By Ray Birch
LAKE FOREST, Ill.—Thousands of Americans are being debanked. In the last three years, 8,056 consumers filed complaints with the CFPB against a financial institution for improperly closing checking, savings or other deposit accounts.
A group of lawmakers in February sent a letter to the U.S. Senate Committee on Banking, Housing, and Urban Affairs on the topic, pointing out big banks are the primary agents of debanking. The four largest banks in the country—JPMorgan Chase, Wells Fargo, Bank of America and Citigroup—had the highest volume of debanking complaints sent to the CFPB, the group said.
“First Lady Melania Trump was debanked. Citibank has debanked three million customers,” noted Michael Moebs, economist and chair of Moebs $ervices, who provides clarity on what debanking is, answers common questions about the approach and shares advice for those considering or using the tactic.
What is debanking?
Moebs $ervices noted the Cambridge & Oxford dictionaries define debanking similarly as “the act by a bank of closing someone’s account because they are regarded as a risk: legally, financially, or to the bank’s reputation.” Wikipedia defines debanking, writing that “de-banking, more commonly spelled debanking, also known within financial services as de-risking, is the closure of people’s or organizations’ accounts by financial institutions that perceive the account holder(s) to pose a financial, legal, regulatory, or reputational risk to the bank.”
“The Merriam-Webster dictionary does not list debanking and avoids defining it entirely,” said Moebs. “Moebs $ervices views these definitions as muddled. Debanking is a portfolio risk process resulting in determining whether or not a financial service should be opened and/or maintained based solely on profitability and if not, then not opened or closed.”
Moebs emphasized debanking addresses not just a single account or household, but a portfolio of all accounts and households or companies which are measured by profitability.
All Products Include Risk
“Debanking is any user of any type with single or multiple accounts, or a household, or a company that is not profitable,” Moebs explained.
Is debanking risky?
“All financial services or products include risk,” Moebs pointed out. “Providing a service or product is driven by making a profit, or the bottom line. A financial institution can make money and stay in business or lose money and go out of business. In comparison, any competitive sport has winners and losers whether individually or a team.”
Is debanking legal?
“There is no law preventing a depository from opening or closing a financial service account,” Moebs said.
Is debanking discriminatory?
“No, unless done for political, religious or race reasons, or is a violation of the U.S. Constitution’s Bill of Rights and subsequent amendments,” stated Moebs. “The civil rights of the user plus adherence to Truth-In-Lending and Truth-In-Savings must be followed when debanking.”
Michael Moebs
Can an account be debanked if unprofitable?
“Yes, but this could be a marketing landmine—yet debanking is legal,” Moebs said. “The landmine comes if the service portfolio is a mixture of fees, rates and balances. So, one pricing tactic does not accommodate everyone’s bottom line results – it is a confluence of pricing ways.”
How would an FI debank an unprofitable single service account or even an unprofitable household?
“A profitable service portfolio is the overall goal,” said Moebs. “The prime example is checking accounts. Currently over 80% of FI’s do not have profitable checking portfolios. Individually not every account or household will be profitable. The portfolio will be a mix of profitable and unprofitable checking accounts and households. However, the true measurement is the entire portfolio of checking accounts collectively. Maintaining a profitable portfolio is key.”
Closing unprofitable accounts and households means spreading overhead expense over fewer accounts and households/companies, thus making the portfolio more expensive and unprofitable?
Reduce Direct And Indirect Expenses
“The debanking process will also reduce direct and indirect expenses such as compensation and benefits for tellers and service representatives,” explained Moebs. “Purging unprofitable accounts decreases or offsets not just overhead expenses per account or household. Again, think strategically to achieve portfolio profitability not individual account or individual household profit or net income.”
Why would an FI debank some accounts and not all unprofitable accounts?
“Would you prefer to have 50 accounts making a profit or 100 accounts losing money in total?” asked Moebs “The correct answer is 50. Yet, in most circumstances it is not possible to eliminate all accounts of a user or their household. As an example, a user may have an unprofitable checking account but a very profitable auto loan. The net of checking and auto loan of the household is profitable, thus preventing the checking account from being debanked.”
Moebs concluded by pointing out debanking is a “new word” for financial services.
“It represents profitability to any financial institution,” he said. “Profitability is defined to include legal or law, regulation, risk, reputation, and ultimately all these are represented by the bottom line or net income for a single-service user, or multiple-service user, or a household/business of both types of users. It is a portfolio methodology not an account nor household approach to measure the bottom-line profitability. And it goes without saying never let mom be debanked and expect another mom’s apple pie.”