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Expert says Poor Subsidize Rich through Banking, Credit

Wealthier people often take advantage of credit card reward systems, whereas lower-income people often pay with cash. (3dman_eu/Pixabay)
Wealthier people often take advantage of credit card reward systems, whereas lower-income people often pay with cash. (3dman_eu/Pixabay)
February 12, 2018

PORTLAND, Ore. — Bank of America’s announcement that it will eliminate free checking for people who don't maintain a minimum balance has revealed a paradox: the less money a person makes, the more expensive it can be to manage their money.

This new policy will affect Oregonians, as there are about 50 Bank of America locations across the state. Aaron Klein, a fellow at the Brookings Institution, said these types of fees are among the hidden ways the U.S. banking and payment system is regressive, which exacerbates income inequality.

"The poorer you are, the more the payment system takes from you. And the wealthier you are, the more it gives to you,” Klein said. “And this is particularly true for Americans who are living paycheck to paycheck."

Klein said there are two obvious ways this plays out: The first is the credit card reward system. People paying with credit cards often get tax-free, cash-back rewards on purchases. Lower-income people, who tend to pay with cash, miss out on those perks.

Second, the U.S. payment system is slow, and a person's paycheck may not get to their bank fast enough. This frequently causes people to overdraft and can drive some to rely on payday loans.

Klein said there are some simple solutions. He called the country's slow payment system an "embarrassment," and noted that many others have real-time payment systems, including England, Mexico and Poland. Japan has had a real-time payment system since 1973.

Klein said the Federal Reserve worked quickly to implement the technology allowing consumers to deposit checks from their phones, but then dragged its feet on the system bringing that money from the bank to a specific account.

"Doing that cost lower-income, working families billions of dollars a year in late fees, overdrafts and payday loans to bridge the gap,” he said. “Policymakers need to act on simple, available technological solutions to help working families."

Klein added that banks have moved faster to implement real-time payment than the Federal Reserve. It will cost them money, but banks realize if they don't do it, someone else will. He said policymakers should also improve laws against money laundering, which make it expensive for banks to open and maintain checking accounts.

An NBC News piece on this topic, authored by Klein, is available here.

Eric Tegethoff, Public News Service - OR