Report

Converting Basic Financial Services Fees into Prosperity

An Untapped Opportunity for Consumers and Banks

Quick Summary

Twelve percent of California households lack a bank account and pay fees to cash checks and pay bills, adding up to $700 annually for the typical unbanked household. The majority of these households appears to be qualified for bank accounts, but is either misinformed about the relative cost of banks or distrustful of them.

Executive Summary

Fees generated from basic financial services like overdraft protection and out-of-network ATM charges now add up to $58 billion in annual revenue for financial institutions. Yet, for as much money as is generated from these fees and for as controversial as they have become, very little is actually known about who relies on these fee-based services, which hinders the development of appropriate policy and market-based responses. Using data from a new survey of California households commissioned by the Annie E. Casey Foundation, The Brookings Institution, The Pew Charitable Trusts and the William J. Clinton Foundation, this paper examines the underlying market for four major basic banking fees and finds that:

  • About 21 percent of households with a bank account report that they have overdrawn their accounts at least once in the last year. Contrary to common perception, the majority of households that overdraw their bank accounts are middle-class families (in the second and third income quartile) that are headed by white, middle-aged, college-educated adults who have internet access and a mobile phone, speak English at home, and typically overdraw their accounts just two times a year. However, the small share of households that rely heavily on overdrafts (three or more times during a year) consists primarily of low-income households and collectively represents a comparatively large percentage of the overdraft market overall.
  • About 24 percent of households with a credit card report that they fell behind on their monthly card payments at least once in the last year. Delinquent credit card customers in California tend to be middle-income, have a college education, and work full-time. Most are white and about a quarter are foreign-born. Nearly all own a mobile phone and have regular access to the internet. The majority of these households also subscribe to or regularly read print magazines, own stocks or mutual funds, and bank online.
  • About 41 percent of households report that they use a foreign (or out-of-network) ATM. The out-of-network ATM fee market in California consists primarily of middle-and higher-income households whose heads have college degrees and work full-time. Most are white and about a fifth are foreign-born, and nearly all own a mobile phone and have regular access to the internet.
  • About 12 percent of households pay fees to cash checks and pay bills because they lack a bank account. The majority of unbanked households in California include low-income, full-time employed, foreign-born Hispanic workers who do not have a high school diploma, have never had a bank account, are paid in checks by their employers, and use money orders to pay their monthly bills. About half own mobile phones, a third have regular internet access, and scarcely any read print magazines.

In total, about 58 percent of California households pay fees for overdrawing their checking accounts, falling behind on their credit card payments, using out-of-network ATMs, or cashing checks. Contrary to common perception, the bulk of households paying these basic banking fees is middle-class, relatively well-educated and technologically sophisticated consumers. In addition, fee usage tends to be highly episodic for most households, not something that occurs regularly and systematically. The lone exception is in the check-cashing market, which is dominated by lower-income households with low levels of educational attainment, that rely heavily on expensive non¬bank services.

We conclude with a recommendation for how policymakers can lower these $58 billion in annual fees. In particular, state and local governments can connect consumers to fee-based products and services that are already widely available at a lower cost. For instance, the majority of households that overdraw their checking accounts have a savings account they could link to and avoid all or a majority of the fees they currently pay. We also find that the majority of unbanked households in California have characteristics that suggest they could save a substantial amount of money by opening a low-cost account at a bank or credit union. There are also numerous low-cost options available to consumers to eliminate or reduce costs associated with credit card delinquencies and out-of-network ATMs.

