Eliminating Barriers to Bank Accounts: How CalAccount Can Ensure Financial Inclusion and Serve as a Model for Public Banking

Executive Summary

Millions of Americans lack access to basic, no-cost, no-fee bank accounts. The current banking system, with its high fees and inadequate and discriminatory services, punishes the most financially vulnerable and pushes some individuals out of the financial system entirely. This in turn drives individuals and families toward predatory alternatives that reinforce a cycle of financial precarity.

California has one of the highest concentrations of unbanked individuals in the country. In recent years, the state has led the nation in considering remedies to this problem that would guarantee access to free basic banking services for all. This study has two main aims. The first is to provide a rich qualitative picture of the exclusionary banking status quo in California and how it is affecting Californians—particularly Black, Latino, and Spanish-speaking service workers. Through a survey and a series of focus group discussions, we shed light on the multitude of barriers to financial system access in the state.

Our second aim is to analyze a proposal called CalAccount that is currently under consideration with the state legislature. CalAccount would serve as a retail banking option that offers voluntary, no-fee, no-penalty accounts to all California residents. By outlining the major areas of reform needed to remedy the challenges faced by the Californians in greatest need of better banking options, our intention is to inform the ultimate design and implementation of CalAccount.

The Problem: A Broken and Exclusionary Banking System

Our capitalist economy relies on private banks and other financial institutions to provide what is in fact a critical public service: free and unencumbered access to our money and fair participation in the systems that store and manage it. By retaining deposits and issuing loans to individuals and businesses, banks serve a function that is essential to economic stability for individuals, families, communities, and our macroeconomy as a whole. As such, the government has a vested interest in overseeing and regulating the banking system. Yet, in the past half century, the banking industry has been under-regulated. As private institutions, banks profit off of our money—not only via interest but also in recent decades by charging fees and fines on the most basic banking services. This disproportionately impacts Americans with the fewest resources and the least socioeconomic security. 

Our current banking system bars the most vulnerable Americans from full economic participation and penalizes poverty for those who do manage to participate. Some 15 million families have little formal access to banking, and 5 percent of American households are unbanked entirely. These families are disproportionately low-income, Black, Latino, and single mother–led and have less formal educational attainment. In many cases, families simply can’t afford to open and maintain accounts. Non-sufficient funds (NSF) and overdraft fees tend to affect users with the lowest balances and thereby target the individuals least likely to be able to pay them, if not prevent them from banking entirely (DiVito 2024; Kutzbach, Northwood, and Weinstein 2021). 

Meanwhile, low-income Americans who do bank often encounter discrimination in accessing basic banking services. Studies have repeatedly identified disparities both in policy and in practice for Americans of minority racial and ethnic backgrounds (DiVito 2022a). To take one example, traditional banks operating in predominantly Black neighborhoods tend to have higher initial opening deposits and minimum balances, adding a layer of racialized discrimination to the exclusionary practices of contemporary financial institutions (Pew Charitable Trusts 2014).

Access to basic checking accounts is a critical point of entry into full participation in an increasingly cashless economy. These accounts allow for check cashing, debit card transactions, bill payment, and, in general, secure and reliable access to money. They enable individuals and families to cover the kinds of frequent, short-term expenses that make daily life possible. When people are unable to access these basic services, they have few options but to turn to predatory nonbank alternatives such as check cashers, which charge even higher fees than traditional banks and come with both physical safety and financial security risks. Check cashers may charge as much as 10 percent of a check’s total value (DiVito 2022a; Muniz 2022). A striking 14 percent of Americans find themselves reliant on these predatory alternatives—including underbanked individuals who have some, but insufficient, access to traditional banking (DiVito 2024; Kutzbach, Northwood, and Weinstein 2021).

In addition to reinforcing the deep socioeconomic and racial inequalities in American society, these punitive and exclusionary practices at times fly directly in the face of government policy intended to help the most vulnerable. When the federal government issued stimulus checks in 2020 and 2021 in response to the COVID-19 pandemic, the most financially vulnerable Americans—individuals and families who did not have active bank accounts—waited months to receive paper checks by mail rather than direct deposits. Once they arrived, the recipients had no choice but to incur high fees from check cashers, not to mention missing rent, bills, and other costs in the meantime (DiVito 2022a; Baradaran 2020). 

While the lowest-income Americans suffer under this regime, banks and other financial institutions are making enormous profits. Over the past decade, a few regulatory measures have made a notable difference in containing the abuses of the banking industry. The simplest have been reporting requirements and the attendant pressure on banks to do better. Only since 2015 have banks been required to report their overdraft earnings. In 2022, five of the seven major US banks eliminated NSF fees and eliminated or adjusted their overdraft fees (Horowitz and Liang 2022). Since 2023, the Joe Biden administration has also coordinated with the Consumer Financial Protection Bureau (CFPB) to further rein in a range of persistent “junk fees,” including overdraft and NSF fees. These measures have resulted in some positive changes. Research from the Financial Health Network published in 2024 found that overall bank revenue from overdraft and NSF fees fell from an estimated $9.8 billion in 2022 to $7.9 billion in 2023. The 2023 sum was nearly half of the 2019 estimate of $15.5 billion (Gdalman et al. 2024).

