Today the U.S. House Select Committee on Economic Disparity & Fairness in Growth held a roundtable, “America’s Unbanked and Underbanked,” and talked with industry leaders about the ways Congress can work with financial institutions and private sector stakeholders to expand access to banking services to underserved communities.
Highlights from the roundtable discussion include the pros and cons of digital payments as opposed to cash, the need for banks in rural jurisdictions and the potential of offering bank accounts to all citizens.
While the discussion touched on a large range of issues, guest speakers did provide their own potential solutions and thoughts on how Congress can help bring access to the underbanked and unbanked. Key suggestions included:
- Introducing ‘immediate fund availability’ legislation, raising the statute of immediate funds from $200 set in 1987 (Aaron Klein, Senior Fellow, Economic Studies, Brookings Institution)
- Provide flexible institution-level equity capital to Community Development Financial Institutions (CDFI) that touch unbanked individuals and entrepreneurs (Ines Polonius, CEO, Communities Limited)
- Equitable implementation of the Corporate Income Tax (CIT) from the US Treasury, protection against predatory lending practices leaking into fintech (Robert E. James II, Chairman, National Bankers Association)
- Involve the Treasury Department in banking solution innovation conversations (Wole Coaxum, CEO, MoCaFi)
- (Justin Fisk, Director of Research and Policy, Online Lender’s Alliance)
Slow moving money
One of the earliest issues brought up at the roundtable was the lack of speed in fund availability after depositing money.
Delays and roadblocks related to pandemic stimulus money, issued by the CARES Act, highlight the issue but are only the tip of the iceberg, according to Aaron Klein, Senior Fellow of Economic Studies at Brookings Institution.
“The single most impactful thing [Congress] could do today is give people access to their money immediately,” Klein said, explaining that the amount that can be immediately accessed following a deposit has remained unchanged since being set by law at $200 in 1987.
“This can be done by simply amending the Expedited Funds Availability Act to require immediate access for the first several $1,000 of a deposit, instead of permitting the lengthy delays that cause people living paycheck to paycheck to seek these workarounds,” he said.
While the Federal Reserve has the regulatory authority to fix this problem, he does not believe it will after more than 20 years. He also believes the Reserve’s dual-responsibility to regulate and operate its own payment system also causes friction, and forces the entity to study the issue for long years before they can even begin acting.
“I’m asking you to change the law, and banks will have one of two options: use a private real-time payment network that’s already been built, or expedite the funds immediately and bear a tiny, almost negligible amount of float risk,” Klein said, adding that private banks like JPMorgan have already begun offering instant deposit access services.
“It would just mean the Federal Reserve would lose market share, and banks would have a difference,” he said.
Overdraft fees
The roundtable also touched on how overdraft fees impact the unbanked and underbanked, following recent comments by the Office of the Comptroller of Currency (OCC) and Consumer Financial Protection Bureau (CFPB).
Last week the CFPB announced it is enhancing its enforcement scrutiny of banks “heavily dependent on overdraft and non-sufficient fees (NSF)”, following research that found banks pulled in an estimated $15.47 billion in 2019 via these penalties. JPMorgan Chase, Wells Fargo and Bank of America made up 44% of that total, according to the report.
The OCC is set to back the initiative, with Acting Comptroller of the Currency Michael Hsu saying that the office is also working to reform and eliminate these fees during a speech to the Consumer Federation of America on Wednesday.
“By definition, these fees are being paid by those bank customers who are the most financially vulnerable, i.e., those with low deposit balances,” Hsu said.
Immediately following the CFPB’s statement, Capital One announced it would be the first to eliminate these fees following the news. Now JPMorgan Chase is following suit, announcing it will also reduce bank overdraft fees in a push to attract more customers.
While it will take time for regulators and legislators to internalize these ongoing issues and work to bring services to the underserved, reduction or elimination of overdraft fees seems like one of the best places to start.
Not only do these fees target the most at-risk individuals, they also reduce consumer trust in banks and undermine the validity of the U.S. banking system overall.
“Basic financial services have become a reverse Robinhood, whereby lower-income Americans pay tens of billions for services,” Klein said during the roundtable.
“Why are so many Americans paying so much for financial services when they have a bank account?”, he asked. “The answer: our financial system is not well structured to provide the services for people living paycheck-to-paycheck.”
Klein pointed out that one-in-12 of American families with bank accounts pay $350 or more per year in overdraft fees, according to CFPB data. He not only believes that these fees disproportionately affect poorer members of the population, but that they create distrust of banking systems and actually force use of high-cost workarounds like payday loans.
“The cost of basic banking is the driving reason among the unbanked,” Klein said, explaining how high overdraft fees push the unbanked away from traditional financial systems.
“$35 overdraft fees, while a payday lender charges $50 to borrow a few hundred dollars to make it through the weekend. Avoid the banks altogether and take your check to a check casher, for a $20 fee you get cash immediately. This helps explain some of the rational choices.”
In other recent fintech news, the CFPB and FDIC requested input on regulating bank mergers following a decades-long trend of consolidation. Credible also acquired online insurance marketplace Young Alfred in order to provide a “one-stop-shop” for lending and insurance.