Helping the ‘bankless’: California considers entering banking to serve underprivileged consumers

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Anneisha Williams estimates that she has paid several hundred dollars in overdraft fees over the years. When her last bank recently refused to refund about $500 that a hacker stole from her checking account, Williams decided she was done with the banks.

Williams, 38, works full-time at a Los Angeles-area jack-in-the-box and is a home care provider. She also raises six children; She doesn’t have time to bother with a bank she no longer trusts, she said.

“They told me they couldn’t refund my money, basically it’s just a loss,” she said. “It was just a mugging.”

Now Williams does online banking through a financial technology company. It doesn’t charge her any monthly fees and offers her free overdraft protection. But state law says such companies are not banks and are not allowed to call themselves banks.

Williams has joined California’s “bankless” — about 7% of Californians who don’t have checking or savings accounts with traditional banks.

Another 18% have bank accounts but end up using financial services with higher fees, such as B. Payday lenders or check cashing companies. According to banking experts, they are considered the “underbanked”.

According to studies, one in four Californians does not have full access to banks. Many are low-income and minorities who pay high fees to access their cash.

Lawmakers say they are preparing to help. The state legislature passed legislation in 2021 creating a commission to research a public banking option called CalAccount. His report is due to lawmakers on July 1, 2024.

CalAccount would be a state-run public bank, but the state would likely involve another bank or financial partner. It would offer services like free checking accounts, overdraft protection, ATM cards and savings accounts to people underserved by banks, state officials said.

Member of Parliament Miguel Santiago, a Los Angeles Democrat who authored the law, said it would bring people back into the economy who are being pushed out by high financial fees.

Financial possibilities

“We cannot create a stable economy if financially underserved households spend an average of 10% of their income on fees and interest just to access their own money and pay bills,” Santiago said. “Creating a public option to bank and closing the racial wealth gap is not only a moral imperative, but also creates greater financial security for all of our communities.”

CalAccounts would offer “a voluntary, fee-free, federally-insured transactional account,” according to the California Public Banking Option Act. People could access their accounts in person at post offices instead of bank branches.

According to the Federal Reserve, California has one of the highest concentrations of unbanked families in the entire country. Workers making less than $15 an hour make up 81% of the state’s unbanked population, according to a study.

The Federal Deposit Insurance Corp., which regulates banks, says “unbanked” means no one in a household has a checking or savings account with a traditional bank or credit union. Underbanking means they have a bank account but still don’t have access to many financial services like credit cards and loans.

Not enough money

CalAccounts critics say there aren’t enough of those who are unbanked or unbanked to justify a government-run financial alternative. Many Californians don’t have access to banking services, they said; they simply lack cash.

“This is a crucial distinction that needs to be made; People who use payday loans and other high-priced lending products do so because they have insufficient cash flow, not because they don’t have access to banking services,” 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 a public bank gets its money to lend and how transparent it is will be important. A public banking system could obscure lending practices that deserve public scrutiny, he said.

“Spending of taxpayers’ money should be authorized by the legislature and made available to the public,” he said. “If the bank’s loans were funded entirely with federal tax revenue allocations, I wouldn’t have a problem with that. But financing them through borrowing can mask losses and delay the final bill from being passed to taxpayers.

“This is how the state student loan program became a trillion-dollar public loss. California should not repeat the same mistake.”

Bet on colored people

Unbanking greatly impacts people of color and low-income families. Nearly 1 in 2 Black and Hispanic households in California are unbanked or unbanked, state officials said.

One reason: Low earners are often burdened with bank fees that others with higher balances do not have to pay. According to a study by the Roosevelt Institute, a liberal think tank, black households are nearly twice as likely to pay overdraft fees than white households, and Latino households are 1.4 times more likely.

In 2021, 11% of US adults with bank accounts paid at least one overdraft fee, but 20% of Black and 14% of Latino account holders paid such fees, according to the Federal Reserve.

Banks charge overdraft fees—typically around $35—on each transaction. Some banks charge a single customer multiple times for the same mistake and charge them each day their account remains overdrawn, the Roosevelt Institute said.

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

(Lauren Justice

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CalMatters)

Frequent overdrafts account for about half of banking firms’ checking account profits, according to a 2020 study by global consulting firm Oliver Wyman. Overdraft-related fees generated $17 billion for banks in 2019 and about 9% of annual pre-tax profit among the 25 largest banks.

Due to public pressure, some banks have reduced fees in 2021. But in the third quarter, fees were high again, and banks made $11 billion that year, the Roosevelt Institute said.

Add in what unbanked customers pay check cashers and payday lenders, and Californians lose 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 deducts a $12 fee from her account every month if her balance is less than $1,500.

“That $12 is important,” said Julia, who didn’t reveal her last name because she fears deportation as an undocumented immigrant. “For a poor person, every single dollar matters. We have to pay for lights, gas, garbage disposal and food. You have to have two or three jobs to make ends meet.”

Online banking through a financial technology company like Williams is an option. But these companies are not registered banks. They often work with banks to offer their services. And some have spawned hundreds of complaints.

If the state runs a public bank, people could have their paychecks, welfare payments and tax returns deposited directly, proponents say.

However, that option may be years away. After lobbying by the banking industry, the legislature changed the public banking law. Rather than create a bank, the bill created a blue-ribbon commission to conduct market analysis to determine if it is feasible.

To date, this commission has held only a few meetings. It’s only just beginning with hiring a market analysis consultant.

In the meantime, state and federal governments should be more active in regulating banking and protecting consumers, wrote Emily DiVito, author of the Roosevelt Institute report.

To back this up, their study includes research that allegedly shows how employees at some California banks treat minority or low-income customers.

Researchers posed as potential customers and went to 80 bank branches to obtain account opening information. Bank employees turned minority recruiters away nearly a third of the time, DeVito wrote, but white recruiters were turned away once out of 23 visits.

Employees gave various reasons: customers needed to make appointments, employees were too busy or on their lunch break, or relevant bank account information was on the bank’s website.