Cost of Banking for LMI and Minority Communities

We test whether minimum account balances to avoid fees, maintenance fee amounts, and nonsufficient funds charges are systematically different in LMI and majority-minority communities relative to other communities and find that they are generally higher. The minimum account balance to avoid fees on a noninterest checking account is about $45 higher on average in LMI Census tracts than in higher income tracts, and more than $70 higher on average in majority-minority tracts than in majority-white tracts. We investigate potential sources of these differences such as bank business models, competition among providers of financial services, and other demographic characteristics of the tracts. Opportunities for lending income, bank operating costs, and bank size can largely account for the higher cost of retail banking services in LMI and majority-minority communities.