What's a bank account worth?
The recent trouble at Russell Simmons' RushCard prepaid card has thrown the potential consequences of trying to live without an account into sharp relief. Banks have their share of customer service issues and technical glitches, but it's hard to imagine a bank locking broad swaths of its customers out of their accounts and allowing direct deposits to get lost.
Most of us probably take our checking accounts for granted; it's a given, like having a TV or a smartphone. But to those who can't or won't get a bank account, routine tasks can get much more difficult and expensive -- or in the case of RushCard, risky.
Unbanked consumers will pay up to $40,000 over the course of their lifetime for routine transactions like check-cashing, according to a new report from the National Consumer Law Center and the Cities for Financial Empowerment Fund. And that doesn't begin to take into account the lifetime impact of not having a safe place to save, or access to mainstream loan products.
The banking penalty box
There are 2 main credit-reporting agencies banks turn to in order to vet potential checking account holders: ChexSystems and Early Warning Services, or EWS. They were originally conceived to fight fraudsters who would open up accounts, write checks and disappear; now, most of the negative records they keep on account holders have to do with unpaid overdrafts, according to the report.
For the unbanked, these companies, known as credit-reporting agencies, or CRAs, cast a long shadow. Millions of bank account applicants are rejected over their negative reports each year, and a survey by the Federal Deposit Insurance Corp. found that more than 80% of banks use a CRA for screening.
A bad rap for some of those rejected
The accuracy of CRA reports can be questionable, especially when fraud is involved. One horrifying example from the report:
The client, a New York City resident, experienced fraud on his bank account at a time when his sole source of income was Social Security Disability benefits, which he received by direct deposit. ... In December 2011, he discovered that his debit card was missing, and immediately reported the missing card to his bank. He then received a letter from the bank informing him that a fraudulent check had been deposited into his account and that the bank had charged him $1,500 as a result. He went to a branch and learned that several fraudulent checks had been deposited, followed by several unauthorized withdrawals. He filled out a bank fraud affidavit swearing that he had no knowledge of the transactions and also filed a police report, which he provided to the bank. The bank then had him close his old account and open a new one, to which he redirected his SSD benefits. Then the bank, apparently having denied his fraud claim, offset $733 in SSD benefits from his new account. He then tried to open a new account with another bank but was denied based on the negative information that the first bank had reported about him to ChexSystems. He then had to receive his disability benefits on a Direct Express Social Security card, which caused him to incur ongoing ATM fees. We helped him file a CFPB complaint, after which the bank agreed to waive the remaining overdraft and remove the ChexSystems reporting.
It's analogous to a police officer writing tickets based on nothing more than observing a car doing something illegal and writing down the license plate number, without knowing -- or caring -- who was actually driving the car.
Calls for more accuracy, accountability
Based on this and other existing data about the impact and accuracy of reports from ChexSystems and EWS, the authors of the report call for several reforms to the way the CRAs, the banks who report to them and regulators, operate:
- Conduct real investigations when a consumer disputes a negative entry on their report, rather than just verifying it with the bank that made it.
- Put in place policies that quickly and easily allow consumers to scrub negative entries that result from identity theft.
- When screening potential account holders, banks should make a distinction between consumers who had intentionally abused their banks in the past, and those who made honest mistakes.
- Regulators need to work with all parties to standardize the way negative reports are classified.
What do you think? Are you unbanked? If so, is it because of an issue with ChexSystems or EWS?
Follow me on Twitter: @claesbell.