At the same time, however, banks continue to find ample opportunities to profit off of American families, in particular the most financially vulnerable. Banks are in an ongoing arms race with regulators and are constantly trying to innovate new fees, find loopholes, or lobby away troublesome restrictions. While overdraft and NSF income has fallen significantly over the past few years, annual bank revenue from account maintenance and ATM fees has increased by around $1.6 billion since 2020 (Gdalman et al. 2024). Although this has not been enough to fully offset the decline in overdraft and NSF fees, it reflects the persistent role of fees as big business for banks. Meanwhile, irrespective of changes in bank policy and practice, household spending on deposit and transaction fees and services—including bank fees and nonbank alternatives such as check cashing—has remained more or less flat since 2021 (Gdalman et al. 2024). In the everyday practice of banking, all sorts of issues persist. Despite having eliminated NSF fees in 2022, Citibank has since become the subject of a class action lawsuit that alleges that it nonetheless improperly charged customers (Jewett 2024). Banks have also come under scrutiny recently for suddenly closing accounts when customers acquire multiple suspicious activity reports for large cash transactions or wire transfers with banks in high-risk locations abroad, often without any warning or apparent explanation (Lieber and Bernard 2023). 

Racial and income disparities in bank fees have likewise been incredibly persistent in the period since the pandemic. Overall, the burden of overdraft, ATM, and NSF fees continues to fall disproportionately on a specific subset of households. According to the Financial Health Network, households that paid one or more overdraft fees in 2023 were three times more likely to also pay a monthly account maintenance fee and more than one and a half times as likely to pay ATM fees, compared with households that did not incur overdraft charges (Gdalman et al. 2024).

The current problems with banking for the most economically vulnerable Americans are far from inevitable. After all, overdraft fees date only to the 1990s. Instead, these problems are outcomes of the deregulation of the banking industry that began in the 1970s and ramped up over the last third of the 20th century. Historically, a range of financial institutions, including thrifts and mutual aid organizations situated in particular communities, offered low- and middle-income Americans accessible basic banking products. But these kinds of financial institutions have declined in prominence since the late 20th century, in part because broader deregulatory efforts threatened their business models. Over the same time period, the shift away from tight regulation led to new efforts on the part of traditional banks to offset loss of profits stemming from new financial products. In turn, this encouraged banks to levy fees on basic bank accounts that were otherwise unprofitable due to their low average balances and frequent withdrawals (DiVito 2024). 

Efforts to regulate private banks have long been, and are likely to remain, complicated. As powerful profit-making institutions, banks have historically resisted and circumvented regulatory efforts by looking for new avenues to profit (HR&A Advisors 2024; DiVito 2024). To effect the kind of sweeping change needed to challenge the foundationally exclusionary and inequitable practices of American financial institutions, we need both federal and state policy that explicitly guarantees the public’s access to no-cost basic banking services. 

The various attempts to create public banking infrastructure at the federal level have not yet been successful. Under one promising proposal dubbed FedAccounts, the Federal Reserve would offer and operate no-cost, no-fee, no-minimum-balance accounts for all US residents (DiVito 2024; Ricks, Crawford, and Menand 2018). This would extend to the public the same services from which private banks benefit when they bank at the Fed. Among these benefits, instant payment clearing would significantly improve the banking experiences of low-income individuals who are currently penalized by overdraft fees when there is a lag in processing time between incoming deposits and outgoing withdrawals (DiVito 2022a; Ricks, Crawford, and Menand 2018). 

Accounts backed and provided by the Fed could be made accessible to Americans via a postal banking system whereby individuals could bank at the country’s 32,000 brick-and-mortar post office locations. In fact, in the early 20th century, the United States operated a popular and secure postal banking system. Beginning in 1911, a Postal Savings System allowed all Americans access to no-cost savings accounts at post offices. The system maintained its popularity through the Great Depression, when public trust in private banks, by contrast, eroded. It was discontinued in 1967 as public use ultimately declined in light of higher interest rates at private banks and new financial protections for private bank accounts via the Federal Deposit Insurance Corporation (FDIC) (DiVito 2022b). The combination of public trust for the Fed with the history of postal banking in the US, as well as the simplicity of the postal system’s public infrastructure, makes FedAccounts a compelling idea (DiVito 2022a).

