Switching to Responsible Banking – Center for American ProgressFebruary 28, 2021
Introduction and summary
Individual customers of deposit-taking banks are extremely important to big banks’ bottom lines. In addition to paying fees for services, these customers provide banks with an astonishing amount of low cost, stable funding through their checking accounts. The money in these accounts—called demand deposits in banking parlance—allows banks to make loans and buy assets. In the third quarter of 2020, domestic demand deposits in Federal Deposit Insurance Corp.-insured commercial banks and savings institutions totaled more than $15.6 trillion.
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Given the importance of demand deposits to bank funding, one would expect banks to treat their customers well and be sensitive to the way their customers view their business behavior. But the evidence suggests that this is not so. Banks must be more concerned that poor treatment of customers or lending that conflicts with the interests of a sizable number of depositors—for example, private prisons or union-busting companies—could reduce their overall funding.
From just the 2008 financial crisis onward, major U.S. banks misled investors, resulting in more than $150 billion in fines; opened more than 3 million fake accounts that consumers did not want; subjected hundreds of service members to illegal foreclosures; paid millions of dollars in settlements over racial discrimination in hiring practices; and charged Black and Latino applicants higher interest and heavier refinancing fees. Black and brown Americans in particular continue to pay far more in high-cost banking fees, as they often do not have the wealth to afford lower-cost bank products.
Banks have also not been particularly attuned in their lending and investing behavior to growing popular concerns about climate change. Since the Paris climate change agreement in 2015, the largest American banks have provided almost $1 trillion in financing for the fossil fuel companies most aggressively expanding oil and gas projects. Broad-based membership groups—such as the Sierra Club with its environmental members and Business Forward with its small-business partners—and activists and consumers are raising their voice in favor of change.
However, banks that have a record of mistreating their customers, being indifferent to the climate effects of their investment portfolios, or treating their workers poorly are, in general, not disciplined by customer exit. They still enjoy stable amounts of demand deposits that help them fund their business. In fact, customer account switching is notoriously rare. J.D. Power’s 2019 U.S. Retail Banking Satisfaction Study showed that just 4 percent of consumers switched primary banks in 2018. This raises the question of why customers do not simply leave for banks that would treat them better—or that invest more responsibly.
The explanations for this behavior…