Why Government Should Help Poor People Get Bank Accounts
The former head of consumer affairs in New York City explains why helping the poor manage money wisely would also help governments manage their money better.
In late April, senior government officials from several American cities and more than 25 countries in Latin America and the Caribbean met in New York City to talk about banking options for the poor. The fact that staff from Newark, N.J., Savannah, San Antonio and Miami attended the event reflects the increasing emphasis that local governments in the United States are placing on financial literacy as a tool for reducing poverty.
Almost one in 10 American households do not use a bank, according to a 2011 survey by the Federal Deposit Insurance Corporation. Another 20 percent of Americans are under banked, meaning they have bank accounts, but also use expensive alternative financial services, such as payday lenders, pawn shops and check-cashing outlets. The survey showed that about 82 percent of unbanked households make less than $30,000 a year and slightly more than half of unbanked households earn substantially less than that -- under $15,000 a year. Both the unbanked and underbanked populations struggle to build good credit scores that are critical for buying cars or a house.
In the past decade, some state and local governments have worked with banks and regulators to make it easier for low-income individuals to open accounts and accumulate savings. For example, the mayor and treasurer of San Francisco convinced local banks to waive overdraft fees and other charges. In Oakland, the city added a debit feature to its municipal ID card, which then provides some basic online banking features, including the ability to receive paychecks through direct deposit. San Antonio -- and many other cities -- offers one-on-one financial counseling to help people reduce their debt and improve their credit ratings.
These initiatives, typically described as financial empowerment or inclusion strategies, became increasingly popular after the launch of the Bank On program in San Francisco and the Office of Financial Empowerment (OFE) in New York City in 2006. (The New York office reports that since 2006 it has helped clients pay down more than $14.7 million in debt and build more than $2.4 million in savings.)
Jonathan Mintz, who oversaw OFE as the head of consumer affairs under former New York City Mayor Michael Bloomberg, argues that the public sector has undergone a paradigm shift where public officials no longer believe financial education is the responsibility of nonprofits and banks. Instead, government officials now believe they have a responsibility to teach people how to manage their money wisely as part of a larger strategy to wean people off public assistance.
Since leaving the Bloomberg administration, Mintz became the CEO and president of the Cities for Financial Empowerment Fund, a nonprofit that helps cities with their financial education programs, such as the group's "Bank On 2.0" program. CFE Fund was one of several partners that organized the international conference in April. Mintz spoke with Governing May 1 about the conference and the financial empowerment movement in American cities.
As you probably know, our May issue is our international issue, so I want to begin by asking about the international financial inclusion conference you participated in. Were there certain things that you hadn’t heard of before that you think could be replicated here in the United States?
I was talking to one country that is investing deeply in young men, doing job training for prolonged periods of time and we were talking about measuring the social good of having people on that path rather than not getting those services, where you’re looking at higher prison participation. I was very interested in their investments in workforce development.
I think that the conditional cash transfer model is a very interesting model. They’re using it in so many different contexts. I thought that Colombia, Mexico and Peru were doing some really interesting investments, structuring them as conditional transfers, which I know was something that was politically complicated when we started doing it in New York City, but is really the standard model in Latin America.
A lot of these big social service initiatives end up being enshrined in law in Latin American and Caribbean nations. What’s interesting about that is that on the one hand, laws are always harder to pass and clunkier to change. On the flip side, programs enshrined in law are more stable, they survive administration changes, and they have assured sources of funding. I thought that was an interesting way to think about not just the sustainability of programs, but also to speak to the political opportunities. Lots of times lawmakers feel left out of administrative programs and this is a way to get their investment and buy in as well.
I read that at the time of its creation in 2006, New York City’s Office of Financial Empowerment was the first in the country for a city. Do you think more American cities will do so?
There are now already several offices of financial empowerment. There’s lots of ways to house this work, but in fact lots of cities have opened offices of financial empowerment. Even the new [federal] Consumer Financial Protection Bureau created an office of financial empowerment. We’re seeing a lot of interest from countries in Latin America and we’re also seeing efforts in Canada to start creating offices of financial empowerment. Not to put too much in a name, but I think the idea of creating a constellation of energy around these issues is absolutely replicating.
