At a time when access to financial resources could not be more essential, millions of unbanked Americans are unable to receive a COVID-19 stimulus check or to make the non-cash payments demanded by many stores. The unbanked already pay a substantial fraction of their income for financial services that are free to the middle class, and they participate in a cash economy that leaves them vulnerable to crime. Unsurprisingly, the burden of being unbanked falls disproportionately on the poor and on people of color.
Perhaps surprisingly, a solution to this problem can be found in India. In 2014 India launched Jan Dhan Yojana (Scheme for People’s Wealth) and, in just a few years, created hundreds of millions of bank accounts, dramatically increasing the percentage of banked households. India’s solution to the problem of the unbanked — requiring existing banks to offer free, quality accounts in underserved areas — can be replicated here at home.
Unbanked in America
Consider the costs of being unbanked in America. Unbanked or underbanked consumers, who obtain at least some financial services outside of banks, spend $17 billion annually for payment and deposit services. For example, check cashing fees, which can be 5% or more of the value of the check, are a tax on income that can add up to tens of thousands of dollars over a lifetime. Prepaid debit cards, which are very popular among the unbanked, can cost up to $300 a year, and the unbanked often have to pay rent by money order or cashier’s check because their landlords insist on it. These are just the direct costs. The indirect costs include the considerable time and effort spent making payments that others are able to make instantaneously.
Unbanked or underbanked consumers also pay more for credit, spending $14 billion annually in fees on high-interest, short-term loans from payday and pawn-shop lenders. These consumers are unable to build up a credit score that could make them eligible for a credit card or other lower-cost forms of credit. The unbanked or underbanked are also more likely to be the victims of crimes that are motivated by a desire for cash like burglary and robbery.
These costs are predominantly borne by economically disadvantaged and minority communities. The unbanked tend to have lower than average income and education levels. Black and Latinx households are, respectively, six and five times as likely as white households to be unbanked. These group differences cannot be explained by income alone. For example, among households making less than $15,000 annually, 68% and 63% of black and Latinx households, respectively, have no access to mainstream credit — defined as a credit card, auto loan, student loan, housing, or bank personal loan — while this figure for whites is 48%.
Why do the unbanked bear these costs? When asked, the main reasons consumers give for not having a bank account are a lack of money to maintain a balance, the fees associated with an account, a lack of trust in banks, and a lack of convenient products, hours, and locations. A large fraction of unbanked consumers have had a bank account in the past and so are speaking from experience. Survey evidence suggests that the unbanked are well informed of the short-run costs and benefits of banking services and alternative financial products. For example, the unbanked are much more likely to be paid in cash, so they don’t have the same incentives to maintain a bank account as someone paid by check or direct deposit.
The problem of the unbanked has so far proven intractable. To date, the government’s approach has been largely laissez-faire, counting on the goodwill of banks to expand their services or waiting for technology, such as mobile banking, to solve the problem. But despite nearly a decade of economic growth, in 2017 the unbanked numbered 8.4 million households or 20.5 million individuals, representing 6.5% of the population. For the underbanked these figures were 24.2 million households and 73 million individuals, representing 18.7% of population. These numbers are likely to rise due to COVID-19.
These national figures mask considerable geographic variation. Southern states rank near the top of the unbanked list, as do California and New York. For large cities, Miami, Detroit, El Paso, Cleveland, and Memphis have the highest share of unbanked, each close to 20%. Of course, cities also contain large differences across neighborhoods, which intersect with income and race. For example, New York City has an unbanked share of 11.7%, but the neighborhoods of Mott Haven and University Heights in the Bronx — each with poverty rates of 40% — have unbanked shares of 30%. The rural counties with highest rates of the unbanked — ranging from 20%-30% — can be found in Texas, Mississippi, Louisiana, and South Dakota. No solution to the problem of the unbanked can ignore these differences.
Liberty Bank Accounts: An Indian-American Solution
It is time for a different approach to the unbanked, one based on India’s remarkable example. To be sure, the banking needs of a developing country of 1.3 billion people are not perfectly analogous to our own. Nevertheless, by adopting two key elements of India’s strategy, we can achieve universal financial inclusion by creating our own Jan Dhan Yojana — Liberty bank accounts.
