Checking-Account Fees, Involuntary Account Closure, and Neighborhood Demographics

Abstract

This paper uses confidential supervisory information for a large random sample of checking accounts at a small number of large banks to examine the costs associated with checking account ownership and the determinants of involuntary account closure. We find that average monthly checking account fees incurred by our sample are around $9, but these fees are very unevenly distributed across account holders. Accounts that were opted in to the standard overdraft coverage of debit-card or ATM transactions tended to have much higher account fees than accounts that were not opted in. Much of the variation in account fees reflects fees associated with having insufficient funds to cover transactions (NSF-related fees). Multivariate tests confirm that account balances and transaction activity explain much of the variation in fees. Controlling for account-related factors, we also find differences in fees that are associated with census-tract characteristics. Our tests indicate that higher account fees or a lack of account activity are important factors associated with a higher likelihood of involuntary account closure. New accounts also have a very high closure risk. However, we again find associations between census-tract characteristics and the likelihood of involuntary account closure. The tract characteristics that are associated with higher account fees or involuntary account closure are similar to the demographic characteristics of households that tend to be unbanked or underbanked. Hence, our findings can help to explain why some households turn to nonbank sources of transaction or liquidity-credit services.