The Racialized Costs of Banking

Recent scandals have heightened public and political attention to the financial system, making salient the flawed and racially discriminatory practices of financial services that are necessary for participating in today’s economy.¹ Large and national banks in particular have been implicated in these scandals. Civil lawsuits filed in California in 2017 allege that Wells Fargo employees targeted undocumented immigrants and Native communities to open transaction accounts and lines of credit without consumers’ knowledge and illegally charged fees on dormant accounts that consumers didn’t even know they owned.² When consumers’ accounts exhibited signs of fraudulent activity, the bank closed the accounts instead of conducting investigations as legally required.³ Wells Fargo was fined $35 million and $100 million for these practices and, in 2018, the bank received a $1 billion fine associated with their auto insurance and mortgage lending practices.⁴ JPMorgan & Chase’s settlement of a $55 million lawsuit alleging racial discrimination also received widespread publicity, which evolved out of lenders’ use of discretion in varying mortgage interest rates that resulted higher rates for black and Latinx borrowers.^{5 6}

While these banks’ practices have captured national headlines, racially discriminatory practices are not confined to large and national “Wall Street” banks and are likely ubiquitous across U.S. financial services and evident in the most basic of financial products.⁷ Racially discriminatory practices can also be observed within the small and community “Main Street” banks nostalgically lauded in mainstream public discourse as friendlier and more trustworthy.⁸ Small and community banks’ practices sometimes receive less scrutiny given their public perception, limited geographic scope, and lower share of deposits. However, relationship banking—the foundational practice of small and community banks that distinguishes them from their larger, more centralized counterparts⁹—may enable discriminatory practices through its reliance on discretion and contradict the wholesome stereotype of “Main Street” banks.

Relationship banking—the foundational practice of small and community banks—may enable discriminatory practices through its reliance on discretion and contradict the wholesome stereotype of “Main Street” banks.

Despite the publicity surrounding banks’ practices associated with their entry-level banking products, few investigations examine the possibility of racialized costs and fees associated with entry-level products like checking accounts. However, checking accounts are among the most widely used products and often serve as the first product obtained by a consumer—a fundamental banking product that, in many ways, serves as a gateway into the economy.¹⁰ Ninety-eight percent of consumers who use a bank have a checking account.¹¹ Moreover, costs and fees prevent many consumers from opening and/or maintaining these accounts.¹² Nearly two-thirds of consumers say their main reason for not having a checking or other bank account is because they do not have enough money, such as for affording the minimum opening deposit, minimum account balance, and maintenance fees.¹³ Indeed, consumers pay a cumulative average of $1,000 over 10 years for their checking accounts’ combined minimum opening deposit and balance, maintenance fees, and overdraft and insufficient funds fees.¹⁴ If banks tailor their checking accounts and the associated costs and fees to the communities they serve, and/or use discretion in charging these costs and fees, then the patterns of racial and economic segregation that characterize the American geographic landscape may shape variation in the cost of banking. In other words, banks may charge communities of color more for entrée into and participation in the economy.

This report discusses findings from novel survey data from a stratified random sample of banks that investigated the racialized costs and fees associated with entry-level checking accounts. Primarily a sample of small and community Main Street banks, a range of account characteristics are analyzed that may discourage or prevent consumers from opening accounts and heighten the possibility of their closing accounts, such as minimum opening deposit and minimum balance amounts, maintenance fees, and overdraft fees. (Readers should note that these data and analyses do not make direct comparisons between big and small and community banks. While demonstrating discriminatory practices within small and community banks, these data do not measure whether—or the extent to which—larger banks have discriminatory practices.) Balance requirements are higher and fee structures are more punishing among banks in black and Latinx communities net of controls for socioeconomic characteristics and the presence of competing financial services. There is also evidence for the role of bank employees’ discretion in shaping costs and fees. Bank tellers in predominantly non-white places are more likely to report higher overdraft fees compared to tellers in predominantly white places. These results are even more troubling when considered alongside racial inequalities in income and wealth—not only are black and Latinx areas served by more expensive banks, but they are home to poorer residents.

Racialized patterns in banks’ exclusionary practices have been widely documented, including banks’ tendencies to disproportionately open and operate branches in white communities.¹⁵ For instance, black and Latinx communities are less likely to have bank branches than are communities on average, both nationally and within metropolitan areas.¹⁶ During the Great Recession, comparably-sized banks closed at higher rates in markets serving communities of color between 2009 and 2014, with some black and Latinx communities losing half their branches.¹⁷ The uneven distribution of bank branch locations exact a cost on residents of communities of color in the forms of greater travel distance and time to the nearest banking facility.¹⁸ These practices also create “banking deserts”¹⁹ in which payday lenders, check cashers, and other non-bank services thrive,²⁰ thereby implicating banks in facilitating a market dynamic whereby the financial services environments in communities of color are dramatically different—in terms of quality and expense—from those in white communities.

