FROM THE OFFICE OF PUBLIC AFFAIRS June 27, 2000LS-736 GARY GENSLER TESTIMONY BEFORE THE HOUSE COMMITTEE ON BANKING AND FINANCIAL INSTITUTIONS Chairman Leach, Ranking Member LaFalce, and Members of the Committee, I appreciate this opportunity to be here today to discuss basic banking and H.R. 4490, the First Accounts Act of 2000. I would particularly like to thank Chairman Leach and Mr. LaFalce for cosponsoring the First Accounts Act on its introduction. Despite the strong national economy, 10 million American families are not participating in our financial system at even the most basic level. These 10 million families - nearly 85 percent of who make less than $25,000 annually - lack a bank account. Bringing these families into the financial services mainstream will mean lower costs and more opportunities for them to plan financially and to save for the future. That is good for these families, and good for our national economy. For some time, Treasury has been working to help families gain access to the financial services mainstream. Building on these efforts, the First Accounts Act will help us take small, but important steps to expand the reach of the financial system to many families who lack this basic passport to the broader economy. My testimony today will focus on four points:
Bridging the Banking Divide The Federal Reserve's 1998 Survey of Consumer Finances indicates that there were nearly 10 million families in the United States in 1998 without either a checking or savings account, representing 9.5 percent of US families. Over 8.4 million of these families have incomes below $25,000, or less than 65 percent of US family median income. Nearly one in four lower-income families is unbanked. The problem also occurs disproportionately among minority families, nearly one-quarter of who are unbanked, even regardless of income. Evidence further indicates that the unbanked are often concentrated in lower-income urban areas. For most of us, entering the financial services mainstream is simple. We can walk into a local bank branch, make an opening deposit, and walk out with a checkbook and a checking account. We have our paychecks directly deposited to our account, and can access those funds in any number of ways - at convenient ATMs, at point-of-sale terminals at local merchants, or by writing checks. And we are typically able to keep a cushion of funds that allows us to handle financial contingencies, avoid overdrafts and maintain a minimum balance in the account. For the unbanked, gaining a foothold in the financial services mainstream is unlikely to be as simple. Let me highlight five reasons why Treasury believes many low-income Americans do not have bank accounts: a lack of low-cost account products tailored to their needs; prior problems with bank accounts; insufficient convenient access; a lack of consumer education; and industry perception that these customers may not be profitable. First, financial institutions may not offer account products that meet the needs of the unbanked population:
Second, the unbanked may have greater difficulty qualifying for conventional account products. This may reflect past problems that the unbanked have encountered in the banking system:
A third reason may be the lower availability of mainstream financial services in the areas where the unbanked live and work:
Fourth, many unbanked Americans lack knowledge about the benefits of a bank account and how to effectively manage household finances. This may negatively affect their attitudes and perceptions about financial institutions and account products. Fifth, many financial institutions feel that serving this customer segment involves greater risks and fewer rewards than serving other segments. In particular, the costs of developing new products and new distribution networks to reach the unbanked, combined with the costs of marketing and providing consumer education to this population, may result in an extended period of time for a bank to recover its start-up costs for serving the unbanked. Financial institutions may also be concerned about the long-term profitability of serving this sector. We need to overcome these practical barriers if we are to help bring the unbanked into the financial services mainstream. The Importance of Universal Access Like money itself, the benefits that a bank account provides are easy to take for granted, until you do not have one. Providing greater access to the financial services system has the potential to generate tangible economic benefits, both for families and for our nation's economy.
With even a modest amount of savings, lower-income families may be able to handle unforeseen financial needs, needs that drive those without savings toward high-cost credit options like payday lending. The high costs of payday loans, which average about $36 on a two-week $200 loan, can erode what little financial stability these families may have.
Second, without a bank account or credit card, it is next to impossible to conduct financial transactions online. It is even difficult to gain access to the Internet. Thus, if we are going to bridge the "Digital Divide," we need to bridge the banking divide.
Increasing Access to Financial Services For these reasons, it has been a high priority of this Administration, and the Treasury Department in particular, to help Americans overcome barriers to the banking system. Between 1992 and 1998, the percentage of families without a bank account decreased from 13 percent to under 10 percent. Let me highlight a few of the ways in which this Administration's efforts have contributed to this favorable trend: First, the strong economy has helped to increase the incomes of even the lowest-paid American families. Real income for families in the lowest fifth of the income distribution rose faster than for any other group since 1993. Strong growth in family income has helped to reduce the ranks of the unbanked. Second, a strong Community Reinvestment Act. Under the revised CRA regulations adopted in 1995, banks and thrifts are examined for their performance not only on lending and investment, but also on the provision of services. CRA is helping to encourage financial institutions to be more attentive to the financial services needs of low- and moderate-income persons. The Federal Financial Institutions Examination Council (FFIEC) has made clear that banks and thrifts can receive positive CRA consideration for the provision of consumer education, innovative accounts, Individual Development Accounts, and Electronic Transfer Accounts, discussed more fully below. Third, EFT '99. In 1996, Congress enacted the Debt Collection Improvement Act, which required Treasury by 1999 to make most Federal payments by electronic funds transfer. To meet this requirement, Treasury launched the EFT'99 initiative, and put in place a two-part strategy to meet its statutory obligations under the Act.
