Minorities possible unfairly disqualified from opening bank accounts
My friend Frank Pasquale sent me this article over twitter, about New York State attorney general Eric T. Schneiderman’s investigation into possibly unfair practices by big banks using opaque and sometimes erroneous databases to disqualify people from opening accounts.
Not much hard information is given in the article but we know that negative reports stemming from the databases have effectively banished more than a million lower-income Americans from the financial system, and we know that the number of “underbanked” people in this country has grown by 10% since 2009. Underbanked people are people who are shut out of the normal banking system and have to rely on the underbelly system including check cashing stores and payday lenders.
I can already hear the argument of my libertarian friends: if I’m a bank, and I have reason to suspect you have messed up with your finances in the past, I don’t offer you services. Done and done. Oh, and if I’m a smart bank that figures out some of these so-called “past mistakes” are actually erroneously reported, then I make extra money by serving those customers that are actually good when they look bad. And the free market works.
Two responses to this. First, at this point big banks are really not private companies, being on the taxpayer dole. In response they should reasonably be expected to provide banking services to all of not most people as part of a service. Of course this is a temporary argument, since nobody actually likes the fact that the banks aren’t truly private companies.
The second, more interesting point – at least to me – is this. We care about and defend ourselves from our constitutional rights being taken away but we have much less energy to defend ourselves against good things not happening to us.
In other words, it’s not written into the constitution that we all deserve a good checking account, nor a good college education, nor good terms on a mortgage, and so on. Even so, in a large society such as ours, such things are basic ingredients for a comfortable existence. Yet these services are rare if not nonexistent for a huge and swelling part of our society, resulting in a degradation of opportunity for the poor.
The overall effect is heinous, and at some point does seem to rise to the level of a constitutional right to opportunity, but I’m no lawyer.
In other words, instead of only worrying about the truly bad things that might happen to our vulnerable citizens, I personally spend just as much time worrying about the good things that might not happen to our vulnerable citizens, because from my perspective lots of good things not happening add up to bad things happening: they all narrow future options.
mathbabe 
What passed in 2010? You regulate lower fees on people that cost more money because their inability to balance a check book, those people will not have access to check book.
Banks want to make money, if they are turning away potential customers, it is simply because they won’t make money. Once again liberals are helping the poor get poorer.
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Curtailing opportunity curtails the use of property, and property without its use has no value.
Any libertarian will agree that a zoning law restricting a property owner’s air rights sale deprives property — if they can’t be sold: they can’t be cashed, and without the cash potential air rights are just air. Money is property, and money is only value. To minimize its use is a taking. To restrict educational opportunity is a taking of human value.
Curtailing your money’s potential or your intellectual potential — it’s all a restraining or taking of property. And it curtails the overall benefit to society since the economy improves if everyone’s money and intellectual capital are maximized. Even the simplest and most basic societies educate its members to valorize them for their full social potential. Well, modulo gender resrictions.
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Sorry if my comment seems odd. I was responding to your “second, more interesting point…to defend ourselves against good things not happening to us.” To appeal to (or argue with) libertarians, why not assume libertarian values and show that those “good things not happening to us” are, in solely libertarian terms, definitional of libertarian values and rights?
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I find this truly bizarre. Over here (in Ireland, as in the UK) having a current account (USA: checking) doesn’t imply anything about your financial probity. The bank isn’t lending you money by offering the account. It doesn’t come with an overdraft facility as standard. It’s just a place to deposit your salary or other income, and take it out again to pay bills etc.
I moved to Ireland for a job almost 14 years ago; on my first day at work, I got a simple “he works here” letter from my employer, walked to a local bank branch during my lunch hour, and opened an account which I still have today. Nothing elitist about that. But it does offer you some financial “legitimacy”, for want of a better word, which remains as long as you don’t seriously abuse it. It presents no risk and no net* cost to the bank, so why would they deny it to someone?
* banks use your deposited funds in their own dealings i.e. to make more money.
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Bank accounts definitely cost money to maintain, and for accounts with small balances, the cost of the account is more than the profit earned. The costs include deposit insurance, fraud liability (if your ATM card gets stolen in the US the bank is ultimately liable for the resulting losses; note I believe this is different in the UK), the time spent by the teller in opening the account, the time spent by customer service staff on all future servicing of the account, costs of compliance with legal regulations, and many others.
A few of these costs are unavoidable, but the vast majority are imposed by legal regulations, either directly or indirectly. For example, say a high-risk account holder deposits a check which later turns out to be fraudulent. By law, in the US (again the UK might differ), the bank must make the deposited funds available within five days. This is often not enough time to verify the authenticity of the check. The account holder can then withdraw the funds, leaving the bank in the red when the check ultimately bounces. There are many other scenarios where the bank can lose money on checking accounts. Normal people like you and me don’t think in these terms, but criminals who are out to commit fraud know about these strategies and use them.
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To the extent DJ’s costs are unavoidable, they must be balanced against the additional costs associated with not serving the unbanked. The bank’s profitable customers regularly do business with the unbanked, often in cash. This cash ends up deposited in the bank, counted by a teller, increasing the costs of serving such customers. There are many other ways the bank and its profitable customers lose when dealing with the unbanked.
From a total cost perspective to society, it’d be far better for everyone to have a real-time on-line deposit account and a debit or ATM card than the present US system. Some countries already have it. You could eliminate virtually all forms of fraud associated with the off-line systems that DJ describes. Banks could then charge more for customers who want fraud-prone services (checks and off-line credits/debits.)
Can’t clear a US check within 5 days in 2013??? Unbelievable, but I’ll take DJ’s word for it. There’s really no excuse for this and no good reason they can’t be cleared in real time. No wonder they’ve gone away in many countries.
I’ve increasingly come to believe that we haven’t moved to real-time banking in the US because financial profits are far more easily made by assessing fraud-related fees than any other way. Limiting or eliminating fraud and fees associated with it would be a substantial profit drain for the banks.
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The reason why checks cannot be cleared in real time is that some checks are outright fraudulent. Anyone who knows your account number can order checks for your bank account through any of a vast number of (legitimate) third-party check-printing services. These checks have exactly the same legal standing as your own checks. The only guard against this fraud is your signature on the check. Unfortunately, checking signatures is difficult to automate.
I think if the banks are truly interested in discouraging cash transactions, there is much more low-hanging fruit to be harvested. They could start by lowering credit card interchange fees.
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” the bank must make the deposited funds available within five days. This is often not enough time to verify the authenticity of the check. ”
Maybe in 1983. This occurs very quickly now.
The timing is very interesting actually. Banks love to play a timing game on checks. Suppose A writes a check to B. What will often happen is the money leaves A’s account, and takes one or more days to arrive in B’s account. Where is it in the interim? It’s a risk free loan to the bank. As in Office Space, they may only be making pennies on the pennies on the dollar, but we are talking about billions, possibly trillions of dollars here.
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So, as I said above in another reply, the bank can indeed verify in real time whether the account in question has sufficient funds, but this does not entirely solve the problem of fraudulent or counterfeit checks. In the limit, a human has to be involved to clear the check, and criminals love to exploit the edge cases.
The float on checks is, ironically, something more befitting of the year 1983. With today’s interest rate differentials, it is really no longer interesting at all to banks. They can borrow all the money they want from the Fed at 0.25%.
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