Overview

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. Lawsuits and fines levied against large national banks allege that their discretionary practices for charging costs and fees have unfairly targeted undocumented immigrants, Native communities, and communities of color. While the practices of large national banks have captured headlines, racially discriminatory practices are likely ubiquitous across U.S. financial services and evident even in the most basic financial products at small and community “Main Street” banks.

This report discusses findings from an investigation into the racialized costs and fees associated with entry-level checking accounts from a sample of primarily small and community Main Street banks. Contradicting the wholesome stereotype of Main Street banks, 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. The 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. Given these findings, financial system regulations and strong consumer protections are necessary for guarding consumers and communities of color against being charged more for inclusion in the financial system and participation in the economy.

• Banks charge communities of color more for opening and maintaining basic, entry-level checking accounts. The minimum opening deposit is substantially higher in majority black neighborhoods ($80.60) and in neighborhoods without a racial majority ($97.00) than in white neighborhoods ($68.50). Opening deposit requirements are almost the same in majority Latinx ($68.60) as in white neighborhoods.
• It is cheaper to maintain a checking account opened in a white neighborhood. A minimum balance of only $625.50 is required to avoid fees in a majority white neighborhoods, compared to $748.80 in majority Latinx neighborhoods, $870.50 in majority black neighborhoods, and $957.10 in other neighborhoods.
• Discretionary banking practices amplify the racialized costs of banking, and evidence of racial bias among tellers means that checking account costs and fees depend on who consumers talk to at the bank. Tellers in places with small white populations report significantly higher overdraft fees and greater likelihoods of using credit or screening agencies than tellers in places with large white populations.
• Segregation substantially shapes the cost of banking. In total, the average checking account costs and fees are $190.09 higher for blacks, $25.53 higher for Asians, and $262.09 higher for Latinx when compared to whites.
• Banks’ costs and fees further limit the economic power of communities of color by requiring more earnings to be sequestered in checking accounts where they cannot be used. The average white American needs to deposit approximately 3 percent of a paycheck in order to open a checking account in their neighborhood and keep 28 percent of a paycheck deposited to avoid a fee or account closure. Blacks, by comparison, need to initially deposit 6 percent of a paycheck and keep 60 percent unused in their account. Comparable values for Latinx are 6 percent and 54 percent; for Asians, the values are 3 percent and 22 percent.