Aaron Klein’s opening statement at a panel discussion on Unbanked and Underbanked America

President Himes, Ranking Member Steil, Committee members, thank you for inviting me to participate in this roundtable on Unbanked and Underbanked America. I commend the Committee’s attention to these important issues that affect approximately one in four American families. Addressing these issues is essential to achieving this committee’s goal of closing the growing prosperity gap.

Basic financial services have become a reverse Robin Hood system in which low-income Americans paying tens of billions for services middle and upper income Americans receive for free.1 This is particularly the case for the under-banked people. The Federal Deposit Insurance Corporation (FDIC) estimates that approximately one in six American households is underbanked, which they define as the use of a bank account but also the use of a payday lender, check cashing or remote transmission service.2 In addition, one in twelve American families with bank accounts pays $ 350 a year or more in overdraft fees, according to the Bureau of Consumer Financial Protection.3

Why do so many Americans pay so much for financial services when they have a bank account? The answer: Our financial system is not well structured to provide the services that people living paycheck to paycheque need at low cost. This forces many people to resort to expensive workarounds. The bottom line is that the less money you have, the more money you spend to access your own money. Basic banking services are one of the reasons it’s expensive to be poor in America.

An example sheds light on this problem. Consider depositing a check. Despite rapid improvements in the technology involved in check clearing and legislative changes to allow this new technology (the Check 21 Law of 2004, which I worked on), it can sometimes take up to six days for the money for a check to be available in a consumer’s account. For those who still have money in the bank, this delay is relatively insignificant. But for those who live paycheck to paycheck, the results are devastating.

Consumers who run out of money while they wait for the payment to clear are left with grim options: keep paying bills and use your debit card, you face overdraft fees that average $ 35. per transaction; go to a payday lender and pay $ 50 for a few hundred dollars to spend the weekend; or skip the bank altogether and take your check to a check teller, paying an average of $ 20 and get the cash right away.

Estimates of the total amount of overdraft fees paid range from $ 15 to $ 35 billion a year.4 5 Payday loan fees have been estimated to nearly $ 10 billion.6 These are fees paid only by people with bank accounts – by definition every overdraft fee is paid to a bank or credit union and every payday loan requires an account in order to give the lender a post-dated check. warranty. My research using FDIC data shows that 70% of customers who cash checks have bank accounts and the majority of checks cashed are from those customers.seven

Other elements of our slow payment system add to these costs, including the ability of banks and credit unions to post debits before credits and the inability of consumers to know exactly when their check or direct deposit will be due. available. Millions of Americans were paid on Friday, December 10. For the most part, with what is called “direct deposit”, the money has actually been withdrawn from their employer several days earlier. That money has sat there for days as people living paycheck to paycheque potentially spend $ 50 billion a year on those three charges alone while waiting for their own money to arrive.

This helps explain the main reason people without a bank account report not having one: Bank accounts are too expensive and don’t provide the service they need. Nearly half of the unbanked cite costs and fees as the main reason why they don’t have a bank account.8 In comparison, less than one in twenty cite location or times as the main reason. Far too many solutions to the “unbanked problem” focus on physical access issues when the main issues are cost and speed.

Problems in our banking and payments system impact federal government programs, reducing the effectiveness of policies designed to help. For example, Congress has acted with incredible urgency in providing emergency aid to millions of American families who were suddenly without income at the start of the COVID-19 pandemic, applying emergency payments to families within weeks. only after closing on March 27, 2020. However, the US Treasury did not start sending money until April 10, then it took another five days until April 15 before funds were actually available for those who were lucky enough to receive the first batch. What were families supposed to do on those days while waiting for their money?

Less than half of all eligible Americans received their COVID-19 stimulus in that first round. More than a third had to wait until May or later to receive their emergency funds.9 And when they received their money, for one in four, it was by paper check or plastic card. How come 95% of families in this country have bank accounts, but Uncle Sam couldn’t find 25% of US bank accounts to give them money in the midst of a nationwide pandemic? Part of the reason is that the treasury department just doesn’t have the information, and another part is that they don’t want to and can’t work with the private sector companies that have it.ten This problem is still not resolved, like one in seven families eligible for the child tax credit did not receive their money by direct deposit.11

The result is significant for those affected. One estimate is that $ 66 million from the first round of CARES Act stimulus payments went to the checkboxes because people couldn’t afford to continue to wait. There is still no easy system for families who receive the child tax credit to use it as the regular direct deposit required by many banks and credit unions to qualify for “free checking” accounts.

There are several simple and hopefully bipartisan solutions to these problems. The most impactful thing the federal government can do is immediately give people access to their own money. This can be done by simply amending the Fast Track Funds Availability Act to require immediate access for the first thousand dollars of a deposit, instead of allowing the long and costly delays that hurt people living on a deposit. pays to the other. Allowing people to have immediate access to their own money should be the conservative little idea that transcends ideologies and forms sane policy.

Access to digital currency is a condition for participating in the new digital economy. Accessing digital money is easy and free for those who have money, while for those who don’t have much, digital money is expensive. Requiring all banks to offer a basic low-cost bank account is a solution to many aspects of this problem.12 the The FDIC designed a secure account product, which was picked up by the BankOn movement. Many banks and credit unions already offer these types of accounts. the American Bankers Association urges banks to offer such an account as part of its best practice.13 This best practice should be universal so that any American at any bank can open a low cost, full service basic account. Every bank and credit union has a government charter. This charter offers great advantages and also responsibilities. A low cost basic account is such a responsibility.

In conclusion, there is no magic one-chip solution to fixing the whole system. But there is a series of simple policy levers that can be pulled, each of which helps to solve part of the problem. Thank you very much for the opportunity to participate, and I look forward to starting a lively conversation.

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