Can minorities get fair service? Don’t bank on it

June 28, 2018
Jared Wadley

ANN ARBOR—”Main Street” community banks are sometimes viewed as wholesome and welcoming to all of their customers’ financial needs.

But a new study indicates that African-Americans and Latinos are not getting that warm reception from these small banks, which punish these customers with higher balance requirements and fee structures.

These discriminatory practices—captured in national headlines and alleged against large banks—are more common at small community banks, researchers said.

“Small and community banks’ practices sometimes receive less scrutiny given their public perception, limited geographic scope and lower share of deposits,” said Terri Friedline, a researcher at the University of Michigan School of Social Work, who co-authored the report with colleague Jacob William Faber, a New York University sociologist.

When the spotlight has been placed on many small banks, the research indicates unfair practices against people of color. The analysis of data came from a national sample of 1,344 banks—mostly small and community banks.

The minimum opening deposit is substantially higher in majority black neighborhoods ($80.60) and in neighborhoods without a racial majority ($97) than in white neighborhoods ($68.50). Opening deposit requirements are almost the same in majority Latino ($68.60) as in white neighborhoods.

Researchers also reported that it’s cheaper to maintain a checking account opened in a white neighborhood. A minimum balance of only $625.50 is required to avoid fees in majority white neighborhoods, compared to $748.80 in majority Latino neighborhoods, $870.50 in majority black neighborhoods, and $957.10 in other neighborhoods.

Other key findings:

  • Racial bias among tellers means that checking account costs and fees depend on who consumers talk to at the bank. Tellers in places with small white populations report significantly higher overdraft fees and greater likelihoods of using credit or screening agencies than tellers in places with large white populations.
  • Segregation substantially shapes the cost of banking. Compared to white neighborhoods, the average checking account costs and fees are $262.09 higher for Latinos, $190.09 higher for African-Americans and $25.53 higher for Asian-Americans.
  • Banks’ costs and fees further limit the economic power of communities of color by requiring more earnings to be sequestered in checking accounts where they cannot be used. The average white American needs to deposit about 3 percent of a paycheck in order to open a checking account in their neighborhood and keep 28 percent of a paycheck deposited to avoid a fee or account closure. African-Americans, by comparison, need to initially deposit 6 percent of a paycheck and keep 60 percent unused in their account. Comparable values for Latinos are 6 percent and 54 percent; for Asian-Americans, the values are 3 percent and 22 percent.

“Given these findings, financial system regulations and strong consumer protections are necessary for guarding consumers and communities of color against being charged more for inclusion in the financial system and participation in the economy,” Faber said.

The findings appear in a report from New America.

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