Fees associated with basic financial services and transactions are both a growing source of revenue for banks and an increasingly prevalent component of household budgets. Banks, for instance, saw their noninterest service fee revenues from deposit charges alone increase from $8 billion in 1987 to more than $38 billion in 2007, or by about 375 percent.1 In comparison, median household income grew by just 10 percent during the same period.2 This is not a pure apples¬to¬apples comparison, since banks earn noninterest fee income from commercial enterprises as well as from individual consumers, but estimates suggest that consumers generate a large share of this amount.3 

Growth in fee revenue reflects a broad expansion in the range of basic financial services afforded to customers. Most prominently, depository institutions now charge fees for over two dozen different services associated with checking accounts, from widely reported fees such as those charged for overdrawing accounts and using out¬of¬network ATMs, to more exotic fees like those associated with abandoned accounts and account reconciliation.4 Non¬depository institutions, too, charge customers for a range of financial services including cashing checks, issuing customer ID cards, and loading money onto prepaid debit cards, among many others.5 

While not all of these fees are new to the market, many now come in new variations.6 Many have also become increasingly expensive, according to a recent report by the GAO.7 In one analysis of proprietary data, for instance, the GAO found that average nonsufficient funds and overdraft fees rose by about 11 percent between 2000 and 2006, then estimated to be about $25 per incidence. Increases in the cost and prevalence of fees are the result of a number of market dynamics, including the growing attraction for financial institutions to “nudge” consumers into automated interactions (e.g., debit card transactions instead of teller transactions), the substitution of fee income for traditional sales income (e.g., the replacement of sales “add¬on” charges by foreign¬currency exchange fees), a growing appreciation for the revenue potential of these fees, service expansions (e.g., the growing convenience of electronic payments), and improvements in the ability of financial institutions to manage risk.8 

Converting Basic Fees Fig 1

Yet, for the amount of money that is generated from these fees and for as controversial as many of them have become, very little is actually known about who relies on the services for which they are charged, which hinders the development of appropriate policy and market responses.9 For instance, if bank fees for basic services are being paid primarily by lower-income customers—as some have asserted—then traditional bank accounts may not be appropriate for those households, since their tight budgets may make the costs of managing a bank account more expensive than the alternatives.10 On the other hand, if bank fees for these same services are primarily being paid by middle¬and higher-income households, then the primary driver of these fees is perhaps not tight budgets but some type of behavioral issue, such as absentmindedness or poor money-management skills, suggesting a policy response more oriented around education.11

Similarly, if non-bank fees for check cashing and bill payment are being charged predominantly to people who misunderstand or are distrustful of banks, then policy may be needed to help overcome these perception barriers. But, if instead these fees are being charged to people who live in a cash economy and don't see the need for bank accounts, then the liquid, paperless structure of a non-bank relationship is likely preferable.12 

Appropriate market responses are also curbed by the lack of information about the customers of basic financial service fees. For instance, the fact that depository institutions currently charge up to two dozen different fees seems to suggest that a bank could potentially differentiate itself and pick up market share by offering fewer or less expensive fees.13 Yet, if the bulk of these fees is being charged to moderate¬and lower¬income households, then there may not be much of a market opportunity for differentiation because these households represent a comparably smaller and less attractive segment.14

This paper responds to these questions by analyzing the results of the first-ever survey of household financial services uses and needs in California. The survey, administered in May 2008, was commissioned by the Annie E. Casey Foundation, The Brookings Institution, the William J. Clinton Foundation, and The Pew Charitable Trusts, in partnership with the Office of Gov. Arnold Schwarzenegger and the Office of Mayor Antonio Villaraigosa of Los Angeles. California was selected for this analysis because state and local leaders there are launching market-based initiatives to bring down the cost of some of these fees for households. This report will provide the baseline upon which those initiatives can be evaluated, as well as one of the first-ever glimpses into consumer demand for these transaction fees.