First, every bank could be required to offer a no-cost bank account with features that are attractive to the unbanked. In India, banks were required to offer a free, no-minimum balance account with a debit card providing access to ATMs at over 1,500 locations. The accounts were configured for mobile payments and were eligible to receive electronic transfers from a number of government benefit programs.
In the United States, all federally-insured banks would be required to offer a Liberty account. A Liberty account would be a free, no-minimum-balance account with no overdrafts and no fee for bouncing a check. The account would include a debit card and unlimited free withdrawals on a large, locally-defined ATM network. These features eliminate most of the direct cost concerns that keep unbanked consumers away from banks.
Liberty accounts would provide the services offered by alternative financial products. For example, Liberty account holders would get a fixed number of free money orders and cashier’s checks per month. As a result, consumers would no longer need to incur monthly fees for these services from other providers. Liberty accounts would also be designated to receive federal and state benefits, not to mention federal emergency payments, through direct deposit. In order to attract and maintain customers with poor credit histories, government and commercial creditors — other than the bank — would not be permitted to seize funds from a Liberty account. To encourage non-cash payments, Liberty accounts would be configured for mobile payments. Finally, Liberty accounts would have a maximum balance so that customers would eventually graduate to other bank products.
Second, reaching the unbanked requires a mix of explicit regulatory targets, bank coordination, and payments. In India, the government first undertook a national survey to map the unbanked. It then mandated that specific banks introduce either branches or limited-service banking correspondents in every area containing a fixed number of unbanked households, while ensuring that every post office location be served by a banking correspondent. At the same time, the government organized a national media campaign around the links between JDY bank accounts, mobile payments, and government transfers.
This approach could easily adopted in the United States. FDIC and industry surveys have already mapped the unbanked and underbanked population in almost every urban and rural banking market. What the FDIC needs is congressional authority to order local banks to establish branches, limited-service kiosks, and ATM machines in underserved areas at underserved times. To this end, every United States Postal Service (USPS) location would be allocated to a bank, perhaps through an auction, to offer limited payment and credit services through a kiosk. Grocery and convenience stores, where the unbanked frequently acquire financial services, would be other potential locations
In general, regulators would identify quantity targets for new Liberty accounts in each market, but banks would decide how to meet these targets, including by paying customers to open accounts. Banks would also need to be in compliance with their Liberty-account obligations in order to open new branches, enter new business lines, or pay bonuses. Finally, the federal government would launch a media campaign around Liberty Accounts, sponsored by the USPS, to encourage consumers to sign up.
Without question, offering Liberty accounts would be expensive for some banks, but there are ways to mitigate this burden. Banks could receive a subsidy that varies with the number of new Liberty-account customers they attract. The least active banks would instead pay a tax. This way, the cost of offering Liberty accounts would be borne by the banking sector as a whole in exchange for their explicit and implicit government guarantee.
The benefits from Liberty accounts would be substantial. Consumers would save billions in annual fees and the banking sector would in turn receive billions in new deposits. Consumers would have a safe vehicle to build savings and a credit score, making them eligible for other bank services such as credit to survive emergencies or to invest in education, a home, or a car. The cash economy in underbanked areas and its associated harms would shrink, and emergency government payments could finally reach those who need them most.
Payment services are a public good and should be provided to everyone free of cost. Encouragingly, there is now political momentum behind the idea of universal bank access. However, the leading policy proposal to date — endorsed by Senators Elizabeth Warren, Bernie Sanders, and Kirsten Gillibrand — envisions turning the USPS into a bank. But there is little need to so transform the beleaguered USPS when there are 10,000 federally-insured banks and credit unions in the United States that can more efficiently provide banking services. Banks are already quasi-public entities to the extent they play a central role in the payment and monetary system, and they can be required to support universal bank access. Moreover, postal banking can at most be done at USPS locations, whereas Liberty accounts could be offered at every USPS and bank location. India leveraged a few dozen banks and its postal locations to approach universal bank access. America can attain it.