Inside Financial Services

The CFPB’s Latest Idea Doesn’t Make Much Sense

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Reuters, yesterday:


The U.S. bureau charged with protecting consumers on Wednesday pressed the 25 largest retail banks to make checking and saving accounts accessible to millions of “unbanked” Americans.

In a letter, it encouraged them to help depositors avoid overdrafts and ongoing negative balances with special accounts.

Checking accounts or prepaid reloadable accounts make it easier for consumers to receive wages and benefits, make payments and manage their day-to-day lives, the Consumer Financial Protection Bureau said in the letter.

“Unfortunately, however, many consumers, including those with limited or irregular incomes, struggle to manage their spending, avoid unwanted fees, repay overdrawn balances, and maintain these critical accounts.” [Emph. added.]

So the CFPB wants banks to develop a no-fee checking account for low-income, unbanked consumers. How helpful! One wonders why banks haven’t thought to come up with a product like that already. Actually, here’s why: a no-fee checking account aimed at low-income customers would be a colossal money-loser. It would be expensive for banks to maintain given the size of balances involved and frequency of negative balances. Opportunities for cross-sell would be limited. (As far as that goes, roughly half of banks’ checking customers are unprofitable.) The banking industry—which is highly competitive, remember—has for years tried to find a way to profitably serve unbanked consumers. It can’t. The numbers don’t work.

But all of this of course means nothing to the Consumer Finance Protection Bureau. Among government agencies, it is uniquely unaccountable to voters or their elected representatives: the agency is funded not by annual Congressional appropriation but rather directly via the Federal Reserve. It is run not by a bipartisan board but rather by a single individual who can’t be fired, by the president or anyone else. Thus the CFPB has zero incentive, and will feel no pressure, to balance the interests of consumers against the interests of the industries it regulates. In this case, the CFPB wants banks to provide no-fee checking to low-income consumers, and simply doesn’t care that the accounts would be huge money losers.

What a preposterous way to regulate. On the one hand, all financial regulators should want a banking system that’s profitable and well-capitalized. But on the other, the CFPB is pressing banks to give away money-losing freebies that, for all anyone knows, low-income consumers have no interest in. That makes no sense. Unfortunately, I doubt this will be the last of the CFPB’s bad ideas.

What do you think? Let me know!

8 Responses to “The CFPB’s Latest Idea Doesn’t Make Much Sense”

  1. SWPilgrim

    Great! Those of us in the retail core can pay $ 5 ATM fees to keep the system solvent.

  2. JimBob

    Banks are becoming wards of the state. If the CFPB feels this is so compelling, they can do it when they open government-run banks in the post office. Of course, the original intent of that idea was to help bail out the USPS, so this would only compound the problem, but that is the logic of government.

  3. NoThanks

    Washington bureaucrats are again trying to encourage imprudent behavior, both by consumers and by TBTF banks, to redistribute income and stimulate an economy made sluggish by, well, Washington bureaucrats. How did that work out in the ’00s?

  4. NW Iowa Banker

    What is fascinating to me is that Congress doesn’t hold the credit union industry accountable to their charters and mission to better serve this population. Instead Congress and regulators just continue to blame banks while credit unions merrily expand into high income markets, expand their business lending and laugh at Congress for continuing to grant them their Federal Tax exemption with no accountability to meet their mission.

  5. Morgan's Mom

    Is this the brain storm of Elizabeth Warren? Bureaucracy run amok. Why can’t our government put some accountability into the equation? Also isn’t this the group spending unprecedented amounts of other peoples money, building a Taj Mahal. Just wondering, little dictators that they are.

  6. Brian H

    There are plenty of free checking options among credit unions. Plus you get a free option on de-mutualization!

    I strive to be an unprofitable banking customer. I do this by taking advantage of matching offers when I see them (i.e. open a new acct with $100, leave it there for 3 months, they give you $100), grabbing up points/rewards when one of my banks allows me to fund via credit card (not cash advance), moving money to the bank only as needed to cover expenses, and keeping accounts with banks that pay high interest rates on your first $500 or whatever it is.

    I suggest everyone join me in taking banks up on their generous offers!

  7. Ron Shevlin

    Will someone have to prove that they “qualify” for this account? If not, why wouldn’t all other checking account customers–you know, the “banked” who apparently have steady incomes and don’t struggle to manage their spending–switch to this new account?

    By the way, the research I’ve done has found that 1/2 of the so-called “unbanked” have prepaid debit cards which they use to manage their financial lives. They may very well be paying a monthly fee for that card (or cards), but there is evidence, logic, or proof that this is an inferior option to what the CFPB is proposing.

    I’m pretty sure CFPB stands for Causing Financial Providers to Break Up.

  8. Anonymous

    Tom, good comments on the CFPB plan to “encourage” banks to open accounts for the unbanked. I would add that the CFPB does not see themselves as a regulator, charged with maintaining the safety and soundness of the banking system. They see themselves as an enforcer.

    Also, I think credit unions were originally invented to serve the unbanked, but that mission has sure changed. Ed Garding

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