Three national partner banks of Walmart depend entirely on overdraft fees taken from low-income buyers.
First Convenience Bank, Academy Bank and Woodforest National Bank all made more than 100% of their profits in 2020 and 2019 from overdraft fees, according to a study released earlier this year by the Brookings Institution. As the report notes, companies “had overdraft revenues greater than 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) in an Aug. 3 supervisory hearing before the Senate Banking Committee, made up of top financial regulators. The acting head of the Office of the Comptroller of the Currency (OCC), Michael Hsu, criticized the “excessive overdraft fees”, and told Senator Van Hollen that his agency “was looking very closely” at the issue.
âThese particular institutions have been identified, along with other practices. We’re going to use the full range of our toolkit, our monitoring toolkit, to address this, âHsu said. “Some of them have been identified for some time and we are working on them,” he added.
Van Hollen had asked about the safety and soundness of banks dependent on certain income streams for their profitability. Hsu said this was a valid concern, but noted that he could not comment on specific cases or “confidential surveillance information.”
It has long been known that Walmart’s in-store banks are generally the largest overdraft fee collectors in the country. But with the new review comes Walmart’s attempt to expand its reach into the financial services industry. Earlier this year, the company announced that it was launching a âfintechâ (financial technology) start-up aimed at providing âaffordable financial solutionsâ to its customers.
truth asked Walmart for 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 world’s largest company in terms of revenue and people employed, despite Amazon’s rapid expansion over the past two decades. The research looked at which companies derive most of their profits from overdraft fees and found that the top three are all Walmart partners. First Convenience, Academy and Woodforest are also the only companies in the United States with overdraft fees exceeding 100 percent of total profits, with penalties levied by the first two exceeding 200 percent of each company’s profits. Woodforest and First Convenience market the services they offer to Walmart cash registers on their websites.
Study author Brookings Senior Fellow Aaron Klein said the banks that derive most of their income from overdraft fees are more like “payday lenders” than traditional banks. Loans are generally the most lucrative financial service offered by banks.
“They are a combination of payday lenders and check tellers, whose business model is based on a single product with a very high annual interest rate that is only paid by cash-strapped people,” he said. Klein said of business. He gave an example: an overdraft fee of $ 35 to facilitate a $ 25 purchase, which equates to an annual interest rate (APR) of 25,000%. By comparison, credit unions offer small, short-term 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 the one that traps payday loan borrowers. Another 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 released 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 regularly receive free “checks, such as cashing. , money transfer and prepaid debit cards for making online purchases.
In 2014, overdraft fees at Walmart in-store banks made national news when an analysis published by the the Wall Street newspaper showed how companies had disproportionately high overdraft penalty revenues and how they were effectively used by Walmart customers as alternatives to payday lenders. The article stated that the vast majority of First Convenience, Academy and Woodforest branches were located inside Walmart stores.
In 2010, the largest and most dependent on Walmart of the three, Woodforest, paid $ 33 million to settle the OCC’s 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 newspaper in 2014, he knew that people were using his bank as a substitute for a payday lender. Woodforest allows people to withdraw up to $ 500 for a penalty fee.
Walmart became the world’s largest company in 2002, at the height of the pro-deregulation neoliberal era, after a series of free trade agreements led to the offshoring of American manufacturing and the growth of the country’s service economy.
The company also topped the Fortune 500 list thanks to an aggressive cost-cutting strategy – by eliminating suppliers and running ruthless anti-union campaigns targeting its workforce. Walmart has closed entire stores and divisions rather than negotiating with workers who vote to unionize. None of the company’s 1.5 million employees in the United States belong to a union. New recruits were also forced to watch a training video denigrating collective bargaining. The result has been the preservation of poverty wages for Walmart employees. According to a study released last November by the Government Accountability Office, no other company has more staff in means-tested welfare programs like Medicaid and food stamps.
Since 2017, Walmart has offered its employees an alternative to overdraft fees and payday loans in the form of payday advances with interest rates between 6% and 36%. Around 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 by applying for a federal banking charter in October 2005. The company withdrew its request in March 2007 after lawmakers and regulators refused.
But with the development of fintech companies, Walmart doesn’t need to apply for a banking charter to expand the range of financial services it offers. Fintech companies can be regulated as sellers to banks. One of these companies, Chime, recently caught the attention of ProPublica after receiving a large number of complaints for restricting clients’ access to their money.
Walmart said in February that it had no plans to apply for a charter to become an industrial loan company (ILC) after bolstering its fintech team by hiring two senior bankers from Goldman Sachs. (In December 2020, the Federal Deposit Insurance Corporation made it easier for non-financial companies to become ILCs, which are allowed to act as banks without Federal Reserve supervision.) Industry watchers have also said that Walmart does not appear to be not interested in creating its own bank, but rather in strengthening the services it offers through smartphone application. This could give the company and its partners additional opportunities to extract onerous bank fees from customers without being subjected to the oversight normal banks face.
But it’s unclear what the regulatory landscape would look like for the company’s fintech business if officials cracked down on steep penalties from partner banks whose business models resemble those of payday lenders.
âExcessive overdraft charges, predatory loans, high cost debt traps: all of these things should be banned,â Hsu told Van Hollen. âThey have no place in the federal banking system.