Banks are implicated in facilitating a market dynamic whereby the financial services environments in communities of color are dramatically different—in terms of quality and expense—from those in white communities.

Racialized patterns are also reflected in banks’ historic and present-day practices around redlining, whereby banks extend less credit and/or higher cost credit to communities of color.²¹ Racialized patterns in redlining represent whether, how, and the extent to which banks invest in communities of color and reveal the ways that banks extract extra costs from communities in exchange for their investment: lending lower-quality credit at higher interest rates. This dynamic was clearly evident during the subprime lending boom when black and Latinx people and places were targeted for often-predatory subprime loans.²² Such neighborhoods also bore the brunt of the foreclosure crisis following the Great Recession²³—due in no small part to racially differential treatment by lenders²⁴—and similar practices have continued into the housing market’s recovery.²⁵

Racialized patterns raise the concern of discrimination—especially when considering the long history of the finance industry as an active discriminator²⁶ and contemporary examples of racial targeting,²⁷ differential treatment,²⁸ and disparate impact.²⁹ In addition to the reluctance to operate in communities of color,³⁰ another potential site of racial discrimination may be bank employees’ discretionary practices in charging costs and fees.³¹ Discretion by frontline employees that results in racial discrimination is well-documented in literature on police stops,³² court proceedings,³³ and social service delivery.³⁴ In the context of financial services, bank employees wield discretionary power in implementing bank policies in a racialized manner. In other words, how much a customer pays in costs and fees may depend in part on who they talk to at the bank. This pattern is reflected in analyses of data from mortgage lending lawsuits brought to the U.S. Department of Justice Civil Rights Division, which illuminated widespread discriminatory practices, including loan officers who “referred to subprime loans in minority communities as ‘ghetto loans’ and minority customers as…‘mud people.’”³⁵

As it turns out, discretionary practices are the foundation of small and community banking. According to the FDIC, small banks hold less than $1 billion in assets and limit their services to a localized geographic scope. Adhering to the same asset holding threshold, community banks are further defined by their reliance on relationship building, local knowledge, and other unconventional data to deliver their products and services.³⁶ In fact, Dennis Nixon, CEO of IBC Bank located in Texas and Oklahoma, penned this exact sentiment in his editorial criticizing the regulations enacted under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Lamenting the regulations’ burdensome effects on small and community banks, Nixon writes, “Everyone should understand that discretion is the essence of community banking. The relationships we build in our communities that allow us to make local lending decisions are what set us apart from the larger banks…Community banks [work] with people in our communities who are not only our customers, but also our neighbors.”³⁷ 

The discretionary practices that allow banks to flexibly deliver consumer-oriented products and services simultaneously create opportunities for discrimination to emerge and flourish. Sanctioned by institutional norms and deeply embedded practices that determine which consumers are worthy of handling responsible banking,³⁸ banks and their employees make discretionary decisions that alter consumers’ engagement with and trust in financial services. As illustrated by the recent financial system scandals, banks and their employees make discretionary decisions when setting the terms of financial products and services, such as opening new accounts and lines of credit and charging interest rates on loans. In fact, when asked about banks’ official policies for charging overdraft fees on entry-level checking accounts, bank employees reveal socially-embedded biases as part of their discretionary decision-making, saying “There’s an ad-hoc policy,” “If we know it’s a mortgage payment, we might allow that,” and “Not if it’s at a casino.”³⁹ In fact, banks involuntarily close checking accounts at significantly higher rates in counties with higher percentages of black residents in the presence of excessive overdraft fees—practices that effectively push consumers out of the financial system.⁴⁰ Augmented by socially-embedded biases,⁴¹ racially discriminatory practices can emerge when banks and their employees charge consumers and communities of color more for their products and services.

The discretionary practices that allow banks to flexibly deliver consumer-oriented products and services simultaneously create opportunities for discrimination to emerge and flourish.

These practices powerfully illustrate how banks can engage in racially discriminatory practices that effectively siphon wealth out of communities of color through the very financial products and services that are considered to be tools for wealth and investment.⁴² Moreover, racial segregation may exacerbate discriminatory practices by creating easily identifiable, geographically organized local markets.⁴³ Thus, the potential role of segregation in creating opportunity for animus to manifest as higher costs and fees in communities of color warrants investigation.⁴⁴