Report Content

Introduction

Read Full Section: Introduction (PDF)

This section reviews the markets in California for four different sets of fee¬based basic banking services, specifically fees charged for a) overdraft and non-sufficient funds; b) credit card delinquencies; c) out-of-network ATM usage; and d) check cashing, most commonly used by unbanked households. For each of these, we use the survey data to profile the market size, the major market components, and the market drivers.28 

A. The Bank Overdraft and Non-sufficient Funds Fee Market

All depository institutions charge some type of fee when customers overdraw their bank accounts.29 These fees come in many varieties. The most prevalent is an overdraft service, by which the overdrawn balance is temporarily loaned to the customer for a fee. Most banks that offer this program lend money in increments rather than the precise amount overdrawn.30 Other types of overdraft protection include automatic transfers from one of the customer's other accounts, and an automatic overdraft line of credit. Of these three types of overdraft protection programs, nearly all banks report in a recent study that the fee-based overdraft program is profitable, about 60 percent report that the automatic line of credit is profitable, and only 40 percent report that the linked-ccount program is profitable. In addition to overdraft protection programs, a small number of banks report that they charge a non-sufficient funds fee and do not loan the customer money to cover the negative balance. It is more common, however, for banks to offer an overdraft protection program that is available only to certain segments of its customer base. Overdraft charges were estimated in a recent GAO assessment of industry data to average about $25 per incidence.31 

B. The Credit Card Delinquency Fee Market

The fee structure for credit cards has grown increasingly complex over the last two decades.39 When credit cards were introduced in the 1950s, the only predominant charges were the card's (fixed) interest rate and an annual fee. Today, consumers are faced with a range of other, more complicated service fees including: 1) late penalty fees, 2) over-limit (exceeding the credit limit) fees, 3) payment processing fees, 4) returned check fees, 5) cash advance fees, 6) convenience check fees, 7) balance transfer fees, 8) fees to make purchases in foreign currencies, 9) membership fees, 10) exchange rate fees, 11) card replacement fees, 12) revolving balance fees, 13) stop payment fees, 14) telephone payment fees, and 15) fees to obtain duplicates of account records.

In addition to a proliferation of service fees, variable interest rates have also become more common. A GAO survey of popular credit cards, for example, found that the annual percentage rate (APR) varies across types of transaction (e.g., retail purchases, cash advances), bill payment history (e.g., delinquency APR and cure APR), and credit utilization (i.e., over-limit APR). In addition, the majority of credit cards began to shift from charging a fixed APR to a variable APR in the 1990s, leading to interest rate fluctuations that the cardholder might not anticipate upon enrollment.40 According to the Federal Reserve's semiannual Survey of Credit Card Plans, for example, 59 percent of the 150 credit cards surveyed carried variable APRs. All told, credit card APRs41 can range from about 8 percent to over 30 percent, depending on the type of transaction and the cardholder's credit standing.42 

Since 1978, credit card interest rates have been subject to usury laws in the state where the credit card company (or division) is located. For this reason, most card issuers are located in states with nonexistent or very high interest-rate caps, notably Delaware and South Dakota.

C. The Out-of-network ATM Fee Market

Checking account owners that use an ATM outside of their bank's network typically incur two separate fees. One fee is charged by the bank or retailer that owns the ATM (a surcharge fee) and the other fee is charged by the financial institution at which the customer's account is located (an out-of-network or foreign ATM fee). The average surcharge fee (charged by ATM owners) in 2008 was $1.97, and the average out-of-network ATM fee (charged by the customer's financial institution) was $1.46.51 Added together, the average customer using an ATM outside of his bank's network incurs usage charges amounting to $3.43 per withdrawal.52 

D. The Check-Cashing Market

Over 26,000 non-bank institutions in the U.S. cash checks and sell bill-payment solutions, predominantly to households without a basic transaction account at a depository institution.57 Fees for check cashing are regulated by states and in California are as follows: cashiers are allowed to charge up to 3 percent (3.5 percent without an I.D.) of the face value of a government-issued or payroll check, and 12 percent of the value of a personal check.58 They are also allowed to charge a $15 fee for each bounced check and a $10 one-time account setup fee. Money-order providers are also regulated, although state law does not set a maximum fee. Research has found that non-banks tend to match fees to the maximum allowed rates, defying expectations about the effect of competition on rates.59 

