With only a few exceptions, second-chance checking accounts are hardly worthy of their name. All too often, a better descriptor could be "punishment accounts" or "fool you twice accounts."
I say that because they combine very high fees with an overdraft, and in doing so, they demand a rethink of the nominal value of a branch bank relationship. I hear people opine that a traditional bank account of any stripe will serve a lower-wealth consumer better than a prepaid card would, but these products prove how that assumption can be false.
While the fees are bad, the most concerning part is the presence of overdraft. In many cases, it was overdraft that pushed someone out of the payments system in the first place. Surveys say that the most common reason consumers choose to drop out of the banking system are in order to avoid unexpected fees. They walk with their feet, as Tiebout might say, right out the door.
Banks contend that they want to do their part to address the problems posed by the unbanked. But when an institution markets an overdraft-enabled account to people who are trying to re-start, it undermines the whole endeavor. In an era when regulators are working hard to protect consumers, the second-chance checking account stands out - and not in a good way.
Woodforest National Bank consistently ranks among the highest of all banks in their overdraft fee revenue. Even though they are a small institution, they collect more in overdraft fees than do some of the nation's largest banks. Reviewing the FFIEC's new data on overdrafts, I was surprised to see that such a small institution could place so highly when they have only a small fraction of the deposit base. There they are, having collected more in overdraft fees than did Capital One, Citibank, or Fifth Third. To make it more confounding, I found that Woodforest charges what would be considered to be a relatively low overdraft fee. So while $27 (on most of their checking accounts) is still not cheap, most banks penalize a consumer for more. How does this happen? The first culprit is probably their $1 overage cushion. I surveyed about 100 banks. None offered a smaller buffer. But otherwise, nothing was out of the ordinary.
But then a housing counselor told me that Woodforest sent a representative to her agency. "He was a nice young man," she said, "but he tried to get me to sign my clients up for their overdraft checking account!"
"Don't they have one of those second-chance products?" I asked. "It seems like that might be useful for some of your clients." As an HUD-certified counselor, she sees borrowers who are attempting to modify their loans in order to stave off foreclosure.
"Exactly," she said. "They do. But guess what! It has overdraft! I dressed him down and sent him on his way!"
I have known this counselor for a few years, and I can attest that her feelings are rarely misconstrued. When she is not happy, everyone in the room knows it. She wouldn't steer her clients near an account with overdraft.
Second Chance Checking at Woodforest costs $11.95 month. The fee is reduced to $9.95 if certain conditions are met. An overdraft, if approved for payment, costs $29.
But was this a case of a bank with an outlier checking account? I decided to see what second-chance accounts looked like at other banks.
I was surprised. The typical second-chance checking account has a monthly fee of over ten dollars. Many have an account opening and an account closing fee. Paper statements cost three of four dollars. Sometimes there is a fee to get a debit card!
Consider BBVA Compass' Easy Checking account. It costs $13.95 per month. You have to pay five dollars if the account becomes dormant and another $25 if you close the account less than six months after it was opened. A paper statement costs three dollars. Each overdraft costs $38 and the consumer can be charged for as many as six overdrafts in a single day. There is also a stop payment fee of $25 and an NSF fee of $38. The bank processes chronologically throughout the day, but it is still the case that deposits are only credited on business days.
Bank of Texas' Opportunity Checking costs $14.95 per month. There is a fee for bill pay and additional per-transaction fees if the consumer uses online bill pay more than fifteen times in one month. Bank of Texas' Opportunity Checking clears its checks on a high-to-low basis. High-to-low provokes overdraft. Additionally, Bank of Texas applies an extended overdraft fee after five business days. After that, the account is debited $6.50 on each business day where the account remains in the negative.
At Webster Bank, consumers of their second chance account will pay $37 for each overdraft. The monthly fee is $16.95. With direct deposit, the fee drops to $11.95. It also has a dormancy fee and an early account closure fee.
There are even credit unions offering this mix of fees and risk. Buckeye State (Ohio) Credit Union's Second Chance Checking has a monthly fee of $15, a check printing fee of $20, and a policy to return an overdraft for $35. A consumer cannot qualify for a better account unless he or she goes one year with no overdrafts.
PNC's account does not have overdraft. That is the exception to the rule. Of note, Webster Bank will not cover ATM withdrawals and debit card transactions that would otherwise create an overage. Because it is possible that many second-chance consumers would forego checks to avoid paying for the cost of check printing, the possibility of overdraft is sharply reduced.
An oddity with pros and cons is the Bank of Oklahoma Opportunity Checking account. While Opportunity Checking is still expensive at $14.95 per month, it comes with an auto-save service that mimics an Individual Development Account. The service lets a consumer transfer fifty cents (or more if so desired) from the spending side to the QuickSave account. At the end of the year, B of O matches the accumulated sum up to $250.
My takeaway is that any consumer who wants to get a fair second chance should get a prepaid debit card without overdraft, with a transparent fee schedule, and with a savings pocket for setting aside money into a rainy day fund. Woodforest customers would be better served if they walked across the Wal-Mart to the end cap and then selected either a GoBank or a Bluebird card. BBVA consumers should ask their teller for one of the bank's ClearSpend cards.
National Account Standards
Most of these accounts would not meet the Center for Financial Empowerment/FDIC's National Account Standards for transaction accounts. The NAS criteria show that its developers recognized that it costs to provide a transaction account. Accounts can qualify even if they charge a monthly maintenance fee of $5, and they can charge up to $10 if there is a contingency for fee waivers. But in the spirit of transparency, the NAS push for a one-size-for-all-services approach, where there are no fees to use online bill pay fee or to close the account.
They would not meet the standards for WiseWage, either. WiseWage only markets cards that agree to offer their services without appending overdraft to the account. WiseWage has checkless checking and prepaid debit card accounts. Although regulators define them differently (demand deposit vs. general-purpose reloadable), most consumers will use the cards in essentially the same way. Both serve as FDIC-insured transactional accounts. One of the WiseWage accounts offers an early direct deposit service which enables account holders to receive pay up to two days earlier.
A skeptical person might ask, "but are these accounts available to people who are listed on ChexSystems?" The answer is "yes, they are."
Some banks have made the conclusion that a second-chance checking account is a flawed product. Instead, they have developed alternatives to help people. Chase and BB&T now offer Durbin-exempt prepaid cards. Bank of America has SafeBalance and Capital One has 360. Both are checkless checking accounts designed to be managed online and without overdraft. Citibank is among the institutions that will consider applicants without factoring for ChexSystems.