Imagine a life without access to proper financial services: no savings or checking account, retirement advice, credit card, or home mortgage. To many, access to affordable to financial products seems like a given, but it is vital to the economic wellbeing of nearly every American family. These tools enable consumers to grow and protect their wealth, plan for their future, and take part in American prosperity.
So, why then, is government making it so much harder for people to have access to these services?
As Aaron Klein of the Brookings Institution wrote in his article “America’s poor subsidize wealthier consumers in a vicious income inequality cycle,” access to financial products for lower-income people is becoming harder. Mr. Klein notes Bank of America’s recent decision to impose a $12 monthly fee on e-checking accounts for some depositors. However, as I recently noted, many customers at Bank of America should direct their frustration towards the Durbin amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, rather than their bank.
The Durbin amendment, which was included at the 11th hour, caps interchange “swipe” fees on debit card payments by almost 50 percent of their original rate, biting into the profitability of card payments. Confronted with considerably lower revenue from debit card use, most financial institutions reluctantly abandoned free checking, eliminated rewards programs, and increased fees across the board to make up the difference. In total, around one million people, who are mostly low-income, have withdrawn from the banking system because of it.
Proponents of the Durbin amendment said capping these interchange fees would be a boon for limited-income Americans because businesses would lower prices on goods. Unfortunately, evidence seems to disagree. In fact, a Federal Reserve Bank of Richmond report noted 98.8 percent of retailers either raised prices or kept them the same after the legislation passed. The most likely retailers to increase their prices? Grocery stores and fast food merchants; higher prices from these merchants hit poorer households the hardest.
Since the Durbin amendment does not impact credit card services, financial institutions shifted their efforts to build up their respective (and more profitable) credit card system. Some have written, including Mr. Klein, that credit cards are mainly used by more affluent consumers. However, this is just not the case. Of the ten million new credit-card consumers who entered the marketplace last year, over half of the new consumers came from individuals in their 20s opening their first card, and 60 percent of new accounts are considered “subprime borrowers.”
Analysts have also overlooked the fact that all people gain from the benefits produced by rewards cards. Nearly half of all open credit accounts are considered prime or subprime (177 million accounts), and the vast majority of these users have at least one rewards card. To that end, a study found 74 percent of cardholders with an income between $20,000 and $30,000 own a rewards credit card. For these folks, extra cash-back or “points” at the grocery store or the gas station can go a long way. Most importantly, 94 percent of cardholders earning less than $30,000 believe their credit-card based rewards program is valuable to them.
But to be clear, gaps remain between high-income credit card users and those on the lower end of the income scale. As is usually the case, government has only exacerbated the disparity between these income groups, not closed it.
Heavy handed government regulations continue to limit credit card access for many low-income Americans. Since 2007, there has been a 250 percent increase in Code of Federal Regulations regarding credit card-related restrictions. According to a new report, these regulations are partly response for a 50 percent drop in credit card issuances among lower-income Americans.
Lower income Americans are stuck between a rock and a hard place: the Durbin amendment has pushed individuals away from traditional checking accounts but federal regulations have made it more difficult to acquire credit cards. Only in Washington can some blame private business despite government policy that is failing those with lower-incomes.
Americans need real change from Washington, not more top-down regulations that make it harder for people to get a basic free checking account or a credit card with an interest rate that is matched to the level of risk. Lawmakers should work to repeal the Durbin amendment and support policies that will boost access to financial services products regardless of income.
Thomas Aiello is the Policy and Government Affairs Associate at the National Taxpayers Union, a nonprofit citizen group whose members work every day for lower taxes and smaller government at all levels.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.