June 22, 2014

Is Bank Account Applicant Screening the Next Target?

For obvious reasons, banks are reluctant to do business with customers who are more likely that most to commit fraud or fail to pay their bills. In fact, federal banking statutes and regulations require banks to perform due diligence on new customers. (These are often referred to as the "Know Your Customer" rules, among other terms.) Many banks use background screening services to review potential customers’ history of fraudulent activity, writing worthless checks, and similar activities that banks prefer to avoid. When banks learn that a prospective customer appears to present a heightened credit risk or fraud risk, the bank often denies the account application. ChexSystems, a subsidiary of FIS, is one of the major providers of these background screening services, as are Early Warning Services, Certegy, and Telecheck.

Some government officials are now complaining that these screening measures disproportionately affect low-income customers, penalizing them for relatively minor mistakes and forcing them to resort to high-cost "shadow banking" financial services rather than more affordable traditional banking services.

Last week, New York's Attorney General announced a voluntary agreement with Capital One under which Capital One will continue to use ChexSystems to screen customers for fraud, but will not use it to evaluate whether the customer would pose a credit risk. The Attorney General said the agreement is part of an ongoing investigation by its Division of Social Justice in the Civil Rights Bureau and the Division of Economic Justice in its Consumer Fraud Bureau into banks’ use of customer history databases. As part of the agreement, Capital One also agreed to "donate" $50,000 to the Office of Financial Empowerment, a New York City agency that provides financial education and counseling to low-income residents. The changes to Capital One’s policies will be implemented nationwide.

The Consumer Financial Protection Bureau has also investigated these services (and further action may be coming).

One takeaway from these developments is that some powerful government officials view a bank account as a civil right, and they have enough power to pressure even a large institution like Capital One into submission. 

(c) photo of New York City by Matt Cordell

1 comment:

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