Jessica Silver-Greenberg at the New York Times has an important account of how a system created by banks to catch scam artists like check-kiters has morphed over 20 years into a shadow credit reporting system. Given how hard it is to get the credit bureaus to fix errors in a system that is visible (for instance, you can get your credit report for free once a year from each bureau), imagine what it would be like to have a bank tell you they wouldn’t let you open a checking account due to reports you had no idea even existed.
Here’s the nut:
Unlike traditional credit reporting databases, which provide portraits of outstanding debt and payment histories, these are records of transgressions in banking products. Institutions like Bank of America, Citibank and Wells Fargo say that tapping into the vast repositories of information helps them weed out risky customers and combat fraud — a mounting threat for banks…the databases have ensnared millions of low-income Americans, according to interviews with financial counselors, consumer lawyers and more than two dozen low-income people in California, Illinois, Florida, New York and Washington.
What has happened is that banks are trying to focus their retail banking services on more affluent customers and dump poorer ones (I can see this with the mushrooming of bank branches in my neighborhood, displacing wine and food stores. I wonder what is happening with Community Reinvestment Act enforcement to allow this withdrawal os services from poor areas, particularly when banks are posting record profits). These databases provide the justification for refusing to take customers as a result of comparatively minor mishaps, like bounced checks (which may not even be their fault if a check they deposited turned out to bounce). And since customers who are low income will often be living paycheck to paycheck, it’s not hard for them to have short term cash flow problems.
Of course, this system is wonderfully convenient for the banks, since by denying potential customers access to bank accounts, it forces them to use much more costly services like payroll cards. The article estimates that one million consumers have been denied banking accounts thanks to these reports, a 10% increase since 2009.
These services may be be out of compliance with consumer credit reporting requirements:
….the databases are coming under scrutiny from consumer lawyers and federal regulators, who say it can be challenging to remove inaccurate information or get copies of the reports, a requirement under federal law.
The Consumer Financial Protection Bureau has fielded complaints about the databases and is determining whether they comply with the Fair Credit Reporting Act, a federal law meant to stanch the flow of inaccurate consumer information, according to people familiar with the investigation. Banks are required to provide a reason for rejecting an applicant.
Some databases, though, provide scant details of the reason for the negative mark, according to a review of more two dozen letters.
While banks maintain that they look to work with customers and don’t rely solely on these reports, and the error rate in them is low, customers and consumer advocates paint a different picture:
“We have had too many experiences where even banks that have offered to be flexible with us find their own internal risk management systems mean that their hands are tied,” said Mr. Mintz, New York’s commissioner of consumer affairs.
The problem, said Jerry DeGrieck, a senior policy adviser to Mayor Mike McGinn of Seattle, is that “lenders just don’t want to take a risk on these clients.”
Recent regulations, which rein in the fees that banks can charge — including overdraft protection, a big moneymaker on lower-income customers’ accounts — have made lenders more reluctant to take gambles on customers with tarnished records, analysts say. Simply put, it is less economical for banks to provide inexpensive financial services and it is tougher for banks to generate revenue on lower-income customers who typically maintain small account balances. Still, banks say they are committed to provide banking services broadly.
I’m not a fan of the banks’ actions, but this outcome is a result of having customers expect to get free checking accounts. When I was in Australia, it was close to impossible to have a relationship with a bank and not incur $25 to $30 a month in fees. Now Australia is a comparatively small market and the banks had an oligopoly. Nevertheless, banks in the US finessed the “free checking account” problem by having all sorts of sneaky income earners, like overdraft charges. Customers would do better to accept more explicit fees on routine services (for instance, the account I chose in Oz ave me only a certain number of checks for free a month, and after that, there was a charge). But just the way people been conditioned to expect information on the internet to be free, they think the payment system should be free, which instead means the costs get buried in funny ways and hit some users a lot more than others. Now that neofeudalism is in, the new strategy for profit enhancement is more aggressively abusing those who have low incomes.
Of course, the more logical alternative would be to regulate banks as utilities, given how massively they are subsidized, or promote the creation of a Post Office bank to provide bare bones bank services on a low fee basis. But we can’t do anything sensible in the US if it will cut into the rentiers’ profits.