Thursday, June 17, 2010

Changes in Bank Regulations Will Impact the Poor

New rules to limit fees banks charge on overdrafts and credit card transactions are expected to result in new charges for basic banking services. In recent years offers of free checking accounts without minimum balance requirements made it possible for low-income customers to establish bank accounts in lieu of using high cost check-cashing outlets. To off-set lost revenue from new bank regulations, and to speed their recovery from losses resulting from sub-prime lending, banks will begin charging customers whose business does not generate sufficient revenue to cover the costs of their free checking accounts.

According to an article in today’s Wall Street Journal it typically cost a bank $250 to $300 per year to maintain one checking account. Customers who use multiple services such as home mortgage and/or home improvement loans, open investment accounts or have high credit card activity, easily cover the cost of a free checking account and will likely continue to enjoy this perquisite. The poor, who do not have the means to use these more “profitable” products, will face paying higher fees or be forced back to the check-cashing stores.

Although from a pure economic point of view basic low cost checking and savings accounts at banks or credit unions will still be a better deal for the poor than the cost of using check cashers and pay-day lenders, the added burden of the higher fees will likely deter many from establishing or maintaining accounts with reputable financial institutions. This needn’t and shouldn’t be so.

Many products the more affluent bank customers use, which entitle them to free basic banking services, have built in tax subsidies that make them even more attractive and affordable. I refer to the interest deductability of the home mortgage interest expense and the income sheltering capability of such investment products as health savings accounts, individual retirement accounts (IRAs) and 529 college savings plans. Such products are estimated to provide hundreds of billions of dollars in benefits annually to those with the income to take advantage of them. This is not a bad thing. But where are the beneficial products for the less well off?

Financial institutions have a right to cover the cost of their services but they should also be encouraged, perhaps required, to provide services low income families need and want at prices they can afford. Technology is bringing down the cost of basic banking services around the world. Countries such as Kenya and Pakistan offer low cost mobile banking services to the poor why can’t we do the same in the United States?

Checking accounts are expensive, “low tech” and outdated. Banks have been trying to get their clients to “go paperless” for years. That is why if one has the means to access one’s accounts on-line and execute financial transactions electronically, one enjoys lower pricing and a full range of banking services. Financial institutions should be welcoming lower income clients with Individual Development Accounts (IDAs which function like IRAs but can be used of education and saving for starting a business or buying a home), low cost electronic passbook savings accounts and stored value cards for making payments and on-line purchases.

Creating such products is not rocket science—it’s being done in developing economies. There is no excuse for not developing this technology to serve the poor in the United States.

Wednesday, June 9, 2010

Graduation Day

This is the time of year for graduations the life transitions they represent. My niece just graduated 8th grade and is excited to be headed to high school. High school graduates are looking forward to college or a job; college graduates, employment or graduate school. Despite the tough economy, the prospects for those with degrees are better than those without. Education is still the most reliable passport to financial security. We wish these graduates well and have high hopes for their future success.

Recently, I attended two very different graduations—those for men “graduating” from year long residential rehabilitation programs run by two Bay Area non-profits that serve recovering addicts and alcoholics. Like traditional academic graduations there were inspiring speeches. But at these ceremonies the inspiration came from the graduates who spoke so movingly of their gratitude to those who helped them overcome their addictions and literally save their lives.

For anyone who has never experienced the ravages of addiction and the hopelessness and despair it breeds, it is difficult to comprehend the magnitude of the accomplishment of these graduates. It was humbling to hear them recount with such passion, humility and even humor, how they had struggled and how much they appreciate those who had helped them. One common theme was that this “graduation” was really a beginning, not an end. They acknowledged that their fight is not over, would never be over. In the glow of recognition for what they have already achieved, they brimmed with resolve and confidence that they will be able to move forward and live sober, productive lives.

Listening to them, hearing the encouragement from friends and family who had come to celebrate their achievements, I wanted to believe that they would all be able to build on their hard-won recovery. I am not a trained social worker or expert on addiction but I know their future is much more problematic than that of this season’s crop of academic graduates.

I worry that among the difficulties these grads face is a lack of good options for handling their financial affairs, as modest as they may be. In fact, I have learned that the only financial services they are likely to be familiar with and have easy access to are predatory pay-day loan and check cashing outlets. These grads have received some rudimentary advice regarding their finances, but in talking with them and the staff of the programs, it is clear they are not as well prepared in this area as they could be.

I began writing this blog as an exercise of discovery. How can a banker help the poor gain access to appropriate and effective financial services? I am beginning to see how I might play a useful role in this area. I am learning. I think I have just “graduated” to a new level of understanding. Graduations are also called “commencements” for a reason. Time to get to work.