 


Findings

Read Full Section: Findings (PDF)

We find that about 58 percent of households in the state are now being charged overdraft fees, credit card late payment fees, out-of-network ATM fees, or check-cashing fees. Across the United States, these fees add up to over $58 billion each year. And contrary to common perception, the bulk of households paying to use these basic banking services is middle-class, relatively well-educated, and technologically savvy consumers. Usage of most of these fees tends to be highly episodic for most households, and not something that occurs regularly and systematically. The lone exception is the check-cashing market, which is dominated by lower-income households with low levels of educational attainment and that rely heavily on expensive non-bank fee-based services.

In response, we review a new role for public leaders to serve as intermediaries in the market that can connect households to existing lower-priced alternatives. Oftentimes, there are financial institutions that sell lower-cost alternatives, but consumers sometimes have difficulty finding these products for a number of reasons. Using a model developed by the city of San Francisco, cities and states around the country can create enormous savings for their constituents by helping them find lower-priced alternatives to the products and services on which they currently rely. Of particular importance is the unbanked market, which largely relies on overpriced products and services. There does seem to be a minority of unbanked households that cannot be served by traditional bank accounts, requiring non-traditional services like prepaid products (although suitable prepaid products are extremely difficult to find in the market).69 The survey data suggest, however, that a large share of the non-banks serving this market operates on an economic model that is at a competitive disadvantage and, as a result, can be cannibalized by depository institutions.

Before we review this recommendation in greater detail, it is important to stress that we do not comment on the validity of these fees, as others have elsewhere, because we do not have data that speak to the margin generated by these fees and therefore cannot reliably assess the extent to which there are excesses. We also do not have data that adequately capture whether consumers are actively steered by financial institutions into product agreements with an increased likelihood of service charges. Without that information, it is impossible for us to assess the validity of these fees.

State and local governments can connect consumers to fee-based products and services that are already widely available at a lower cost than those that they currently use. For instance, we discuss in the Findings section that most banks offer customers a range of overdraft protection programs, from the very expensive fee-based model to the less expensive linked-account or revolving-account model. These less expensive linked-account programs can potentially save consumers billions of dollars because, as we reviewed earlier, the majority of households that overdraw their accounts have a savings account they could link to. Similarly, we have pointed to a large share of the unbanked population currently relying on expensive non-banks who would be better off switching to low-cost starter bank account products. For a number of reasons, households have trouble finding these lower-cost alternatives on their own. Some do not understand the fee structure of these products; some have trust and misperception barriers; some simply do not spend the time to shop around, or are easily steered toward more expensive product alternatives. Regardless of the specific reason, policymakers can illuminate the product market for consumers and connect them to lower-cost services. This approach short-circuits other, more uncertain, politically difficult policy options. It also takes advantage of products that are already in the market.

 

Read Full Section: Recommendation and Conclusion (PDF)

 