I want to ask the “why now” question. It seems like there’s a growing interest in trying to get the unbanked and underbanked to traditional financial institutions. I would assume that there have been unbanked and underbanked people for a long time. Why is there so much energy around this in the public and private sectors right now?
When we started this work in the [New York City] Department of Consumer Affairs, my sense is that there was always energy for the last 25-30 years around these asset-building type questions, but that energy has always resided in the nonprofit sector. For some reason, thinking about people’s finances was considered not a primary public priority. Dealing with the consequences of their financial insecurity obviously is. Part of where we tapped into something important when we created the Office of Financial Empowerment was the idea that not only could government do something about it, but that there was a reason that government needed to do something about it.
As the economy goes through a rough time and resources become more scarce, you really have to start asking yourself, as a government, are our investments as efficient as they can be? If you are spending a lot of time and effort and money helping someone get a job through a workforce development program and then they come back four months later because they’ve lost their job, you have to invest in them again. One of the questions you have to ask yourself is, what happened? Why is it that the first investment didn’t take? If part of what you’re seeing is they couldn’t afford to fix their car, so they couldn't show up to work, or people couldn’t get jobs because employers are increasingly checking credit scores, then I think you start to recognize that there are places throughout the array of public programming where investing in financial stability is a smarter way to think about the investments that you’re making.
We’ve written a little about Bank On in the past. Would you talk a little about the differences between Bank On and Bank On 2.0?
I think Bank On 2.0 represents an evolution of those municipal banking programs. People in San Francisco and Seattle have been pivotal to our thinking -- as have the dozens of other municipal programs -- about the idea that cities have large populations of unbanked people and that is a municipal problem. It’s not just a social goal to try and fix. People’s disconnect from mainstream banking matters to a city because you are investing so many social resources in helping people and that help gets diluted by the fact that people are having to spend a lot of money to receive money. You go to a check casher. You have to get a check made to pay your bills. You have cash sitting in your pocket rather than sitting in an account.
So cities have really come to understand that these aspirations of connecting people can rise beyond outreach and education strategies and really start to tap into these flows of municipal dollars. I think where Bank On 2.0 is really going to help municipalities step up their programming is in doing some national negotiating with banking partners so that these programs are really about specific and appropriate bank accounts -- like accounts with reasonable monthly and transactional fees, no overdraft, and the ability to link to savings.
These bank accounts are being connected to [public] programs so that when people are signing up for a summer youth employment program, for example, they are signing up for a bank account and that is how they are going to be receiving their money -- through direct deposit. It’s a way of tapping into programs like that and saying, "we’re already touching the unbanked population. They are in fact coming to us. Let us leverage that volume to get an appropriate account. Let’s leverage this whole of the program, so that it’s structured in a way that people need an account to get paid."
When you start talking specifically about populations in programs, and specifically about accounts, you can have real data. One of the frustrations of so many of our municipal banking access partners is that it’s hard to know how many people have really benefited from their efforts. So it’s hard for banks to keep investing in those partnerships and it’s hard for cities to keep making the case to invest in it as well. I think that’s part of what’s going to mark Bank On 2.0.
When you talk about getting real data from programs where people are already interacting with their municipal governments, are you talking about welfare programs?
If you look at any given city, and you take a look at the unbanked population, the vast majority of that population is interacting with the city on various programs: TANF, workforce development, domestic violence, public housing, a whole range of different ways that the city is already touching those people with money or about money. What Bank On 2.0 is going to focus on is leveraging those “money moments” to create banking connections. When I talk about data, it’s one thing to say to a bank, hey we’ve done this public outreach, you’ve said you’re welcoming these customers in your branch doors, but how do you know how many people walked into the branch because of our outreach? How are you defining who a Bank On customer is or isn’t?
Those kinds of vagaries have made data difficult in local banking access initiatives. But with Bank On 2.0, it will be quite specific. If you have 30,000 people coming to a summer youth program, and you structure the summer youth program so that everyone gets a bank account, you know exactly who those people are, you can work with the banks to get aggregate data about how many of them are still in their account a year later and the average balance on those accounts. It’s very data specific. For municipal programs to survive and for private sector programs to survive, you really have to be able to look at how they’re performing.