Banking for the People: Remarks before the CalAccount Blue Ribbon Commission on March 23, 2023

Full, free, and fair access to the money you own, and the financial systems in which it can be safely stored, is necessary to achieve economic security. But America’s current banking and payments system is fee-based, creating a tiered economy where millions of individuals and families are pushed out of the formal banking sector and toward predatory nonbank alternatives (like check cashers and payday lenders). As of 2021, 5 percent of Americans had no bank account at all, and another 14 percent still had to rely on costly nonbank alternatives to meet their needs. Unbanked households cite the financial burden imposed by traditional banks—via things like overdraft fees, minimum balance requirements, and ATM fees—as the primary reason traditional financial institutions fail to meet their banking needs. Overdraft fees, in particular, are a pernicious and paradoxical punishment for insufficient funds. Recent research from economists at the Federal Reserve Bank of Boston finds that low-income individuals are significantly more likely to pay overdraft fees, and Black consumers are significantly more likely to pay any bank account fee at all. Beyond the statistics, the human experience of banking in person—especially for individuals who are low-income, Black, brown, and/or non-English speaking—can introduce even more, otherwise-invisible barriers to full financial inclusion.

As such, the question foremost in my mind when I embarked on this study last year was: What happens when a prospective customer walks into a physical bank branch looking for service? Are basic, low-cost financial products available at convenient locations? And, most importantly, are prospective customers—especially those who are low-income, Black and brown, and/or Spanish-speaking—able to access them? The answers to these questions underscore the need for public-interest banking infrastructure that guarantees basic, no-cost, inclusive banking services.

To capture the range of banking options in California, the field survey sent canvassers to 106 bank branches of 12 banking companies across five highly populated California counties: Alameda, Los Angeles, Sacramento, San Diego, and Santa Clara. In each county, canvassers visited branches of the bank holding companies with the greatest number of branches, as well as the branches of several smaller competitors. During each visit, canvassers requested information about the bank’s lowest-cost accounts. In short, the survey found a troubling prevalence of overdraft-fee-based accounts, a reticence on the part of bank staff to disclose cheaper alternatives, and race and language disparities in access to information and equal treatment.

The first two findings establish an alarming lack of functional availability of basic, low-cost banking products. First, survey results found that overdraft-fee-based accounts were the norm. In 60 percent of completed visits to the three largest banks in the sample (Wells Fargo, JP Morgan Chase, and Bank of America), the bank employee mentioned an account with default overdraft protection costing about $35 per overdraft, capped at three or four fee charges per day. Only two bank companies (at a combined total of three locations) were identified as offering customers a fully no-fee, no-minimum balance account.

This finding was not surprising given the data: Overdraft fees make big money for banks, amounting to between $15 billion and $30 billion in annual revenue. The Consumer Financial Protection Bureau (CFPB) has recently launched an initiative to eliminate certain financial “junk fees,” and select banks have recently moved away from overdraft-fee-based accounts or opted into “Bank On,” a certification that private banks can obtain by offering qualifying low-cost accounts.

However, these options are only useful if customers know about them, and the survey’s second finding shows that many don’t: In fewer than 40 percent of visits to a Bank On–participating institution did bankers mention an account that was Bank On–compliant. If banks don’t provide information about Bank On accounts even when specifically asked, the program will never sufficiently meet the needs of unbanked and underbanked individuals.

The survey’s third finding demonstrates race and language disparities in access to information and equal treatment at banks. Canvassers of color and Spanish-speaking canvassers were turned away from banks by staff far more than their white and English-speaking counterparts—30 percent and 40 percent of the time, respectively (compared to 4 percent of the time for white canvassers and 15 percent of the time for English-only speaking canvassers). Moreover, many canvassers reported feeling unwelcome, uncomfortable, and/or rushed while trying to bank. The reasons bank staff provided for turning prospective customers away included innocuous-sounding explanations, such as that the staff were at lunch or too busy to help. However, the survey’s findings illuminate a trend of disparate treatment predicated on race and language that is damaging in real terms—by failing to provide sufficient banking services for individuals and families, and by exacerbating the historical mistrust that communities of color have toward the traditional financial institutions.

The failure of the banking industry to meet demand for everyone indicates the need for more affordable and accessible options. Truly inclusive banking solutions must offer both affordable financial products and access to systems and/or staff to help consumers understand and navigate them. Such a comprehensive program would benefit individuals and families through the low-cost banking services offered and through faster direct government transfers (such as social security and other welfare payments as well as stimulus during times of crisis).

Public-interest banking infrastructure would also benefit governments: By providing a secure place for firms to reduce risk in the absence of alternative deposit insurance, a public-interest banking system would make certain aspects of financial regulation simpler and reduce the threat of bank runs or consumer panics.

At the federal level, one way to achieve both account and retail service provision is through a blend of FedAccounts and postal banking. Such a system would allow the Fed to provide and maintain individual bank accounts with no account fees or minimum balance requirements. These accounts could then be accessed in person at existing, staffed—and, for most communities, trustworthy—post offices nationwide.

At the state and/or local level, one way to achieve these aims is through a program, such as CalAccount, that guarantees access to a no-cost, no-fee bank account—and systematizes that access through, for example, an interface that helps people learn about the lowest cost options.

Our banking system creates a damaging, multitiered economy that locks out families who can’t afford to participate and inhibits government policy aimed at helping the most economically vulnerable. As I’ve laid out in my presentation, survey results from a diverse sample of California’s banks demonstrate that opt-in-only solutions have left clear coverage gaps that will inevitably always remain without federal, state, and/or local public-interest interventions.