References

  1. Authors' analysis of data from the FDIC Institution Directory's Statistics on Depository Institutions. Please note, however, that this growth in noninterest income has also substituted for income once earned by financial institutions through other means. For instance, consumers now pay fees for foreign¬currency transactions at ATMs in addition to or instead of at a foreign-currency vendor, once the primary mechanism for accessing capital in a foreign country. Similarly, Visa and MasterCard once added a 1 percent charge to any foreign transaction but now charge consumers a flat fee, which has the effect of moving “sales income” into the “fee income” side of a bank's ledger.
  2. Authors' analysis of data from the U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements.
  3. Estimate provided to The Pew Charitable Trusts by Moebs Services, Inc. For instance, Moebs estimates that consumers now pay $34 billion in overdraft fees every year. Note that a higher estimate published in a recent GAO report also includes enterprise overdrafts.
  4. Bankrate.com (August 2008)
  5. Please see, for instance: Appendix 3 in Matt Fellowes and Mia Mabanta, “Banking on Wealth: America's New Retail Banking Infrastructure and Its Wealth-Building Potential” (Washington: Brookings Institution, 2008).
  6. For instance, for an analysis of how the checking account overdraft fee has evolved, please refer to: American Bankers Association Banking Journal, “Consumer Checking Account Challenge: Giving an old banking spud new profit appeal” (2004).
  7. General Accountability Office, “Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts.” GAO¬08¬281 (Government Printing Office, 2008).
  8. Please see, for instance: Sumit Agarwal, John C. Driscoll, Xavier Gabaix, and David Laibson, “Learning in the Credit Card Market,” Working Paper No. 13822 (National Bureau of Economic Research, 2008); Barry Williams and Gulasekaran Rajaguru, “The trade¬off between bank non interest income and net interest margins,” Working Paper (Bond University School of Business, 2008); Nadia Massoud, Anthony Saunders and Barry Scholnick, 2007, “The Cost of Being Late: The Case of Credit Card Penalty Fees,” Chicago Meetings Paper (American Finance Association, 2007); Arnold S. Rosenberg, “Regulation of Unfair Bank Fees in the United States and the European Union: Current Trends and a Proposal for Reform.” In Evolving Legislation on Consumer Credit and Trade Practices, APS Occasional Papers 7 (2007) (Proceedings of 2006 Malta Conference of the International Association of Consumer Law on Consumer Protection Law in the European Union); Timothy Hannan and Ron Borzekowski, “Incompatibility and Investment in ATM Networks,” Review of Network Economics 6 (2007): 1-15; Sujit Chakravorti and William Emmons, “Who pays for credit cards?” The Journal of Consumer Affairs 37 (2) (2003): 208-230; Timothy H. Hannan, “Retail Fees of Depository Institutions, 1994-99” Federal Reserve Bulletin, January 2001; Christoslav E. Anguelov, Marianne
    A. Hilgert, and Jeanne M. Hogarth, “U.S. Consumers and Electronic Banking, 1995-2003” Federal Reserve Bulletin, Winter 2004; Joanna Stavins, “ATM fees: Does bank size matter?” New England Economic Review (Boston: Federal Reserve Bank of Boston, 2000); Joanna Stavins, “Checking accounts: What do banks offer and what do consumers value?” New England Economic Review (Boston: Federal Reserve Bank of Boston, 1999). Please see endnote 1 for examples of the substitution that has occurred in the market.
  9. For an example of the controversy surrounding these fees, please see: Center for Responsible Lending, “Overdraft Loans Trap Borrowers in Debt: Unfair bank practices artificially increase fees” (2008). Or see recent hearings on these issues, including: Overdraft Protection: Fair Practices for Consumers, Hearings before the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Financial Services, 110 Cong. 1 sess. (GPO, 2007); The Credit Cardholders' Bill of Rights: Providing New Protections for Consumers, Hearings before the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Financial Services, 110 Cong. 2 sess. (GPO, 2008)
  10. Note, though, that having a lower income may also make a household more aware of its budget limitations than a higher-income household might be. We merely repeat this conjecture as an example of an opinion that has emerged in the context of little data.
  11. Again, we state this as an example of a conjecture that can emerge in the absence of data. While it is certainly true that debt-to-income ratios are high among middle-and higher-income households, too, multiple years of data from the Federal Reserve's Survey of Consumer Finances make clear that this ratio is persistently higher among lower-income households.
