The concept of banking is something we easily take for granted and have accepted as part of our lives and society. In fact it has become an essential need as it is virtually impossible to function without a bank account. At its core, a bank is a service we pay for in exchange for security and convenience. Rather than us all keeping our money hoarded in our homes where we would have to invest time, cost and energy into protecting it, we entrust a bank to keep it safe for us. They write down what we give them and keep track of it, in the meantime they move our cash around through the many services and channels that the bank operates and as long as we don’t all withdraw our money at once, everything is fine and dandy.
It’s pretty logical that we should be paying the bank something to hold onto our earnings and protect it. After all they are providing us with a service. Banks of course provide many other services. They loan money and offer mortgages and are taking a risk in doing so, making it only fair that it incurs a fee. If it weren’t for banks offering up loans our economy would operate on a much smaller scale, so there is no arguing that banks are an incredibly important institution in our society. However, we have come to rely on banking so completely that they have become an entity with astounding power. Even the United States itself is in debt with the Federal Reserve Bank.
So at this point we don’t question the fees and surcharges banks tack on. What choice do we have? But is it fair? And who is most affected by this system? In recent years many of the major banks have started adding charges for even basic services like maintaining a minimum balance, withdrawals at ATMs, balance inquiries, SMS alert services, failed transactions, address changes, cash deposits, ATM pin generation and so much more. Basically every single action is charged. This is discriminatory against poorer sections of society like farmers, daily wage laborers, students etc. The banks in turn use the money profited to lend to borrowers, also for profit.
Before the financial crisis the banks benefitted huge corporate firms by sanctioning enormous loans to them. When they couldn’t pay it back the banks ended up in to massive losses. To make up for these losses the banks are reaching into the pockets of the little guy. A little fee here and a little fee there can really add up. The result is that depositors are penalized over every action they chose to take with their own funds. In some cases the fees alone of just holding an account can bring a balance into negative or exhausted savings.
The outcome of all this is more and more people are not using banks. But what is the alternative? Many low-income people rely on check-cashing services to pay bills, cash checks and wire money. Payday loans are a short-term unsecured loan that are often simply an advance on the borrower’s paycheck. All these services cause hefty fees, but shockingly enough in some cases using these services is less costly overall than owning a bank account.
To understand why let’s consider a Payday loan which is often criticized for having an APR (annual percentage rate) between 300-600 percent. These are very short loans are typically paid back within two weeks. Low-income borrowers don’t generally have an alternative. Banks don’t generally offer such small amounts on credit and many low-income people don’t qualify in any case. In fact the alternative and equivalent short-term loan is essentially an overdraft fee. If an overdraft fee had a repayment schedule of seven days its APR would be around five thousand percent. Banks are allowed to charge around $140 a day in overdraft fees and in 2011 Americans paid 38 billion dollars in overdraft fees.
Another issue is transparency, a bank disclosure form is hundreds of pages long and convoluted. It is harder to predict what fees will be incurred and when. For someone with nothing spare in their account to buffer the surprise fees it’s much safer to go to their local check cashing business where the fees are listed on a board in neon lights, clear as day.