Yet, at the federal level, public banking has been a relative nonstarter. In practice, greater headway has been made at the state level. North Dakota is currently home to the only state-owned and state-run financial institution in the US. However, the Bank of North Dakota, which has existed since 1919, currently charges fees for basic accounts in keeping with the practices of private banks. In the wake of the 2008 financial crisis, a number of states, including Hawaii, Maine, Massachusetts, Oregon, Vermont, and Washington, conducted studies on the potential advantages and feasibility of setting up public banks. While these efforts confirmed the possible benefits of public banks, each state ultimately put policy development aside in light of fiscal concerns (Congressional Research Service 2022). Nevertheless, the issue hasn’t altogether disappeared from state agendas. Since 2019, Hawaii, Massachusetts, New Jersey, New Mexico, New York, Oregon, and Washington have all considered inclusive banking legislation (DiVito 2022a).

CalAccount: A Promising Proposal for More Inclusive Banking

The state that has by far made the most headway toward public banking is California. In 2019, the state began to study the possibility of city-run banks, and in 2020, it extended this analysis to how state-run banks might facilitate greater access to financial services for the unbanked. In 2021, the California Public Banking Option Act established the CalAccount Blue Ribbon Commission to determine the feasibility of creating a CalAccount program. The state treasurer’s office then commissioned a market and feasibility study from RAND, and the legislature is set to consider a final version of the CalAccount program in the legislative session beginning in January 2025. In its July 2024 report, RAND concluded that from the state’s perspective, the potential benefits of instituting the proposed program outweigh the costs. This was particularly true with respect to disparities in access for Black and Latino Californians, which RAND concluded could be reduced by 25 to 30 percent, if not more (Welburn et al. 2024).

If instituted, CalAccount would offer voluntary, no-fee, no-penalty accounts to all California residents. It would be a statewide retail banking option that operates through existing private depository financial institutions contracted via the state. It would provide no-cost debit accounts, debit cards, and ATM access, plus direct deposit and automatic bill pay. Future legislation would determine which institutions the state will contract to provide services and how, in practice, they will do so. In any case, participating institutions would be mandated to provide fully free accounts with no minimum balance requirements, removing a key financial barrier to access. 

It is no surprise that the question of financial inclusion has been particularly pressing in California. The state has one of the highest concentrations of unbanked people in the country: Some 2 million Californians live in unbanked households, and a further 5.5 million reside in underbanked households—defined as households that are banked but have used at least one nonbank transaction or credit product such as check cashing in the previous year (HR&A Advisors 2024). The Californians living on the lowest incomes—less than $15 per hour—comprise 81 percent of unbanked households in the state (DiVito 2022a; Bohn et al. 2023). Some 61 percent of unbanked households in the state earn less than $30,000 annually, and 41 percent of these earn less than $15,000 annually (HR&A Advisors 2024).

Compared to white households, Black households are 3.5 times more likely to be underbanked (HR&A Advisors 2024). California’s large population of immigrant and undocumented families face language and, in some cases, legal status concerns that affect access to mainstream banking and as such are frequently targeted by nonbank financial alternatives such as check cashers (DiVito 2022a; Lin 2022). While current laws allow banks to use city IDs, foreign passports, and utility bills as forms of identification for opening an account, in practice banks often fail to offer this option. A notable 41 percent of noncitizens residing in California are unbanked or underbanked—nearly three times the rate for US-born citizens. And while single female–headed households comprise 12 percent of total households in the state, they represent 18 percent of unbanked and underbanked households (HR&A Advisors 2024).

The Roosevelt Institute’s 2022 secret-shopper Banking for the People study found an almost complete absence of no-fee, no-minimum-balance bank accounts at surveyed bank branches in California. Overdraft fee–based accounts were prevalent, and bank staff were reluctant to mention cheaper alternatives to potential customers even when they were available. Ethnic minority Californians and non-English speakers were treated differently than their white and English-speaking counterparts in bank branches and were less likely to receive the information they were seeking (DiVito 2022a).

“Californians pay hundreds of dollars in fees per year…on average CalAccount would save unbanked and underbanked households $70 to $150 per year in fees for financial services if adopted by these households.“

More recent research on the banking status quo in California has confirmed this overall picture. In 2024, RAND found that no-fee and no-minimum-balance accounts are “rare in California.” A whopping 95 percent of banks charge overdraft fees, and monthly account service fees are common. Underbanked Californians pay hundreds of dollars in fees per year. RAND estimated that on average CalAccount would save unbanked and underbanked households $70 to $150 per year in fees for financial services if adopted by these households. It would also increase household savings by an estimated $450 to $1,200 (Welburn et al. 2024). Feasibility research on the CalAccount program suggests that if all currently unbanked and underbanked California households had full banking access via CalAccount, Californians could collectively save more than $3 billion dollars annually, including $2.2 billion in deposit and transaction fees and close to $855 million in credit service fees (HR&A Advisors 2024).

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