Debanking, the removal or refusal of banks to offer accounts to customers, is a hot topic in Washington, with Federal Reserve Chairman Powell pledging to examine the issue. One of us testified before Congress that the high cost of basic banking causes people to be debanked. Today, 5.6 million households in America – and approximately one in ten Black, Hispanic, and Native American households – lack a bank account.
While debanking has garnered headlines, fewer may be aware of the Fed’s plans to lower swipe fees charged on debit cards. We believe this proposal is a mistake that could exacerbate debanking. Instead of moving forward with a rule that will make the problem worse, the Fed should address how overdraft fees cause people to leave the banking system.
Why would a regulation on debit card swipe fees cause people to become unbanked? People who live paycheck to paycheck typically pay with debit and, by definition, do not maintain deposit balances high enough to generate meaningful interest margins for their banks. For these accounts, debit swipe fees are a significant source of revenue for banks. And importantly for consumers, these fees are vital to the economics of banks offering basic accounts, and an alternative to another bank economic model – high-cost overdraft fees – that is substantially worse for consumers.