Earlier in the pandemic, West Coast states led the way in providing financial assistance to marginalized populations left out of the federal stimulus and relief packages. In Washington, Governor Jay Inslee directed $40 million in assistance to undocumented families. Oregon set up the Oregon Worker Relief Fund to ease the financial burden of unemployed and undocumented workers. And California’s state government cooperated with private philanthropists to channel hundreds of millions of dollars in assistance to those without legal status. Cities such as Los Angeles also set up their own programs to get money to those left destitute by the pandemic.
Now, California has taken baby steps to reimagine the banking system as well, with the intent of providing access to basic financial resources to impoverished residents who, historically, have operated in a shadow economy without access to legitimate services.
This week, Governor Gavin Newsom signed AB 1177, which sets up a commission to study the possibility of the state’s creating “CalAccounts.” These would function as a zero-fee, federally insured banking system for low-income residents who otherwise might have to fall back on payday lending, check cashing, and other usurious practices.
If the commission finds that the project is doable, California will establish a state bank to serve the needs of the more than 7 percent of its residents who don’t have bank accounts. The vast majority of these individuals are low-income; indeed, in 2017, the FDIC reported that 27.3 percent of households in the state with an income of less than $15,000 per year lived without access to bank accounts. By contrast, only one in 200 high-income households didn’t use banks.
This is important. Historically, payday lenders have preyed on poor residents by charging monthly fees that, in practice, can rapidly add up to the equivalent of an annual interest rate of several hundred percent. In California, such loans are limited to a month in length, but the maximum allowed fees cap out at the equivalent of what would be 460 percent interest per year if the loan were for a full year. A person with good credit, on the other hand, can currently qualify for 2.7 percent mortgage rates, fixed over 30 years.
Obviously, setting up a state bank will not in itself prevent poor Californians from heading to payday lenders when they need an infusion of cash. After all, the state bank, while providing checking and savings services, won’t necessarily lend small amounts of money for short periods. That said, once a person is in the banking system, it becomes easier for them to manage money, perhaps to save some, or even to negotiate overdraft terms with the bank that don’t include levels of interest that amount to highway robbery. Over time, the presence of a state bank should at least reduce the stranglehold that payday lenders have over many in impoverished communities.
Moreover, simply negating the need for poor residents to visit check-cashing facilities will save them large amounts of money over their lifetimes. In California, such services typically charge 3 to 3.5 percent of the value of a paycheck to cash it, and a whopping 12 percent on personal checks. For all intents and purposes, that is a huge tax on poverty.
In 2012, the Stanford Social Innovation Review reported that 60 percent of low-income neighborhoods in California didn’t have a bank in their vicinity. Astoundingly, according to data generated by the Center for Responsible Lending after the 2008 financial crisis, low-income families sometimes paid as much as $2,000 a year for check-cashing services, and Californians have been spending close to half a billion dollars per year paying the fees on payday loans. Since then, data suggests that the payday lending and check-cashing industries have only grown.
If California does, in fact, create a state bank after the commission reports back, it has the potential to fundamentally alter the balance of power between consumers and predatory lenders in the state. For too long, being poor in America has meant that you pay far, far more to borrow money and to cash checks than your more affluent peers do. That’s a poverty trap that makes it ever harder for the poor to find a pathway out of poverty. It’s past time that legislators explored ways to deliver reliable, and affordable, banking services to the poor. California is, finally, moving to do just that.