Purpose
– The purpose of this paper is to analyze interest-bearing checking (IC) account policies, including the monthly fee, and minima to avoid the fee or to earn interest, as shrouded equilibria in the sense that low-income depositors subsidize higher income depositors. The authors ask whether behavior is consistent with low-income depositors being myopic, and analyze the role of competition and bank size.
Design/methodology/approach
– IC policy data from RateWatch cover more than 600 single-market banks from 2008-2012, and are matched to FDIC SOD data and call report data for testing. Hypotheses assuming low-income depositors are myopic are tested, as are the effects of bank size and competition with local market and multi-market banks.
Findings
– IC policies represent locally shrouded equilibria, with low-income depositors subsidizing higher income depositors up to a well-defined threshold, with depositors above that threshold subsiding all other customers. IC policy patterns are consistent with low-income customers being myopic, with banks generally avoiding drawing their attention, attempting to confuse them, and with policies consistent with a present orientation among low-income depositors. Local market competition does not meet the traditional expectation of favoring consumers. Additionally, larger banks report higher fees and minima, with the difference growing during the period.
Social implications
– IC policies have not received regulatory attention, yet the fees likely fall mainly on low-income individuals, and may continue to grow.
Originality/value
– The analysis of IC policies is novel, as is the locally shrouded equilibrium model, and findings regarding competition.
