Update 329 — Access to Financial Services:
Survey of Public Banking Bills in Congress
Before long, the winter will lift and we will see a thousand flowers bloom in the marketplace of policy ideas over the spring, with the first official presidential primary debates to follow in June.
Among the most far-reaching economic policy proposals surfacing thus far, outside of tax reform, are those to expand access to financial services to the over 80 million Americans who currently have only limited access to basic services like checking accounts, or none at all.
A public bank is generally a depository financial institution for the people, managed and insured by the government. Some public bank models like infrastructure or development banks principally focus on economic development, leaving retail banking to private financial institutions. The political conversation around public banking today, though, is more focused on how a retail public banking option could serve un- and underbanked populations in communities everywhere in the United States, from rural outposts in Texas to inner city poverty in New York.
The Underbanked in Crisis
In 2017, 6.5 percent of households were regarded as unbanked, with an additional 18.7 percent of U.S. households called underbanked. The unbanked are individuals or households with no access to a checking or savings account. The underbanked have basic access to a checking or savings account at an insured institution but, due to poor credit, are forced outside of the traditional banking system into high-cost financial products provided by nonbank financial institutions.
The financial exclusion of low-income households constrains economic growth and reinforces class immobility. Alternative financial services (AFS), such as check-cashing services, payday loans, pawn shop loans, and rent-to-own agreements, often result in high transaction and penalty fees that can seriously damage a household’s economic health.
Un- and underbanked households are also significantly less able to save money. Without savings, home ownership and higher education are out of reach. One proposed and tested approach to the problem is public banking.
Public Banking Turns 100
The only active public bank in the US, the Bank of North Dakota (BND), turns 100 this year. The BND mainly works with private financial institutions. Its income has risen steadily since 2013 and the state’s return on its investment is 17 percent. Many believe that the bank’s contributions to the state’s general funds since 2000 and its partnerships with private community banks helped make ND the only state not facing a revenue shortfall in 2009. Not incidentally, North Dakota also had one of the lowest foreclosure rates in the nation during the financial crisis and no bank failures.
Although the BND is a successful public bank, it does not offer many retail services, such as ATM, debit, and credit cards, to which the un- and underbanked lack access. The BND focuses on partnering with existing financial institutions, mainly community banks, rather than providing services itself. It is only a small piece in what could evolve into a larger federal retail public banking system.
A Federal Public Banking System
With over a quarter of the population either unbanked or underbanked, what services should a public bank — in whatever form — offer its customers?
A basic necessity of modern life is access to either a checking or savings account. A public bank should offer this basic service to the un- and underbanked at low or no cost, and it must also provide services that low-income households receive from AFS without the exorbitant fees and transaction costs.
Here are some possible public banking solutions:
- Fed Bank Accounts: Two former Obama Treasury staffers, Morgan Ricks and Lev Menand, have proposed FedAccounts — the Fed would offer the public interest-paying, no-fee bank accounts. Currently, only banks can have accounts with the Fed. These personal accounts would use the Fed’s underlying payments platform to allow free transfers to other accounts and enable point-of-sale purchases via a Fed-provided debit card. They would also earn interest equivalent to the Federal Funds rate (2.5 percent), which is much higher than the 0.05 percent rate that the average checking account draws. The Fed would not provide loans.
- Online Banking: Digital banks, institutions with no physical location where all transactions take place over the internet, have taken off in places like the UK, but have yet to catch fire in America. These banks are built on new technologies and don’t require in-person presence. They usually offer all of the same services as a brick-and-mortar bank. Mobile applications also allow for peer to peer (P2P) money transfers without requiring access to a physical bank. Widespread access to mobile phones makes this solution easy to implement on a wide scale, specifically for the underbanked.
- Postal Banking: The U.S. Postal Service, at its more than 30,000 existing office locations, would offer low-cost small-dollar loans and remittance services, as well as checking and savings accounts that would come with debit cards and online services. The services might be offered by the Postal Service alone or in partnership with banks and credit unions.
All of the federal legislative proposals for a public banking option so far have focused on postal banking. These proposals go back to 2014 when Rep. Cedric Richmond introduced H.R. 5179, the Providing Opportunities for Savings, Transactions, and Lending (POSTAL) Act.
Since H.R. 5179 was introduced, postal banking has been getting more traction. High profile progressive Senators, such as Kirsten Gillibrand, Elizabeth Warren, and Bernie Sanders have spoken to the benefits of a public banking system. Some of the legislation that has been introduced in regard to postal banking is:
- H.R. 3617: The POSTAL Act of 2017 (Rep. Cedric RIchmond)
- H.R. 5816: The Postal Banking Act 2018 (Rep. Yvette Clarke)
- S. 2755: The Postal Banking Act 2018 (Sen. Kirsten Gillibrand)
Public banking has not been considered in any federal legislation outside of these attempts, and none of these bills have cosponsors. With the addition of progressive freshman such as Reps. Ocasio-Cortez, Tlaib, and Pressley to the HFSC, there could be more viable public banking legislation coming down the pike this Congress.
Implications for Financial Sector
A public banking system need not compete with private banking institutions because it would primarily serve the needs of the current un- and underbanked. In fact, a public bank could cultivate a new customer base for private institutions. The US at one time had a federal public banking system — the United States Postal Savings System that operated from 1911 to 1967. Its demise was precipitated by competitive restrictions placed on its activities over concerns that the bank would take customers away from credit unions and traditional banks. A new public banking system can and should co-exist with the private sector without competitive restrictions.
Although legislative debate around public banking has focused on the postal service, a public banking option does not necessarily have to be “delivered” through the postal service. One of the advantages of postal banking is the existing brick-and-mortar locations and their ubiquity in towns and cities across the country, but in the digital age, the real benefit is from the services that a public bank can offer and goes beyond brick-and-mortar accessibility.