An increasing number of the nation's large banks — U.S. Bank, Regions Financial and Wells Fargo among them — are aggressively courting low-income customers with alternative loan products that can carry high fees.
They are rapidly expanding these offerings partly because the products were largely untouched by recent financial regulations, and also to recoup the billions in lost income from recent limits on debit and credit card fees.
Banks say that they are offering a valuable service for customers who might not otherwise have access to traditional banking.
Banks often have an advantage over payday loan companies and other storefront lenders because, even though banks are regulated, they typically are not subject to interest rate limits on payday loans and other alternative products.
Reaching people who use few, if any, bank services could be lucrative, industry consultants said. Kimberly Gartner, vice president for advisory services at the Center for Financial Services Innovation, said that such borrowers were a $45 billion untapped market.
Bank payday loans, which are offered as advances on direct-deposit paychecks, are a particularly vexing part of the new pitch from lenders, consumer advocates said. The short-term, high-fee loans are offered by a handful of banks, and they can get expensive. When the loan comes due, the bank automatically withdraws from the customer's checking account the amount of the loan and the origination fee — typically $10 for every $100 borrowed — regardless of whether there is enough money in the account. That can lead to overdraft and other fees that translate into an annual interest rate of more than 300 percent, according to the Center for Responsible Lending.
Lenders are also joining the prepaid card market. In 2009, consumers held about $29 billion in prepaid cards, according to the Mercator Advisory Group, a payments industry research group. By the end of 2013, the market is expected to reach $90 billion.
A big lure for banks is that prepaid cards are not restricted by Dodd-Frank financial regulation law. That means that banks are able to charge high fees when a consumer swipes a prepaid card.
The companies distributing the cards have drawn criticism for not clearly disclosing fees that can include a charge to activate the card, load money on it and even to call customer service. Customers with a "convenient cash" prepaid card from U.S. Bank, for example, pay a $3 fee to enroll, a $3 monthly maintenance fee, $3 to visit a bank teller and $15 to replace a lost card.
Capital One charges prepaid card users $1.95 for using an ATM more than once a month, while Wells Fargo charges $1 to speak to a customer service agent more than twice a month.
Some smaller banks even offer prepaid cards with credit lines, which carry steep interest charges.
"This is a two-tiered, separate and unequal system and it is worsening," said Sarah Ludwig, a lawyer who started the Neighborhood Economic Development Advocacy Project.