Three national Walmart partner banks are entirely dependent on overdraft fees levied on low-income shoppers.
First Convenience Bank, Academy Bank and Woodforest National Bank all derived more than 100% of their profits in 2020 and 2019 from overdraft fees, according to research published earlier this year by the Brookings Institution. As the report notes, the businesses “had overdraft income that exceeded total net income (meaning they lost money on every other aspect of their business.)”
The research was cited by Sen. Chris Van Hollen (D-Maryland) during a August 3 oversight hearing before the Senate Banking Committee bringing together the main financial regulators. Acting Office of the Comptroller of the Currency (OCC) chief Michael Hsu criticized “excessive fees on overdrafts” and told Senator Van Hollen that his agency is “looking very closely” at the issue.
“These particular institutions have been identified, along with other practices. We will use the full range of our toolkit, our oversight toolkit, to address this,” Hsu said. “Some of them have been identified for some time and we are working on it,” he added.
Van Hollen had asked about the safety and soundness of banks that depend on certain streams of income for their profitability. Hsu said it was a valid concern, but noted that he could not comment on specific cases or “confidential surveillance information”.
It’s long been known that Walmart’s in-store banks are usually the country’s banks. biggest overdraft fee collectors. But the new review comes with an attempt by Walmart to expand its reach into the financial services sector. Earlier this year, the firm announcement that it was launching a “fintech” (financial technology) start-up branch aimed at offering its customers “affordable financial solutions”.
Truth asked Walmart to comment on Hsu’s remarks. This story will be updated if a company representative responds.
The Brookings study did not focus on Walmart, which is still the largest company in the world by revenue and people employed, despite Amazon’s efforts. rapidly expanding over the past two decades. The research looked at which companies get most of their profits from overdraft fees and found that the top three are all partners of Walmart. First Convenience, Academy and Woodforest are also the only companies in the United States whose overdraft fees exceed 100% of total profits, with penalties imposed by the first two exceeding 200% of each company’s profits. Both woodforest and First convenience market their services to Walmart cash registers on their websites.
Study author Brookings Senior Fellow Aaron Klein said banks that derive most of their revenue from overdraft fees are more like “payday lenders” than traditional banks. Loans are usually the most lucrative financial service offered by banks.
“They are a combination of payday lenders and check cashers, whose business model depends on a single product with an exorbitant annual interest rate that is only paid by cash-strapped people,” Klein said of the companies. He gave an example: a $35 overdraft fee to facilitate a $25 purchase, which equates to an annual interest rate (APR) of 25,000%. By comparing, credit unions offer small, short-term dollar loans with an APR capped at 28%.
Klein noted that previous research has shown that 9% of people account for 80% of all overdraft fees, highlighting how overdraft fees lead to a cycle of debt similar to that which traps payday loan borrowers. Another one recent study by the Financial Health Network showed that 43% of low-income households reported having had overdrafts in the past year, with an average of 9.6 overdrafts.
The Consumer Financial Protection Bureau also published a study in April showing that many low-income people avoid opening bank accounts altogether for fear of incurring overdraft fees, forcing them to pay for “services that banked households routinely receive for free”, such as cashing out checks, money transfer and prepaid debit cards to make purchases online.
In 2014, in-store Walmart bank overdraft fees made national news when an analysis released by the the wall street journal showed how the companies had disproportionately high overdraft penalty revenues and how they were actually being used by Walmart customers as alternatives to payday lenders. The article noted that the vast majority of First Convenience, Academy and Woodforest branches were located inside Walmart stores.
In 2010, the largest and most Walmart-dependent of the three, Woodforest, paid $33 million to settle OCC allegations of deceptive practices and excessive overdraft fees. The company changed its practices, but the agency settled the charges without requiring the company to admit or deny the charges against it.
Robert Marling, then CEO of Woodforest, told the the wall street journal in 2014 that he knew people were using his bank as a substitute for a payday lender. Woodforest allows people to withdraw up to $500 with a penalty fee.
Walmart became the world’s largest corporation in 2002, at the height of the neoliberal push for deregulation, after a series of free trade agreements led to the relocation of American manufacturing and the growth of the country’s service economy.
The company also ranked at the top of the Fortune 500 list thanks to an aggressive cost-cutting strategy – in pressing Suppliers and through ruthless anti-union campaigns targeting its staff. Walmart has close entire stores and divisions rather than bargaining with workers who vote to unionize. None of the company’s 1.5 million employees in the United States is affiliated with a union. New recruits were also made to watch a training video disparagement of collective bargaining. The result was the preservation of poverty wages for Walmart employees. No other company has more staff on means-tested social assistance programs like Medicaid and food stamps, according to a published study. last november by the Government Accountability Office.
Since 2017, Walmart has offered its employees an alternative to overdraft fees and payday loans in the form of salary advances with interest rates between 6 and 36%. About 27% of the company’s workforce, or 380,000 employees, used the service in 2019.
After capturing the largest share of the retail market, Walmart sought to establish its own bank in apply for a federal banking charter in October 2005. The company withdrew its application in March 2007 after the refusal of the legislators and the regulators.
But with the development of fintech companies, Walmart does not need to apply for a banking charter to expand the range of financial services it offers. Fintech companies can be regulated as suppliers to banks. One such company, Chime, recently caught the attention of ProPublica after receiving a large number of complaints for restricting its clients’ access to their money.
Walmart said in February that it was not considering applying for a charter to become an industrial finance company (ILC) after bolstering its fintech team by hiring two senior bankers from Goldman Sachs. (In December 2020the Federal Deposit Insurance Company made easier for non-financial companies to become ILCs, which are authorized to do like the banks without Federal Reserve oversight.) Industry watchers have also said that Walmart is not it appear interested in creating his own bank, but rather to strengthen the services it offers by smartphone application. This could give the company and its partners additional opportunities to impose onerous banking fees on customers without the scrutiny that normal banks face.
But it’s unclear what the regulatory landscape for the company’s fintech venture would look like if authorities cracked down on steep penalties for partner banks whose business models resemble those of payday lenders.
“Excessive overdraft fees, predatory lending, high-cost debt traps: all of these things should be banned,” Hsu told Van Hollen. “They have no place in the federal banking system.”