Banking Choices

The Wall Street Journal published an article today about banks inside Wal-Marts and the fees they charge.  The fees are high, particularly for overdrafts, and those fees make up a large percentage of those banks’ income.  At first glance, it sounds terrible – big banks exploiting poor people with high fees.

But wait a minute.  Most of these customers don’t have a lot of other banking options.  They have bad credit.  Or they don’t have the minimum balances required to open accounts at many major banks.  For whatever reason, many customers haven’t had access to banking at all before.

And so these banks provide services, including overdrafts.  Is the service expensive?  Yes.  But…

Some customers at banks inside Wal-Marts said they previously used payday lenders but switched to overdrawing bank accounts because it is less expensive. That was the case with Frank Owens, 38, who opened his Woodforest account in the Cleveland Wal-Mart because of “financial difficulties” at another bank.

Mr. Owens said he overdrew $300 in January and Woodforest repaid itself $330 from his next disability-check deposit three weeks later, the equivalent of a 174% APR. A typical Cleveland payday lender would charge $45 on a two-week $300 loan, local consumer advocates say—a 391% APR.

“I try not to overdraft every month,” Mr. Owens said. “It’s good for emergencies, especially for people with limited income.”

This issue is complicated.  Jon Sanders has previously written about payday lending, and many of his arguments apply to the sorts of banks that are popping up in Wal-Marts, too.  These customers are riskier, so they face higher fees, but these banks also provide services not otherwise available at all.  By limiting choice, we may actually leave these customers worse off.

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