The EFT'99 initiative was designed to address, specifically for federal benefit recipients, many of the challenges of increasing account ownership among the unbanked:
Since unveiling the ETA last June, we have conducted extensive marketing of the ETA to financial institutions. As of June 22, we have 586 financial institutions certified to offer the ETA in 6,132 branch locations nationwide. Fourth, as I noted previously, many lower-income communities lack sufficient convenient access to mainstream financial services. That is why Treasury has been working to provide easy access to banking services within previously under-served communities. Working with the US Postal Service, Treasury has established a small pilot program to place ATMs in local post offices to give families easy and secure access to funds at a low cost. Fifth, Treasury's Community Development Financial Institutions Fund has also played an important role in promoting access to financial services in lower-income communities. Through its CDFI and Bank Enterprise Award programs, the Fund provides financial incentives to banks, thrifts, credit unions and CDFIs for providing increased retail banking services to underserved communities. The Fund currently provides per-account incentives to financial institutions that increase their provision of ETAs to consumers in lower-income communities. Lastly, the Administration has supported basic savings initiatives that bring low-income families into the banking mainstream. Under the Assets for Independence Act, the Department of Health and Human Services is working with states and local organizations to help low-income people establish Individual Development Accounts (IDAs). Families' deposits into these savings accounts are matched with federal and private dollars to help accountholders meet savings goals, such as a down payment on a home or school expenses. Under another demonstration, IDA programs are operating in 13 sites across the country, with more than 2,000 savers. The President's proposal for Retirement Savings Accounts in his FY 2001 budget builds on the successful model of IDAs, and would help more low-income families to start savings relationships with mainstream financial institutions. H.R. 4490 - The First Accounts Act of 2000 The President's FY 2001 budget includes $30 million for the Treasury Department to build on this Administration's work by piloting strategies to help more low- and moderate-income Americans to access basic financial services in the banking mainstream. Treasury estimates that at least half of the 10 million families without bank accounts do not receive federal benefits and are thus not eligible for the ETA. The First Accounts Act of 2000, introduced last month by Chairman Leach and Ranking Member LaFalce, would authorize Treasury to extend the benefits of low-cost basic bank accounts to the millions of unbanked Americans who do not receive Federal payments. Companion legislation has also been introduced in the Senate. The First Accounts bill is currently cosponsored by 25 Members, including many of the Members of this committee. The initiative involves four elements:
This fall, Treasury's CDFI Fund will expand the scope of its BEA and CDFI programs to provide incentives for banks, thrifts, credit unions and CDFIs to offer First Accounts-type products to customers who do not receive Federal payments. Awards, subject to the availability of funds, will depend on the actual increase in services provided. The results of these programs will help to inform the structure and incentives for the First Accounts pilot. EFT'99 will also continue to provide valuable input into the structure of the First Accounts initiative. As Treasury continues its consumer education efforts, it will further develop best practices to apply to the First Accounts initiative. As the ETA continues to roll out over the coming months, Treasury will gauge the demand for low-cost electronic account products among consumers and industry experience in offering such products. Treasury will also gather evidence from our Postal-ATM pilot in six neighborhoods, showing ATM usage in safe, secure locations in underserved, low-income neighborhoods. We will pair our findings from the pilot with further research to identify gaps in electronic access to banking services. After assessing these outcomes, Treasury will determine how best to allocate the pilot's elements - research, education, access points and accounts - and to draw on the strengths of our offices and bureaus that have been instrumental in the implementation of EFT'99. Conclusion Despite the unprecedented growth in our nation's economy over the last several years, 10 percent of American families are not participating in our banking system at even the most basic level. This Administration has done much to help lower-income families move into the financial services mainstream, but much more remains to be done. Helping the 10 million US families without bank accounts to access the financial services mainstream can lower costs for these families and encourage them to save, while benefiting our economy as a whole. The First Accounts Act of 2000 represents a small but significant step toward helping more of these families to enjoy the benefits of full participation in that system. We look forward to working with this Committee to enact this important legislation. I would like to thank Chairman Leach and Ranking Member LaFalce for focusing attention on the issue of the unbanked with this hearing. I will be happy to answer any questions you might have. |
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