Event Recap – Roundtable Discussion on Expanding Financial Services for Unbanked and Underbanked Americans
WASHINGTON – On December 9th, 2021, the U.S. Select Committee on Economic Disparity and Fairness in Growth held a bipartisan roundtable discussion with representatives from the financial services sector to shed light on how they can work with Congress to expand and improve banking services, increase access to capital, and prioritize consumer protection for all Americans, including low-income and historically marginalized communities.
“The purpose of this roundtable is to focus on how Congress can bring unbanked Americans into the formal banking environment and away from the shady aspects of credit provisions,” said Chairman Himes. “That’s why I am excited to discuss how to give families a firmer platform in the world and consider innovative practices to push the traditional banking system in ways that serve Americans more equitably.”
“Prior to Congress, I spent a year in the Bronx trying to understand why low-income families don’t use the banking system, even in a place like New York where there were many attempts to market products to low-income families,” continued Chairman Himes. “That’s why I am excited to discuss how to give families a firmer platform in the world, think and consider innovative practices to push the traditional banking system in ways that serve Americans more equitably.”
Watch Chairman Himes’ full opening statement here.
The following Majority guests spoke before the Select Committee to the issues of unbanked and underbanked Americans and the role of the federal government:
Aaron Klein, Senior Fellow in Economic Studies at Brookings Institution, discussed existing inequities in basic financial services and potential bipartisan solutions. “Lower income Americans pay tens of billions for services that middle- and upper-income Americans receive for free , citing research from the FDIC that “about one in six American families are underbanked,” and “one in twelve American families with bank accounts pay $350 a year or more in overdraft fees.”
“The single most impactful thing the federal government could do is to give people access to their own money immediately,” continued Mr. Klein. “This can be done by simply amending the Expedited Funds Availability Act to require immediate access for the first several thousand dollars of a deposit, instead of permitting the lengthy delays that cost people living paycheck to paycheck.”
“Accessing digital money is easy and free for those with money while for those without a lot of money, digital money is expensive,” concluded Mr. Klein. Requiring all banks to offer a low-cost basic bank account is one solution to many aspects of this problem. The FDIC designed a Safe Account product, which has been picked up by the BankOn movement. The American Bankers Association urges banks to offer such an account as part of its best practices. This best practice should be universal so that any American in every bank can open a basic low-cost, full service, account.”
Ines Polonius, CEO of Communities Unlimited, Inc., described how "banking deserts are at the heart of economic disparities,” outlining that they’re “twice as likely to exist in rural communities than urban centers” and “they more significantly impact minorities and low-income households. Banking deserts create a significant burden on households, as costs of alternative financial services are significantly higher. When a banking desert emerges, predatory financial services fill the vacuum with disproportionately higher cost of access. Small businesses in banking deserts are disproportionately minority-owned and more likely to use credit cards to finance their business.”
Ms. Polonius also urged Congress to help “provide flexible, institution-level equity capital to Community Development Finance Institutions using the Treasury Department’s CDFI Fund programs as a model,” asserting that financial literacy, financial management, and capital investments in Community Development Finance Institutions are critical to “ensuring access to affordable, responsible financial products and services. To address economic disparities, and truly achieve a more equitable and just financial system, the federal government must continue to increase the supply of capital to Community Development Finance Institutions that can channel those resources into distressed communities.”
Wole C. Coaxum, Founder and CEO of Mobility Capital Finance, Inc., described his organization’s approach to expanding access to financial services and the role of FinTech – technology to improve and automate the delivery and use of financial services. “MoCaFi’s platform minimizes the friction that government entities experience when connecting with or delivering resources to hard-to-reach citizens and communities,” said Mr. Coaxum.
“We intend to continue to build and expand our products to include a multi-function municipal I.D. card that will offer banking services in addition to a government-issued I.D. This will make a difference in cities with many returning citizens or underbanked neighborhoods that only offer check-cashing services,” continued Mr. Coaxum. “We also encourage this Committee to consider innovative ways to meet people where they are and revisit opportunities for postal banking, which would be an ideal partner for FinTechs.”
Robert E. James, II, President of Carver Development CDE, LLC; and Chair of the National Bankers Association, discussed several issues around the unbanked and underbanked. “When we think of unbanked or underbanked Americans, we often think of consumers who fall victim to predatory payday lenders or who pay onerous fees for check cashing services,” said Mr. James. “Our members know that the population of the unbanked and underbanked often includes others, including small business owners. The ongoing damage caused by the pandemic shone a bright light on the effect being underbanked has on minority small businesses.”