  12. For some past insight into this question, please see: Jennifer Roth, “Walk-in Bill Payment: The Rational Option for the ‘Cash-Preferred' Market” (Needham: Tower Group 2008); Center for Financial Services Innovation, “Underbanked Consumer Overview & Market Segments” (2008); and Fellowes and Mabanta, “Banking on Wealth: America's New Retail Banking Infrastructure and Its Wealth¬Building Potential.”
  13. Bankrate.com (October 2008).
  14. Banks would have to open more accounts belonging to households in this group to achieve the same potential float as they would by opening accounts for households with higher incomes; also, it's likely that fewer cross-selling opportunities exist within the former group. Large shares of unbanked households have low levels of education and speak Spanish, requiring higher levels of customer interaction, a primary cost driver in retail banking business models. There is also a large minority of unbanked clients with checkered account histories, indicating that there will be fewer qualified households returned from advertising investments in lower-and moderate-income markets compared to those made in higher-income markets. These facts make the basic lower-income market equation for bankers clear: lower relative benefits + higher relative costs = a less attractive business opportunity.
  15. We review in the Methodology section the full suite of fees that are now tied to basic banking services.
  16. Estimate provided to The Pew Charitable Trusts by Moebs Services, Inc.
  17. American Bankers Association Banking Journal, “Consumer Checking Account Challenge: Giving an old banking spud new profit appeal.”
  18. We want to be clear that we do not have usable data on the margins generated by these fees and therefore cannot reliably assess the extent to which there are excesses. For commentary along these lines, please see: Overdraft Protection: Fair Practices for Consumers, Hearings before the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Financial Services; and The Credit Cardholders' Bill of Rights: Providing New Protections for Consumers, Hearings before the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Financial Services.
  19. Emerging Markets, www.emergingmarkets.us (October 2008).
  20. One question was open-ended, asking the respondents to name the two magazines that they most frequently read.
  21. The sample was constructed to draw equal sample sizes from each of the state's income quartiles. For one assessment of how the landline population differs from the mobile phone population, please see: Michael W. Link, Michael P. Battaglia, Martin R. Frankel, Larry Osborn and Ali H. Mokdad, “Reaching the U.S. Cell Phone Generation: Comparison of Cell Phone Survey Results with an Ongoing Landline Telephone Survey,” Public Opinion Quarterly 71 (5) (2007): 814¬839.
  22. CSRS terminated 344 interviews with respondents who did not know or refused to provide their income information; these households are not included in the final 2,001 count.
  23. CfMC is a commonly used survey research software.
  24. Information about these fees was collected from a number of sources including a) the authors' analysis of bank websites, b) Bankrate.com (August 2008), and c) BankingMyWay.com (August 2008).
  25. For instance, please see: GAO, “Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts.”
  26. Authors' analysis of the American Community Survey.
  27. Ibid.
  28. For a helpful primer of bank-related markets discussed in this section, please see: Barry Scholnick, Nadia Massoud, Anthony Saunders, Santiago Carbo-Valverde, and Francisco Rodríguez-Fernández, “The economics of credit cards, debit cards and ATMs: A survey and some new evidence,” Journal of Banking & Finance 32 (8) (2008): 1468¬1483. For a helpful primer on the non-bank related markets discussed in this section, please see: Rebecca M. Blank, “Public Policies to Alter the Use of Alternative Financial Services among Low-Income Households” (Washington: Brookings Institution, 2008).
  29. For an analysis of how the checking account overdraft fee has evolved, please refer to American Bankers Association Banking Journal, “Consumer Checking Account Challenge: Giving an old banking spud new profit appeal.” For the purpose of simplicity, we use the term “overdrafts” throughout this section to refer to both overdrafts and nonsufficient funds even though the two are technically different activities. However, the rates tied to both services, as well as the account balance threshold that triggers them, are nearly identical.
  30. For instance, an overdraft of $37 might lead to a loan of $50 or $100 from a financial institution.
