Why Ultra-Low Rates Don’t Benefit Ultra-Strapped Consumers

By Matthew Shaw and Emma Palley

  • The more precarious a household’s financial standing, the more it must spend on basic financial services as a share of its income.
  • Minority households continue to face substantial disparities in access to and the cost of basic financial services, putting them also at greater risk due to reliance on unregulated entities.

Ultra-low rates are supposed to mean lower-cost financial services for most Americans that then encourage the consumption needed to spur employment and, if all goes according to plan, overcome the inequality cost ultra-low rates impose on the ability of all but the wealthy to save for the future.  Nothing seems to be going according to the Fed’s plan, but a new study shows even more clearly why ultra-low rates do not translate into readily-accessible financial services for the almost two-thirds of American households who spend surprising sums to get even basic financial services.  One might blame predatory financial institutions – many surely will – but ultra-low rates often make the interest banks can permissibly charge so unprofitable that they make up the difference with added fees or abandon key sectors to unregulated companies who can charge still more due to their lack of rules and a wide-open competitive field.  As Karen Petrou’s book details, ultra-low rates have redefined banking into a fee-based business with a primary focus on wealth management, not the financial intermediation for customers across the income and wealth spectrum essential for sound financial products and stable financial systems. 

Work by the Financial Health Network* looked at financially-vulnerable, -coping, and -healthy households in 2020 using both survey responses and secondary data to estimate total financial-services fees and interest borne by consumers.  In short, both vulnerable and minority households spend more of what they earn on banking services compared to financially healthy or white households despite accommodative policy’s ostensible benefit to just these same households.

The study calculates “Financial-Health Scores,” which look at bill repayment, spending activity, savings, household leverage, credit score, insurance premiums, and financial-planning skills.  Even though some of the most expensive financial markets for vulnerable consumers (e.g., single-payment credit, subprime auto loans) contracted during the pandemic, financially-vulnerable and -coping households – 64% of the population – bore a disproportionate amount of financial-services related expenses:  

  • Financially-vulnerable and -coping households spent 13% and 5% of their annual incomes on fees and interest, compared to only 1% for financially-healthy households.  
  • Financially-vulnerable households with checking accounts are charged overdraft fees at a rate more than eight times that of financially-healthy ones.  LMI households are 1.8 times more likely to have overdrafted than non-LMI households.  They also spend 7% of their annual income on everyday financial services versus only 3% for non-LMI households.
  • Fourteen percent of vulnerable households used payday loans and 15% used pawn loans versus only 1% each for financially-healthy households.
  • Black and Hispanic households spend a greater share of their annual income on interest and fees for financial services than white ones, i.e., 6% and 5% versus 3%.
  • A much smaller share of Black households – 45% – has general purpose credit cards compared to white (78%) and Hispanics (74%) households.
  • The share of Black and Hispanic households carrying balances on their cards is also significantly higher than that for white households.

*The Financial Health Network’s report was funded by Prudential Financial.  More on the Financial Health Network may be found here.

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