Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor

7. Policies To Make Deposit Accounts More Accessible

Policies To Make Deposit Accounts More Accessible Recognizing that a significant and growing number of households depend on pawnshops and check-cashing outlets for basic financial services, the previous chapter proposed some regulatory measures to protect fringe banking customers from potential abuse. This chapter examines policy proposals aimed at improving the financial and physical accessibility of deposit accounts for lowerincome households. Such policies could complement efforts to improve the regulation of fringe banks and to increase the financial savings of the poor. Most such proposals impose costs on banks. Some bankers have complained that it is unfair to require banks to serve perceived public interests when other retail businesses are not asked to do so. Such unequal treatment is justified, however, because the government provides banks with privileges that other businesses do not receive. For example, the government restricts entry into banking by requiring that depository institutions secure government charters, it insures banks deposits, and it permits depository institutions to borrow from Federal Reserve and Federal Home Loan Banks under special arrangements. 128 Policies To Make Deposit Accounts More Accessible 129 Although the government has the right to require banks to serve public interests, there are practical limits on the costs that can be imposed on banks. Bank owners must receive a fair riskadjusted rate of return on their capital, or they will move their capital elsewhere. Moreover, banks cannot always count on passing on to their customers the costs associated with fulfilling government regulations. U.s. banks compete with offshore banks for very large deposits, and they compete domestically with money market mutual funds, mortgage companies, finance companies, securities markets, and with each other. The government must therefore ensure that it does not impose such heavy costs on banks that they are significantly disadvantaged relative to foreign banks or nonbank competitors. The government must also ensure that any public service obligations it imposes on banks are shared equally across banks, so that some banks are not placed at a competitive disadvantage relative to other banks. "LIFELINE" BANKING In response to evidence that fees on deposit accounts with small balances increased over the 1980s, federal legislators have introduced proposals to set ceilings on these fees. These efforts, known as "basic" or "lifeline" banking proposals, aim to ensure that bank accounts are affordable for low- and moderate-income families. Although there are many variations in the details of the proposals, they would all require banks to offer, for modest monthly fees, deposit accounts with low minimum-balance requirements and some checkwriting privileges. Other proposals would require banks to cash government assistance checks for nondepositors at no charge, or for nominal fees. 1 A federal lifeline banking law would undoubtedly benefit some low-income households. Those now maintaining deposit accounts 1A few states have enacted basic banking laws of some form (Rubin 1992, pp. 216-217). Connecticut requires banks to cash government checks for nondepositors. Massachusetts has a similar requirement and requires state-chartered banks to provide no-fee savings and checking accounts to customers over 65 and under 18. Illinois requires banks to offer accounts with lO free checks a month and a minimum initial deposit of $100 for customers over 65. Minnesota and Pennsylvania require banks that wish to engage in interstate banking to offer accounts with specified low-cost features. 130 Fringe Banking with small balances in banks with comparatively high fees would realize savings. If banks were required to cash nondepositors' government support checks without charge, this could benefit individuals now paying for these services. In addition, some lowincome households, which currently do not maintain deposit accounts , might find it advantageous to open them if account fees were reduced. The banking industry has generally opposed lifeline banking legislation.2 Industry representatives argue that lowering fees on bank accounts with small balances is unlikely to increase dramatically the ownership of bank accounts by lower-income families. The research presented in Chapter 5 supports this conclusion (see Table 5.7). Many people do not use savings institutions because they do not have any financial savings at the end of the pay period or because they prefer to transact almost exclusively in cash. Such individuals are unlikely to open bank accounts simply because the price of deposit accounts falls by a few dollars a month. On the other hand, about 15 percent of families without bank accounts identify bank service charges and minimum balance requirements as primary barriers to...