Mr. James also urged Congress to “ensure predatory practices do not leak into FinTech companies.” Since Fintech companies promise innovation, and many focus on unbanked and underbanked communities, Mr. James stated “Congress and the regulatory sector can should monitor these companies and their practices to ensure that predatory practices and usurious interest rates do not proliferate in digital environments.”
Justin Fisk, Director of Research and Policy for the Online Lender’s Alliance, underscored the role that innovative technologies can play in enhancing financial services in underserved communities. "For now, I would just add that technology and innovation in this space has been rapid and has allowed many Americans to access financial services who may not have had access at all just a decade ago,” said Mr. Fisk. “There is much more competition today than ever before with banks, credit unions, CDFIs, non-banks and fintech companies all playing an important role in serving this population."
The subsequent Q&A portion of the hearing produced the following points of exchange between Select Committee Members and invited guests, as well as areas of bipartisan agreement:
Chairman Himes (CT-04) asked guests to share their thoughts on raising the Expedited Funds Availability Act, as well as the feasibility of imposing a mandate on banks to offer free basic accounts. Mr. Klein advocated for raising the threshold on the Expedited Funds Availability Act, and with regards to mandating banks, he explained that banks are chartered and thus have “a responsibility under that charter to serve their community.” The American Bankers Association also calls it a best practice to offer “no-cost, low-cost” free bank accounts, which support the argument for mandating banks offer these financial products.
Stephanie Bice (OK-05) focused on the issue of trust in the financial system, asking witnesses, “Do you think there are some things we could do on the cybersecurity front to build more confidence with consumers and allow them the comfort to feel confident in the system?” In response, Mr. Coaxum explained, “I think the lack of trust with banks is as much a historical issue as it is a technology issue.” Mr. Coaxum was recently at an event for the 160th anniversary of the Freedman’s Savings Bank, explaining, “You had hundreds of thousands of people and billions of dollars of former slaves’ free men putting their money in the freedman bank and it failed. And that was sort of the beginning of the end of trust in communities of color in the banking sector because there was a sense that was a federally backed bank, which brought people like Frederick Douglass and others to provide some sort of cover to say the money was ok, and it was mismanaged.”
Angie Craig (MN-02) focused on investments in Community Development Finance Institutions, asking Ms. Polonius, “Can you speak to the ripple effects, what happens when we support Community Development Finance Institutions when they are fully funded and when they are able to support investments in rural communities?” Ms. Polonius’ response was, “Community Development Finance Institutions are about relationship building, about capacity building, and about capital. Our job is basically to make a lot of entrepreneurs capital ready, and we have a plethora of partnerships with banks in whatever communities they exist in so we can actually bring clients to the banks, which bridges that trust factor especially in the Black community and Latino community we work in.”
Byron Donalds (FL-19) asked panelists if the general depletion of community banks was a failure of the market or a failure of our regulatory system. “I think the regulatory environment is one where there is a responsibility to keep the financial services infrastructure safe, and so the regulatory players do a very good job of that. But at the same time, that regulation can stifle innovation,” responded Mr. Coaxum. Rep. Donalds highlighted the importance of understanding the “battle of consumer protections and regulatory environment vs. innovation and access, the people who in my view, the people who die in that fight, are marginal communities and people who have low disposable incomes and low capital bases.”
Gwen Moore (WI-04) asked witnesses whether we should reform the Community Reinvestment Act and asked how Congress can stop banks from debiting accounts before they credit them when transactions sit at the same time. Mr. James and his organization support the modernization of CRA, stating, “CRA is too much focused on physical bank branch locations and where you take deposits, and not as much on the future state of banking, the state of banking as it is now. We support creating a new CRA. What we don’t support is a score card type of approach that doesn’t take into account the unique situations in each individual bank, so that we can serve our communities.” Mr. James also strongly encouraged Congress to invest in “Minority Deposit Institutions and Community Development Finance Institutions that are working in the community.” Mr. Klein responded to Rep. Moore’s second question, stating, “you can solve the debit and credit issue by moving to real time payments and giving people access to their money immediately.”
