A word of warning to those fleeing big banks and bringing their money to nonbank lenders.
This past Saturday was “Bank Transfer Day,” in which 40,000 frustrated customers joined the 650,000 who had already switched their money out of bank accounts with the Too Big To Fail behemoths to smaller community banks. The preliminary results are encouraging: On that day alone, customers deposited $90 million with credit unions and had moved $4.5 billion in the weeks leading up to it.
It’s easy to understand frustration with these banks. It wasn’t too long ago that Bank of America and a handful of others were threatening to charge customers for using debit cards, even though profits from consumers are helping keep some of these banks afloat. Bank fees can add up, particularly for lower income people who may not be able to keep minimum balances, use direct deposit, avoid overdraft fees, and otherwise stay away from banking fees.
But that frustration may be leading some into the arms of even more pernicious institutions: those that serve the unbanked. Before Move Your Money, about a quarter of American families, or 60 million people, were already considered unbanked or underbanked, meaning that they have little to no relationship with traditional banks. But someone has to fill that hole. Those who step in see a real business opportunity, as the ranks of the unbanked are growing.
The traditional stand-ins are payday lenders, check cashers, and prepaid debit card companies. The first problem with these institutions is that they avoid the scrutiny and regulation that is supposed to reign in traditional banks (although the CFPB stands to change all of that). On top of that (and likely because of it), they come with extremely high interest rates and hidden or unexpected fees. For example, payday loans can come with interest rates that exceed 450 percent when annualized. That doesn’t include fees, which can include an upfront $45 — no small price for those with stretched budgets. Check cashers often skim between 2 and 4 percent of each check’s value. That could add up to $40,000 over a customer’s working life.
Prepaid debit cards are a burgeoning market in and of themselves. It’s expected that Americans will load $37 billion onto prepaid cards this year, and by 2013 that number is expected to reach $672 billion. This could mean killer profits for those offering the cards. But an AARP study found that they “may actually be an expensive alternative to traditional banking sources” due to monthly costs and other fees. Consumers can be hit with fees for using ATMs, calling customer service, activating an account, or simply not using the card.
All of these loosely regulated institutions have been making tidy profits from the gap between traditional banks and mattress stashing. Now new entrants are getting into the game, showing the perceived business potential in offering these products. The New York Times reported this week that Wal-Mart has slowly been building up an offering of financial services. More than 1,000 locations across the country let customers cash checks, pay bills, wire money, or load cash onto prepaid debit cards. As with everything else it sells, it’s found a way to offer things on the cheap: It offers cards that normally cost $4.95 to buy and $5.95 a month to maintain for $3 for each fee. It only charges 1 percent to cash checks under $300 and a flat rate of $3 per check for checks from $300 to $1,000. But these fees can still add up.
Beyond being swindled by fees and interest rates, banking with nonbank institutions supports businesses that are likely no better than the large banks. Taking money out of Bank of America and bringing it to Wal-Mart is no way to free yourself of the corporate world. And shady nonbank lenders that escape regulatory scrutiny don’t need to be bolstered with our business.
So yes, move your money. Just be careful where you put it.
Bryce Covert is Editor of New Deal 2.0.
The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.