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One of the most basic financial products a Canadian can have is a bank account. Yet, a study by ACORN revealed that about a million Canadians don’t have a bank account, and about five million Canadians are underbanked, meaning they may have a bank account, but they lack access to other mainstream financial products. These people are usually unable to access these products because their financial background is seen as too risky.
Unfortunately, many banks are unwilling to serve these individuals because they come from lower-income neighbourhoods and they typically yield the lowest profits.
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Why Are Low-Income Canadians Being Charged More Fees?
Did you know that when you earn below a certain income threshold, banking becomes infinitely more expensive in Canada?
To better understand how and why this happens we’ve researched all the fees banks charge when trying to turn unprofitable clients into profitable ones.
Banks are known to make money by accruing interest on your money. So the more you have in your account, the more money they make. However, when your account balance is low, the bank can no longer make a profit, and as such end up charging higher fees. This usually comes in the form of a monthly fee, as well as transaction fees.
As a consumer with limited options, you are forced to pay these fees, which ultimately takes away your hard-earned income, to access and utilize your bank accounts. Banking fees are often a vicious cycle for those who struggle to make ends meet. Paying monthly bank accounts fees means less money and having less money typically means paying more banking fees.
Most Common Fees Charged By Banks
These are some of the most common banking fees that banks and other traditional financial institutions charge when you have a low balance in your bank account:
- Minimum Balance Fee – Some banks require you to maintain a minimum balance in your account or else they will charge you a minimum balance fee( aka a monthly account fee). For people who can’t afford to keep a lot of money in their account, this fee is essentially a penalty for not having more money.
- Overdraft Fee – Many chequing accounts have an overdraft, where you can continue to withdraw or spend money from the account even if you don’t have enough money in it. However, if you use your overdraft, you have to pay a fee in addition to bringing your bank balance above zero.
- Non-Sufficient Funds (NSF) Fee – If you don’t have an overdraft, or your bank doesn’t honour a transaction because you don’t have enough money in your account, you will have to pay an NSF fee.
- ATM Fees – For each ATM withdrawal you make, you’ll be charged $2 – $5 per withdrawal.
- Transaction Fees – If you don’t have a credit card and solely rely on your debit card to make your transactions, you’ll likely reach the transaction limits and start incurring fees for each transaction you make. This can cost up to $1.50 per transaction. If you want unlimited transactions, you’ll usually need to upgrade to a more premium account which will cost more in monthly fees. The only way you could avoid this fee is by having a high minimum balance which is often a struggle for those living paycheck to paycheck.
In order to avoid these extra fees, many consumers choose to manage their income without a bank account by using expensive cheque cashing services.
Why More Low-Income Canadians Choose Alternative Financial Institutions?
Banks often use your level of income as an indicator of your ability to pay bills. If you earn below-average income, you’ll usually be seen as a credit risk from most big banks. As a result, banks will often deny you access to basic credit products like personal loans or even credit cards. The lack of options usually leads consumers like yourself to turn to alternative financial institutions who often have flexible lending standards but higher costs.
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Should Banks Be Doing More To Help Low-Income Canadians?
In general, many big banks don’t offer products or services that are specifically designed for low-income consumers. This is particularly true for credit products like credit cards, personal loans, and mortgages. Many low-income Canadians are denied these products because they are unable to meet the bank’s eligibility requirements.
A common eligibility factor used by banks is the Canadian credit score. Unfortunately, many low-income Canadians don’t have a credit score or have subpar credit because they don’t have enough information on their credit files. This is a direct result of being denied access to different credit products.
It’s a bit of a paradox as you can only gain access to different credit products if you have a good credit score, but in order to get a good credit score, you need access to different credit products.
How Can A Bank Evaluate Someone WIth No Credit Score?
To allow those with thin credit files access to different credit products and affordable terms, banks could use alternative data. This can include a person’s rent payments, phone bills, utility payments, and other monthly financial obligations. Banks could also look into a person’s cash flow management by looking at their bank account balances. According to a study by FinRegLab, cash flow data was able to measure credit risk as effectively as a credit score. Moreover, cash flow data and other alternative data can be used to bulk up a person’s credit file and generate more accurate credit scores.
While unconventional, using alternative data will allow underbanked individuals to access credit products more fairly.
Will Banks Do More To Help Low-Income Canadians
Recent news by the Financial Post announced that the Government of Canada released a report on open banking. Open banking would allow consumers to control how to share their banking data with different financial institutions and services. This regulatory framework would make it easier for consumers to switch banks and for fintech to directly compete with big banks. With Fintechs threatening big bank’s market share, these banks are likely to change their underwriting processes and create better products and services that will promote consumer loyalty.
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