John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.
The story has been around so long it is hard to know if it is a myth. A little old lady walks into a bank to open an account. She has only $100. The bank treats her very well. She walks out satisfied. She returns later that day to deposit her life savings of a million dollars.
Could that happen today? I decided to put banks to the test.
In my most recent column, I talked about low savings rates among low-income households. One reason they do not save is that with small balances they often lose money.
The Boston Globe recently reported on banks raising fees on accounts that drop below minimum balance requirements. One example they gave was Citizens Bank. They have a monthly fee of $50 on a money market account when the balance falls below $1,000. Money market funds are not earning much interest right now. The fees will wipe out the account in less than two years.
The profit model for banks has changed. They used to follow the 3-6-3 rule. Pay 3 percent interest on savings, charge 6 percent interest on loans, enjoy the profit on the difference and be on the golf course by 3:00 P.M.
A few years ago, a Federal Reserve study reported “fee income has more than doubled as a share of commercial bank operating income since the early 1980s.” Interest is now only about half of bank income.
I visited nine banks with local branches. I told them I wanted to open checking and savings accounts with a low balance.
Every bank treated me well enough. They seemed willing to take the time to explain their products. However, many of them spent time telling me about products or options that might not make sense for a low-income earner.
I found that some checking accounts have high fees and pay no interest. At Bank of America their basic checking account has a $6.00 per month fee. They will not waive it.
However, the little old lady could do pretty well for herself elsewhere. Low monthly fee accounts with a small minimum balance requirement are available.
There is a voluntary program called Basic Banking for Massachusetts. It is a set of guidelines “to expand access to bank products and services and to encourage those with modest incomes to establish banking relationships.” Participating banks must agree to low or no monthly fees with low minimum balances. For example, they must have a savings account that can be opened with as little as $10 with no monthly fee.
Some area banks participate. Eastern Bank was the only one to advertise doing so. Some banks and credit unions offer products that have low fees and low balance requirements, but they usually come with a big catch.
The catch is low interest rates. Bank accounts are earning very low rates right now. However, in another example of how Winners Stay, the more money you have the better deal you will get on interest rates.
At TD Bank, you can get 0.80 percent interest on your savings if you have the means to deposit a million dollars. If you have less than $10,000 and no checking account, you get only 0.05 percent. A rate that low does not offer a good reason to save.
I did find one financial institution that not only offers no fee basic banking, but also encourages small account holders. It was also the only place where the customer service representative urged a visit to their community service web site.
My last column discussed the need for legislation to enable Prize-linked Savings. Representative Arciero is working on a bill. Rep. Atkins has agreed to co-sponsor it.
In this case, no new law is needed. The Basic Banking in Massachusetts guidelines exist. Savers just need to take matters into their own hands. I decided to vote with my feet.
I am moving my money to Jeanne D’Arc Credit Union. They have no monthly fee accounts with low balance requirements. They have a unique feature where they actually give the highest rate, by far, to the first $500 in a savings account. They have tiered money market accounts but currently you need only $10,000 to get the highest rate. That is a lot for low-income savers. However, it is much less than the $100,000 I would need at my current bank to get roughly the same rate.
Auditors rate Jeanne D’Arc “Outstanding” on their performance in fulfilling the Community Reinvestment Act (CRA). The CRA is federal law that encourages banks to “meet the credit needs of local communities.” Outstanding is the highest rating possible.
A Consumer Reports analysis found that credit unions and small banks tend to charge less in fees. Wherever you put your money, make sure deposits are insured with government backing. At banks look for “Member FDIC.” At Credit Unions look for NCUA.
No monthly maintenance fees is not the same as no fees. If you misstep, banks will make you pay. The high fees reported in the Globe were for accounts that low-income savers should not be in.
Beyond that, if you bounce a check it will cost you. If you want to stop payment on a check, it will cost you. If your account is inactive for a long time, it will cost you.
However, if all you want is basic banking, you can find it in Massachusetts. Now I am getting a good rate with no fees and a sense that I am reinvesting in the community.
If you do not like your bank’s policies, then vote with your feet.