Warren Davidson (OH-08) emphasized the importance of cash for individuals and businesses around the country. Mr. Klein agreed that “cash is still king; cash is still disproportionately used by lower-income and minority people because access to digital money is disproportionately expensive for those communities. I think it is important to preserve cash as a way for people to pay. It is fundamentally distraught that we have a system where people, who buy goods in cash, are subsidizing people who are wealthy and have fancy rewards cards and earn tax-free rewards on everything they pay.” Additionally, Mr. Coaxum believed there was a place for both cash and digital financial products, but added the caveat that “we have a lot of people that operate in cash because they don’t have a pathway to get to some of the digital products they wanted.”
Marcy Kaptur (OH-09) addressed the financial issues that communities and families face throughout the country. “No community in this country is poor, but there is a great sucking sound that’s been happening for a very long time, as wealth is drained out of these neighborhoods,” said Rep. Kaptur.
“Our financial system today does not operate to empower people in struggling neighborhoods,” continued Rep. Kaptur. “In fact, it abandons them and exploits them, with payday lenders and auto-title loan sharks. Section 1031 of our tax-code supports limited liability corporations that are turning our housing markets into rat-infested neighborhoods.” The Congresswoman recommends incentivizing “community development credit unions which are federally chartered.”
Pramila Jayapal (WA-07) discussed several ideas proposed by other members in attendance, including the need for physical bank branches in largely unbanked communities, the need for financial literacy services, and on the superiority of the German government’s distribution model where banks worked with the government to distribute loans as grants. After this, Rep. Jayapal had an exchange with Mr. Klein about international wire remittances, noting that the U.S. “blocked money transmitters from sending money under the name of terrorism.” This practice penalizes the Latin community and the African community, inhibiting international remittances, and constricting the economies of countries that rely on this form of financial support.
Bryan Steil (WI-01) suggested the reason why the unbanked and underbanked communities don’t see physical bank branches in their communities is due to the high percentage of smartphone owners in communities of color. Ranking Member Steil also considered the need for updated data on smartphone usage and the need for more data to inform individual’s credit scores, such as rental information and other atypical bill payment information not included in traditional credit scoring. To close, Ranking Member Steil voiced his optimism for FinTech as a solution to some of the cost and access issues discussed, and challenged “everybody here to continue to look at the proliferation of technology, smartphones in particular” that is continually changing.
Sara Jacobs (CA-53) continued the discussion of FinTech services, noting, “We’ve talked a lot about incentives with the big banks, but I also think we need to look at these incentives to make sure these FinTech products are in the best interest of communities rather than their investors.” Mr. Coaxum explained that “People solve problems which they are familiar with. If you give a Black founder, a Latinx founder, a woman founder, who understands the banking system capital, they’ll try to solve these problems and you’ll see more people like ourselves try to solve that problem.” Mr. Klein followed up by reiterating the need to make real-time payments standard, asking how people live when they “live paycheck to paycheck, where time is money, and you deposit a check on Friday, and it doesn’t clear until Tuesday.”
Research and background drawn from The Federal Reserve “Report on the Economic Well-Being of U.S. Households in 2018 - May 2019”
“Although the majority of U.S. adults have a bank account and rely on traditional banks or credit unions to meet their banking needs, gaps in banking access remain. Six percent of adults do not have a checking, savings, or money market account (often referred to as the "unbanked"). Two-fifths of unbanked adults used some form of alternative financial service during 2018—such as a money order, check cashing service, pawn shop loan, auto title loan, payday loan, paycheck advance, or tax refund advance. In addition, 16 percent of adults are "underbanked": they have a bank account but also used an alternative financial service product. The remaining 77 percent of adults are fully banked, with a bank account and no use of alternative financial products.”
“The unbanked and underbanked are more likely to have low income, less education, or be in a racial or ethnic minority group. One percent of those with incomes over $40,000 are unbanked, versus 14 percent of those with incomes under that threshold. Similarly, 14 percent of blacks and 11 percent of Hispanics are unbanked, versus 4 percent of whites.”
“Individuals who use alternative financial services (one-fifth of adults) may need or prefer to conduct certain financial transactions through providers other than traditional banks and credit unions. The vast majority (89 percent) of people using alternative financial services use transaction services such as purchasing a money order or cashing a check at a place other than a bank. Twenty-eight percent borrowed money using an alternative financial service product, including payday loans or paycheck advances, pawn shop or auto title loans, and tax refund advances.”