from 5 percent in 2011 to 18 percent in 2015. However, some bank policies discourage the use of personalized teller service, which can create a problem for some older Americans, particularly those living in less affluent neighborhoods. Such customers may need services from bank staff because of personal safety, disability, literacy or language barriers, or a lack of familiarity with or trust in electronic banking.
The FDIC has said that consumers with low and moderate incomes need greater access to safe, affordable bank accounts. To increase this access, the FDIC created a template to provide banks with a roadmap for creating economically feasible, low-cost bank accounts. It launched a pilot program in 2011 to evaluate financial institutions’ ability to offer safe, low-cost electronic accounts suitable for underserved consumers, with reasonable fees proportional to their cost. The results of this pilot show that safe accounts perform on par with or better than conventional accounts.
Bank and gift cards have also been the subject of regulatory scrutiny. In 2006, the Office of the Comptroller of the Currency issued guidelines for the disclosure and marketing of these cards. The guidelines include key disclosures about bank cards, including when and how to use them (e.g., their expiration date, any recurring fees, and customer service instructions), and disclosures to accompany stored-value cards. In addition, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) put in place additional consumer protections for gift cards. Gift cards cannot expire less than five years from the date that funds were first deposited on the card. Further, disclosure information about fees and expiration dates must be printed on the gift card. In addition, dormancy, inactivity, and services fees cannot be charged on a gift card unless the card has not been used for at least one year, and no more than one such fee can be charged per month.
Trusts—consumers’ ability to make informed decisions depends on the availability of clear, comprehensive, and comparable information about fees, conditions, requirements, options, and service-provider performance. Consumers who establish personal trusts administered by banks, for example, often lack adequate information about the experience, performance, and stability of bank trust departments.
Mortgage lending—the homeownership rate has not recovered from the 2007-2008 financial crisis and foreclosures, as well as mortgage debt loads, remain historically high after the free flow of credit to unqualified borrowers helped plunge the country into recession.
Banking, Credit, and Debt: Policy
Providing basic banking services
All depository institutions (federally insured banks, credit unions, and thrifts) should be required to provide, at minimum, an adequate level of banking services to individuals. These services should include:
- basic checking (including electronic accounts) or savings accounts;
- a small minimum balance requirement for opening and maintaining the account;
- a set number of free transactions, including checks and automated teller activities;
- reasonable charges for transactions beyond the allowed number of free transactions;
- reasonable charges for other services; and
- a monthly, easy-to-understand statement that details account activity and is available on request.
Depository institutions should be required to continue to make personalized tellers (or an equivalent service) available to their customers at no cost and should not be allowed to charge customers to use automated teller machines (ATMs) owned or leased by the institution.
Depository institutions should be required to provide lifeline banking services for customers with low incomes.
All depository institutions that routinely cash checks should be required to cash federal or state government checks without charge for their customers and for a reasonable fee for noncustomers. To prevent fraud, the institution should not have to cash the check unless it is made out to the person who presents it and that person is registered for check-cashing privileges with the institution.
In deciding whether to approve banking mergers, regulators should ensure that neighborhoods retain adequate levels and quality of services, and that mergers maintain a strong system of community banks.
Compliance with state banking laws
In deciding whether to approve banking mergers, regulators should consider as key factors the institutions’ compliance with state basic banking laws and participation in the electronic funds transfer account program.
Regulating bank fees and overdraft charges
Overdraft charges should be defined as finance charges under the Truth in Lending Act. Financial institutions should be required to warn a customer when an electronic transaction will trigger a fee and allow the customer to cancel the transaction in order to avoid the fee.
Consumers should be given a reasonable opportunity to rectify their accounts before any additional charges or similar adverse actions occur.
Depository institutions should state clearly whether a fee will be charged for a transaction and should not be permitted to charge duplicative fees for the use of ATMs.
Depository institutions should be required to clear checks and other payment instruments in the order in which they are received; they should be prohibited from delaying the posting of deposits if doing so would result in an overdraft.
Depository institutions should be prohibited from processing orders to garnish or place liens on customers’ accounts without checking to see if the accounts contain Social Security, Supplemental Security Income, veterans’ benefits, or other exempt funds. When accounts consisting primarily or entirely of exempt funds are frozen and this causes customers to overdraw their accounts, the institutions should be prohibited from assessing overdraft and other punitive fees.
Fees charged to customers without an account at the bank should be kept to a minimum.
Inactive accounts at financial institutions should not be charged excessive fees or escheat (revert) to the state until sufficient time has passed, public notice has been given, and a reasonable effort has been made to find the account’s owners or heirs.
Direct deposit of government benefit checks should be strongly encouraged but left to individual choice.
The Electronic Funds Transfer Act (EFTA) should be strengthened to ensure that financial institutions promptly notify consumers when direct-deposit payments are received; to provide mechanisms for prompt, effective resolution of problems; and to inform consumers more accurately about how and where to complain if they have problems with direct deposits.
Protection of electronically processed checks
Congress should amend the EFTA to apply its consumer protections to all electronically processed checks.
The federal government and the states should ensure that technological advances in bank products and services incorporate consumer safeguards such as breach prevention, privacy protections, complete disclosures (including necessary warnings about how to use new products and services), and provisions addressing the loss or theft of such products as smart cards and stored-value cards.
Making information about banks accessible
Financial services providers should be required to publish information that permits consumers to compare factors such as fees and options.
Congress, the Consumer Financial Protection Bureau, and the states should require full disclosure in plain language for checking, savings, and money market accounts, as well as all other financial products. The information should be written in a legible format and should cover each type of account the institution routinely offers.
Advertisements, announcements, and solicitations for interest- or dividend-bearing accounts, including window or outside signs, also should disclose all significant terms and conditions in clear and complete language.