When inflation is high, everyone pays the price.
In June, it was reported that the annual inflation rate was at an all-time high — 9.1% in June 2022, the highest it’s been since November 1981. The Biden administration and Democrats in Congress have been acting to combat inflation, pushing through legislation to lower gas prices, clear supply chain backlogs, and expand safe food production. Despite all the opposition and obstruction in Congress from Republicans in the House and Senate, we are moving forward to deliver for the American people.
But low-income households face the biggest burden. This is because food and gas prices often rip into a bigger share of total spending. Research has confirmed this, finding that low income and nonwhite households experience larger increases in realized inflation than other households.
This issue isn’t just limited to inflationary pressure, though. Low-income and nonwhite households are more heavily affected financially by just about every financial difficulty one can have in this country. Struggling families and low-income consumers are hit hardest by bank overdraft fees and are more likely to be a key source of fee revenue for banks, who rely on these customers for billions of dollars every year.
Banks’ overdraft fee revenue has become a crutch for banks seeking to maximize non-interest-bearing revenue. Since this practice first began several years ago, banks have consistently made billions of dollars every year off of penalizing customers whose account balance falls to zero.
The fundamental case for this product is predatory — it’s a fee for not having any money. The Consumer Financial Protection Bureau found that almost 80% of overdraft and nonsufficient-funds (NSF) fees are borne by only 9% of consumers. In the wake of the pandemic, these fees have squeezed minority communities the most. In 2020, 95% of banks’ overdraft fees were paid by “financially vulnerable” consumers, who are disproportionately Black and Latino. Black households are 1.9 times more likely, and Latino households are 1.4 times more likely, to have overdraft fees than white households. Research by the Center on Budget and Policy Priorities found that Black and Latino adults reported difficulty covering expenses at higher rates: 44% and 38%, respectively, compared with 23% for white adults.
Overdraft fees are a contentious issue in the banking sector. Those who support these fees say that they are both necessary and consensual — many in the banking industry cite an industry-led survey, claiming that consumers are happy with these fees. But issuing a $30+ fee per transaction is not the only way to provide financial flexibility to consumers. Moreover, when consumers are not given clear disclosures notifying them of their alternatives when it comes to financial flexibility, stressing their relative happiness is disingenuous. When given a false sense of choice between a $30 overdraft fee vs. a declined charge, surely anyone would select an overdraft fee — but the issue is that lack of transparency, and the egregiousness of these fees, and the strategic ordering of transactions to maximize fee revenue.
All of these practices have gone on unabated for far too long, while consumers have responded by moving away from traditional financial institutions who refuse to budge. Research has shown that younger consumers, especially those who are in the Gen Z and millennial age brackets, are increasingly willing to leave traditional financial institutions and instead use fintech firms and neobanks such as Chime, PayPal and CashApp to conduct basic banking services that have historically been provided by standard checking accounts. And new market entrants have noticed — the onset of fee-free overdraft protection coverage is a compelling factor drawing in new customers. Fintechs and neobanks have benefited from this competitive differentiation in how they service their customers.
In response, many banks and financial institutions have evolved away from these $30-plus fees, providing overdraft protection with terms that are more flexible and generous to customers. Many of the nation’s largest banks, as well as multiple smaller and regional banks, have pivoted away from this practice in anticipation of where consumer expectations are evolving.
Community banks have expressed concerns about their ability to keep up with competitive pressure from big banks, caused by a multitude of factors including fee revenue and the ability to scale up. I understand and sympathize with them on this issue, and I think it is important that we allow the financial industry to remain competitive with a variety of players. But this competition should not be on the backs of our most disadvantaged. The onus is not on low-income working families to be the sole source of support for community banks, in an industry where competition is evolving and fee revenues are declining.
As a lawmaker, I am thrilled to see our financial institutions taking the right steps, prioritizing their customers and moving away from fees that have hurt America’s poorest consumers for far too long. But it should never have taken this long for banks to do the right thing. Pressure from lawmakers, including my colleagues leading this effort in the Senate, Sens. Cory Booker and Elizabeth Warren, and the public is not enough to move the industry forward in full. We are seeing progress, but voluntary changes are not enough to assure that our lowest-income consumers will be protected in the long run. We must continue and move forward, protect the most disadvantaged Americans and work to ensure their financial security, and crack down on these fees once and for all.