  31. GAO, “Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts.”
  32. The phrase “past year” or “previous 12 months” throughout the paper refers to the period between May 2007 and May 2008.
  33. Estimate provided to The Pew Charitable Trusts by Moebs Services, Inc.
  34. Consider, for instance, a hypothetical household that had a checking account balance of $50 and was enrolled in a fee-based overdraft program. If this household were to write in one sitting four checks each worth over $50 and collectively totaling $250, they would pay four overdraft fees but likely recall it as only one overdraft incidence.
  35. Our data indicate that this group of high frequency overdraft users accounts for about 4 percent of the overall checking account market, but around 30 percent of all overdrafts (and, again, the data cannot distinguish whether these self-reported instances of an overdraft account for one or more fees at a time, so the overall share of overdraft revenue generated by this small share of households may be quite a bit larger).
  36. Allowable check-holding periods are governed under the Expedited Check Funds Availability Act, with implementing language in Federal Reserve Regulation CC. For a readable interpretation of these regulations, please refer to the Office of the Comptroller of the Currency's guide to funds-holding rules, available at www.helpwithmybank.gov/faqs/banking_funds _available.html#drop03 (October 2008)
  37. For a full list of allowances please refer to the Office of the Comptroller of the Currency resource, cited above.
  38. In particular, the data indicate that households that have their paychecks directly deposited stand a one-in-four chance of overdrawing their accounts, compared to about a one-in-five chance among households that deposit their paychecks themselves. Although funds are more swiftly made available for households that directly deposit, it's possible that the automation of this process may result in households being comparably less aware of their balances, spurring a modestly higher propensity to overdraw their accounts.
  39. GAO, “Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Customers.”
  40. GAO, “Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Customers.”
  41. Federal Reserve Board, “Survey of Credit Card Plans,” updated on January 31, 2008. Full list of surveyed credit cards and more details on each are available here: ww.federalreserve.gov/Pubs/shop/survey.htm (August 2008)
  42. GAO, “Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Customers.”
  43. Estimates based on data from CardWeb.com, Inc., which reports that the average U.S. household owns 6.3 bank credit cards. Please see: Kathleen Day and Caroline E. Meyer, “Credit Card Penalties, Fees Bury Debtors: Senate Nears Action on Bankruptcy Curbs,” Washington Post, March 6, 2005.
  44. It should be noted, however, that although nearly one in five households falls behind on its payment schedules, at least once a year, it's unlikely that these households consistently pay their bills late throughout the year. Quarterly data from TransUnion indicate that, in the 15-year span between1992 and 2007, the credit card delinquency rate in California hovered between 1.1 percent and 2.7 percent. These data suggest that there is substantial churn in this market; households are slipping up once or twice in the span of year, but for the most part report that they pay off their balances according to schedule. This evidence of churn is supported by additional recent research that found paying a fee taught consumers to avoid paying future fees.
  45. Kathy Chu, “Facing losses on bad loans, banks boost credit card rates,” USA Today, February 8, 2008; R.K. Hammer Consulting Firm.
  46. For a recent assessment of the national credit card market, please see: Edward Castronova and Paul Hagstrom, “The demand for credit cards: Evidence from the survey of consumer finances,” Economic Inquiry 42 (2) (2004): 304-318.
  47. The sample included credit cards that were active between 1997 and 1999. Sumit Agarwal, Souphala Chomsisengphet, Chunlin Liu, and Nicholas Souleles, “Do Consumers Choose the Right Credit Contracts?” Working Paper 06¬11 (Federal Reserve Bank of Chicago, 2006).
  48. Nadia Massoud, Anthony Saunders, and Barry Scholnick, “Who Makes Credit Card Mistakes?”
  49. GAO, “Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts.”
  50. Joanna Stavins, “Credit Card Borrowing, Delinquency, and Personal Bankruptcy,” New England Economic Review (Boston: Federal Reserve Bank of Boston, 2000).
  51. Laura Bruce, “2008 Checking Account Study,” Bankrate.com (November 2008).
