Pick Your Poison: Abandoning Regulated Banking in Search of Financial Inclusion

By Karen Petrou

• Transaction and savings accounts are critical to financial security and inter-generational economic equality.
• Nonbank offerings might increase financial inclusion, but pose risks to safeguarding savings, personal privacy, and consumer protection unless or until consumer-finance standards symmetrically apply to banks and nonbanks offering like-kind products to vulnerable households.
• Public-utility, postal, or CBDC alternatives to bank accounts are a long way off and may not effectively safeguard high-risk households. 
• Expanding low-cost, no-risk bank accounts is a critical near-term policy option.

Although the Federal Reserve is usually more than protective of its banking charges, the Federal Reserve Bank of Atlanta recently issued a ground-breaking report arguing that nonbank digital accounts will do far better for financial inclusion than the offerings of its regulated banks.  Although idiosyncratic within the folds of bank regulators, this view is increasingly held by nonbanks keen to show that their high-tech products run rings around stodgy, anti-inclusive banks even though the number of unbanked  households has declined in recent years.  Progressives despairing of banks also often urge establishment of the post office, the Federal Reserve, public banks, or – an Atlanta Fed suggestion – a new public utility.  However, absent a lot of new law, critical consumer safeguards – FDIC insurance, personal-liability limits, protection from abusive cross-marketing or personal-data use, and resilience under stress – are often lacking.  Although basic-banking access is critical to economic equality, so too are the terms of that access, the extent to which it is a platform for opportunity or a dead-end to segregated finance, and the impact it has on economic growth.  In the near term, a voluntary banking-industry effort getting low-risk, low-cost accounts to vulnerable households offers hope as COVID does still more harm to those who can least afford it.

What We Know About Basic Banking

There is extensive U.S. and financial-development research showing that access to payment and savings accounts is essential for household economic security and long-term wealth accumulation.  However, much in the U.S. literature does not refine conclusions to differentiate the beneficial impact of bank accounts for individuals who didn’t have them before, instead reaching conclusions showing that savings enhance wealth which is of course obvious, especially if a family started with some.  On the flip side, studies in the financial-development arena are challenging to extrapolate to advanced economies because most of the population starts out unbanked and economic growth is thus easily attributable to financial inclusion even if other factors – increased peace and prosperity – might play more than a small role.

However, moving past these analytical challenges still leaves us with substantial evidence strongly suggesting that access to sustainable, stable, and non-predatory financial products would do wonders for U.S. economic equality.  Some key findings include:

• debit cards enable the poor to save more, but the no-minimum accounts essential for debit cards and these households are harder to find across the regulated banking system and fees have gone up.  Interestingly, this may in part be due to the impact of the Durbin Amendment’s reduced interchange fees, which cut deeply into the non-customer revenue associated with transaction accounts.  As we have elsewhere shown, the Fed’s ultra-low rates also sharply reduce the ability of banks to offer small-dollar, high-activity transaction accounts because of tight bank net interest margins (NIMs).
• FDIC insurance is a critical safeguard to low-balance transaction and savings accounts.  Many other rules – e.g., the $50 liability limit for loss or theft – are also essential and usually inapplicable outside the banking system.  The transition to mobile payments in the course of COVID makes clear how critical this is.
• Families with even a small amount of non-retirement savings – $250 to $750 – are less likely in a financial shock to be evicted, miss a housing/utility payment, or receive means-tested public benefits.  25% of families with transaction accounts lack savings accounts; since low/mid-income households are least likely to have even a transaction account, the double-whammy of no secure day-to-day funds and no cushion is devastating in family or national financial stress.  In fact, savings are even more important to financial security than income.     
• Households who had transaction accounts and thus received federal benefits early in the COVID crisis were far more financially resilient thereafter.

A Near-Term Solution

On October 19, the American Bankers Association* announced a significant expansion of the Cities for Financial Empowerment Fund program aimed at providing low-cost, insured bank accounts for un- and under-banked households.  These Bank On accounts have been around since 2015 and are now available at more than 24,000 bank branches and at least 14 credit unions. 

While they proved challenging for smaller banks due to technical account set-up complexities, the ABA solved for this by using its clout to get twenty core service providers to cooperate with banking organizations eager to offer these new accounts.  This reduced a significant operational roadblock, now leaving it up to bankers if they want to be part of the problem leading to the press for new, nonbank consumer-finance portals or if they will take the trouble not just to be part of the solution, but to be a solution. 

Key features of these accounts include:

• FDIC insurance;
• consumer-protection, privacy, and risk-of-loss safeguards;
• debit cards;
• online and mobile banking;
• minimum opening deposit amounts of $25 or less;
• no overdraft, non-sufficient fund, account activation, closure, dormancy, inactivity, and low-balance fees; and
• unrestricted in-network ATM access.

It’s not enough, but it’s a lot. 

*  The ABA did not fund, direct, or otherwise commission this blog post.  We are grateful for its factual comments and suggestions.