Helping the ‘Unbanked’: To serve disadvantaged consumers, California considers getting into banking

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Anneisha Williams believes she has paid hundreds of dollars in overdraft fees over the years. So when her last bank recently refused to refund about $500 hackers stole from her checking account, Williams decided her bank deal was over.

Williams, 38, works full time at Jack in the Box in the Los Angeles area and is a home care provider. She is also raising six children. She said she no longer had time to mess around with a bank she didn’t trust.

“They said they couldn’t refund my money, basically saying it was just a loss,” she said. “It was just a highway robbery.”

Williams now does online banking through a financial tech company. No monthly fees are charged and free overdraft protection is provided. However, state law stipulates that such a company is not a bank and cannot call itself a bank.

Williams joins California’s “unbanked” demographic. About 7% of Californians do not have a checking or savings account with a traditional bank.

Another 18% have bank accounts, but will use high-fee financial services such as payday lenders and check cashing businesses. According to banking experts, they are considered “underbanks.”

Research shows that 1 in 4 Californians have no access to a bank. Many are low-income and minorities who pay high fees to access cash.

Lawmakers say they are ready to help. The state legislature will pass legislation in 2021, creating a commission to review public banking options called CalAccount. That report is scheduled to be submitted to Congress on July 1, 2024.

CalAccount is a state-owned public bank, but the state may involve another bank or financial partner. State officials said they would offer services such as free checks, overdraft protection, ATM cards and savings accounts to people underserved by banks.

Los Angeles Democratic Rep. Miguel Santiago, who drafted the bill, said the law would bring people displaced by high financial costs back into the economy.

financial options

“When financially underserved households spend an average of 10% of their take home income on fees and interest just to access their money and pay their bills, it creates a stable economy. I can’t,” Santiago said. “Creating public banking options and bridging the racial wealth gap is not only a moral imperative, but creates greater financial security for all our communities.”

CalAccounts provides a “voluntary, zero-fee, zero-penalty, federally-backed trading account,” says the California Public Banking Option Act. People could access their accounts directly at the post office rather than at a bank branch.

California has one of the highest concentrations of unbanked families in the nation, according to the Federal Reserve. Workers earning less than $15 an hour make up 81% of the state’s unbanked individuals, the study said.

According to the Federal Deposit Insurance Corporation, which regulates banks, unbanked means no household has a checking or savings account at a traditional bank or credit union. Being underbanked means having a bank account but not having access to many financial services such as credit cards and loans.

not enough cash

Critics of CalAccounts say no one is banked or not banked enough to justify a state-owned financial institution. Many Californians lack access to banking services, they said. They’re just short of cash.

“This is an important distinction that must be made. Individuals who take out payday lenders and other high-cost loan products are not because they lack access to banking services, but because they have insufficient cash flow. ‘, a coalition of business and banking groups wrote to lawmakers.

Other experts expressed concerns about public banking.

James Hamilton, an economics professor at the University of California, San Diego, said where public banks fund their loans and that transparency will be key. The public banking system could mask lending practices that merit public scrutiny, he said.

“Taxpayer spending should be approved by Congress and made available to the public,” he said. “If bank loans were fully funded by legislatively approved allocations of tax revenues, I would have no problem with that. cover-up and may delay the submission of final invoices to taxpayers.

“Here’s how the federal student loan program cost the public a trillion dollars. California shouldn’t make the same mistake.”

Banking to People of Color

The lack of access to bank accounts has a significant impact on people of color and low-income families. Nearly one-half of black and Latinx households in California are unbanked or unbanked, according to state officials.

One reason is that low-income consumers often incur bank charges that other consumers with large balances do not have to pay. A study by the Roosevelt Institute, a liberal think tank, found that black households were almost twice as likely to pay overdraft fees than white households, while Latino households were 1.4 times more likely to pay overdraft fees. .

According to the Federal Reserve, by 2021, 11% of U.S. adults with bank accounts have paid at least one overdraft fee, compared to 20% of blacks and 14% of Latino account holders. % paid such fees.

Banks charge an overdraft fee, typically around $35, for each transaction. According to the Roosevelt Institute, some banks have billed one of her customers multiple times for the same error, with accounts debited every day.

Aneisha Williams with her daughters Kamaya, 9, and Nevaye, 6, at a park in El Segundo on February 20, 2023.

(Lauren Justice

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CalMatters)

According to a 2020 study by global consulting firm Oliver Wyman, frequent overdrafts generate about half of the profits in bank checking accounts. Overdraft-related fees contributed $17 billion to banks in 2019, accounting for about 9% of annual pre-tax profits among the 25 largest banks.

Due to public pressure, some banks have lowered their fees in 2021. But by the third quarter, fees had rebounded and the bank had raised $11 billion for the year, the Roosevelt Institute says.

In addition to what unbanked customers pay check cashiers and payday lenders, Californians are losing hundreds of millions of dollars a year in fees, Santiago said.

customer service test

Julia, a 61-year-old McDonald’s employee in Richmond, Calif., said her bank charges a $12 fee on her account each month when the balance falls below $1,500.

“That $12 is significant,” Julia said. She did not give her last name, Julia, for fear she would be deported as an illegal immigrant. “For poor people, every dollar counts,” she says. Have to.”

Online banking by financial technology companies is also an option, as Williams did. However, those companies are not registered banks. They often partner with banks to offer their services. Others have collected hundreds of complaints.

If states run public banks, people can deposit their paychecks, public assistance benefits and tax returns directly, proponents say.

However, this option may be years away. After lobbying by the banking industry, MPs amended the Public Bank Bill. Instead of creating a bank, the bill created a Blue Ribbon Commission to do market analysis to determine if it was viable.

So far, the committee has held few meetings. The process of hiring a market analysis consultant is just beginning.

Meanwhile, state and federal governments need to regulate banking more aggressively and protect consumers, writes Emily DeVito, author of the Roosevelt Institute report.

To back that up, her research includes studies purporting to show how staff at several banks in California treat minority or low-income customers.

Posing as potential customers, researchers visited 80 bank branches and asked for information on opening an account. According to DeVito, bankers turned down minority solicitors nearly a third of his, while white solicitors turned him down once in his 23 visits.

The staff gave various reasons. For example, a customer needs to make an appointment, a staff member is too busy or at lunch, or relevant information about bank accounts is on his website at the bank.