  52. For other related work in this area, please see: Christopher R. Knittel and Victor Stango, “Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs,” B.E. Journal of Economic Analysis and Policy: Advances in Economic Analysis and Policy 8 (1) (2008); Christopher R. Knittel and Victor Stango, “Strategic Incompatibility in ATM Markets.” NBER Working Paper No. 12604 (National Bureau of Economic Research, 2006); Elizabeth W. Croft and Barbara J. Spencer, “Fees and Surcharging in automatic teller machine networks: Non-bank ATM providers versus large banks.” NBER Working Paper No. 9883 (National Bureau of Economic Research, 2003).
  53. Please refer to the section that reviews the unbanked statistics for an explanation of this range.
  54. Greg McBride, “2007 Checking Account Pricing Study,” Bankrate.com (November 2008)
  55. For a recent assessment of the national market for debit cards, please see: Ron Borzekowski, Elizabeth K. Kiser, and Shaista Ahmed, “Consumers' Use of Debit Cards: Patterns, Preferences, and Price Response,” Journal of Money, Credit and Banking 40 (1) (2008): 149-172.
  56. Some literature suggests banks have an economic incentive to over-supply ATMs because it increases out-of-network fee use and can be a lead-generation tool. For instance, please see: Dan Bernhardt and Nadia Massoud, “Endogenous ATM Networks and Pricing.” Working paper (2005).
  57. There are other basic financial service fees charged to segments of this group, such as those associated with prepaid cards, short-term loans, and wiring money abroad, but in this section we focus on check cashing and bill payments because these are the two most basic and widely used fee-based services within this group. Please see Fellowes and Mabanta, “Banking on Wealth: America's New Retail Banking Infrastructure and Its Wealth-Building Potential” for a detailed analysis of the location of non-bank retail outlets.
  58. For a full list of state check-cashing fees, please see: Fellowes and Mabanta, “Banking on Wealth: America's New Retail Banking Infrastructure and Its Wealth¬Building Potential.”
  59. Fellowes and Mabanta, “Banking on Wealth: America's New Retail Banking Infrastructure and Its Wealth¬Building Potential.”
  60. Estimates of the unbanked market and its spending are based on proprietary models owned by The Pew Charitable Trusts' Safe Banking Opportunities Project. We rely on both survey and external data to estimate the size of this market because of the difficulty associated with reaching unbanked households for telephone surveys. While the survey controls for this difficulty, we deemed the average of the two estimates (6 percent and 18 percent) to be a more appropriate measure.
  61. We considered running a structural equation model to determine different latent variable groupings, but concluded that it would be too difficult for industry to replicate this analysis with the available data. We also were unsure how industry would be able to find the latent variable groupings in the market with the available data. Further analysis is needed with data that are available to industry, such as an individual's credit score, geography, employment, and so on.
  62. For instance, please see: Ellen Seidman, Moez Hababou, and Jennifer Kramer, “Getting to Know Underbanked Consumers: A Financial Services Analysis” (Chicago: Center for Financial Services Innovation, 2005).
  63. For instance, please see: Seidman, Hababou, and Jennifer Kramer, “Getting to Know Underbanked Consumers: A Financial Services Analysis.”
  64. For a recent discussion of this research, please see: Blank, “Public Policies to Alter the Use of Alternative Financial Services among Low-Income Households.”
  65. For a discussion of this research, please see Fellowes and Mabanta, “Banking on Wealth: America's New Retail Banking Infrastructure and Its Wealth¬Building Potential.”
  66. Fellowes and Mabanta, “Banking on Wealth: America's New Retail Banking Infrastructure and Its Wealth-Building Potential.”
  67. Please see section on overdrafts for a review of these fees.
  68. Unbanked spending estimates are based on a proprietary model owned by the Pew Charitable Trusts' Safe Banking Opportunities Project.
  69. The economics of these products are often not attractive today for either financial institutions or consumers, curbing broad adoption. See, for instance, James C. McGrath. 2007. “General-use prepaid cards: the path to gaining mainstream acceptance.” No 07-03, Payment Cards Center Discussion Paper from Federal Reserve Bank of Philadelphia.
  70. Fellowes and Mabanta, “Banking on Wealth: America's New Retail Banking Infrastructure and Its Wealth-Building Potential.”

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