Banking while poor
Why do the poor have to pay to bank, but the rich get paid to bank?
Banking while poor is expensive. Savings accounts are not linked to a debit card, so if you want to pay in something other than cash, you need a debit or credit card.
A debit card is linked to a checking account. With the exception of Capital One’s 360 Checking Account, all checking accounts have monthly minimum balances, and many have monthly direct deposit minimums. If these monthly minimums are not met, clients will be asked to pay a monthly fee to keep the account open. According to Banktracker, the average monthly fee is $9.60, the average monthly minimum is $1,010, and the average direct deposit amount is ~$460.
An alternative to debit card linked to a checking account is a pre-paid debit card. The cards, which can be purchased at popular retailers like Walmart, CVS, and Walgreens, cost $2–5 to purchase, incur a monthly fee of $5–10, and a slew of other fees, such as $2.50 ATM withdrawal fees, $5 reload fees, and a $6 charge activated after 90 days of inactivity.
The last option is a credit card. Most credit card issuers will require you to have a bank account before receiving a credit card, but it is still possible to get a credit card without a bank account. It is much harder, however, to get a credit card with any meaningful credit limit (>$200) without a positive credit history. Therefore, applicants with no or bad credit typically start with a secured credit card, which means you pay the bank a deposit in exchange for a credit limit up to the deposit amount, as well as monthly reporting by the bank to the credit reporting agencies, which builds credit for the long-term. However, most cards have a minimum deposit of $200 and annual fees of $30–50, both extremely expensive fees for families living month-to-month.
Compare that to my experience as a Chase Sapphire Reserve holder. I pay $550 at the start of the year. In exchange, I receive $300 annual travel credit, complimentary airport lounge access ($99 value), Lyft Pink ($199 value) and 10X points on all rides, free TSA paycheck ($100 value), 50% bonus when converting points to travel purchases, 3X points on travel and dining, and 1X rewards on all other purchases. In an average year, I’ll generate around 100,000 points. This alone is around $1,500 in free travel. Add in other benefits, and that translates to earning $2,120 from my credit card, or $1,570 after you subtract the annual fee. That’s a 3X gain on my initial investment. Just by living my life.
In contrast, assuming someone has to pay a $10 monthly fee on his checking account, that will be $120 per year. That means we have decided to pay rich people $1,450 more to engage with our banking system every year.
Several fintechs have cropped up in the past decade to address this inequity by offering fee-free banking. Foremost among them are Chime and Simple, which charge no fees (other than an out-of-network ATM fee of $2.50 for Chime) to customers and instead generate revenue by charging merchants a percentage of the transaction fees. They have partnered with established banks to ensure their accounts are backed by the FDIC. In 2014, Simple’s partner bank, BBVA, acquired the platform for $117 million. Chime grew 4X in 2019 and is now valued at $5.8 billion.
I am glad to companies such as Simple and Chime push traditional banks from a high-fee to a zero-fee world. But the next step is to allow the poor to generate rewards from responsible spending, just as we allow the rich to do.
Although banks do make money on the interest spread between checking accounts (zero percent) and the capital loaned and merchant fees on debit cards (21 cents + .05 percent of the payment), offering meaningful rewards would require transitioning people from checking accounts and debit cards to credit cards. With credit cards, merchant fees generated are around two percent, not to mention the average 15 percent APR charged for overdue bills. This gives credit card companies ample space to offer meaningful rewards on common household purchases among the poor, such as groceries and gas.
More accessible and profitable credit products must be coupled with straight forward financial education on how to spend responsibly, such as not exceeding a credit utilization target of 30 percent. But I do believe we should be pressuring our financial service providers to not just eliminate the burdensome fees placed on low-wage consumers, but to think about ways that the poor can make, rather than lose, money on their hard earned capital, like the rest of society.