THE "UNBANKED"
Introduction
Chairman Sarbanes, Senator Gramm, and distinguished members of the Committee, I appreciate the opportunity to appear before you this morning to talk about the unbanked and to bring you up to date with respect to First Accounts, a grant program administered by the Treasury Department, which is designed to help "unbanked" low- and moderate-income individuals establish banking relationships with federally regulated and insured financial institutions. Mr. Chairman, I commend you for focusing a national spotlight on this critical issue of expanding consumer access to mainstream financial services by convening today's hearing, as well as the hearings you held earlier this year on the remittance industry and financial education. The policy objective of First Accounts is embraced by members of both parties. It is of great importance to me personally, to the Treasury Department, and to the Bush Administration.
Secretary O'Neill recently noted that: "We must work to ensure that all Americans have the knowledge and tools to build their own financial security. Ownership, independence, and access to wealth should not be the privilege of a few. They should be the hope of every American." Establishing a bank account at an insured depository institution is one of the basic tools necessary for individuals to build their own financial security. Expanding low- and moderate-income Americans' access to mainstream banking services is very much in line with the compassionate conservatism of President Bush to give all Americans the chance to fully participate in the benefits of our free economy. In a recent speech, President Bush defined this compassionate conservatism, by saying "It is compassionate to actively help our fellow citizens in need. It is conservative to insist on responsibility and results." Consistent with this philosophy, we have strived to direct First Accounts funding to those initiatives which can be replicable, self-sustaining and most importantly, promise to bring the greatest number of "unbanked" individuals into bank accounts.
Background
Who are the unbanked? While most Americans have the comfort of keeping their money at insured depository institutions, other Americans use financial services of a different sort. They cash checks at a neighborhood storefront and pay bills in cash or with money orders. Easy and convenient perhaps, but often expensive, dangerous, and not economically productive. Simply put, the unbanked are people who do not have a banking relationship with a traditional financial institution, such as a commercial bank, a savings and loan association, or a credit union.
Although there are few statistics available regarding the true size of the unbanked population in the United States, some estimates indicate that as many as one in ten families, or approximately ten million households, may not have bank accounts.1 According to a January 2002 report, surveys have found that the groups most likely to be unbanked are lower-income households, households headed by African-Americans and Hispanics, households headed by young adults, and households that rent their homes. 2
Given the estimated size of the unbanked population in the United States, an obvious question is why do so many people remain outside of the mainstream banking system? Are they shut out of the system or have they made a conscious choice to not do business at traditional financial institutions? Surveys on this issue reveal varied responses to these questions.3 Some individuals who are unbanked cite financial reasons; they say that bank fees or minimum balance requirements are too high. Other unbanked individuals suggest that they choose to remain unbanked because the types of accounts offered by traditional financial institutions do not meet their needs. For example, a person may not write enough checks or have enough month-to-month savings to make it worthwhile to maintain an account. Attitudes towards banks also appear to be a factor as a large number of people surveyed indicated that they are not comfortable dealing with banks or letting them know their private financial information.
Advantages to Being "Banked"
An individual should have the right to choose where he or she will seek financial services. The right to choose, however, is an illusory right if people do not have accurate and complete information that will enable them to make educated decisions and access to a range of financial service providers.
The unbanked typically pay higher costs in the form of transaction fees for financial services than individuals with banking relationships. Recent Treasury research indicates that a minimum wage worker can pay an average of $18 per month for cashing paychecks at a check casher.4 A Social Security recipient would pay an average of $9-16 a month to cash his or her risk-free government check. Relying on alternative service providers as a source of credit is equally or more expensive. Annualized interest rates for loans from pawnshops, car-title lenders, payday lenders, and small loan companies can be as high as 100 to 500 percent.5
Individuals also face heightened safety and security risks as a result of having to conduct all financial transactions in cash. Carrying large amounts of cash is dangerous and keeping cash at home is risky. There have been a number of recent news stories describing how criminals have specifically targeted unbanked immigrants for robbery as they leave check cashing outlets because of the likelihood that these individuals are carrying a significant amount of cash.6 Other articles cite cases of people losing their life savings in fires because they kept it hidden in their homes in the form of cash.7 Unlike traditional depository institutions, alternative financial services providers cannot offer their customers deposit account products. Deposit accounts at insured financial institutions offer a safe place to keep money until the depositor is ready to spend it.
Let me emphasize that we do not question the validity of products offered by alternative service providers. They can offer the advantages of immediacy and convenience, for which the providers charge a premium. We do believe, however, that low and moderate income Americans should have choices, and those choices should include the ability to establish an account at a mainstream financial institution such as a bank, thrift, or credit union.
Finally, establishing a banking relationship is taking a first step toward building a promising future. Individuals lacking basic financial services may have a reduced ability to manage their finances, and may be limited in planning and saving for the future. Without a banking account, it is nearly impossible to establish a sound credit record, which in turn is necessary to qualify for a car loan, home mortgage, or small business loan at reasonable rates. A traditional banking relationship offers the account holder an opportunity to become familiar with fundamental financial concepts that are critical in asset building and bank accounts provide a tool to help families fulfill their savings goals and manage their money.
Treasury Initiatives
Through the First Accounts program, Treasury is funding initiatives to connect unbanked low- and moderate-income individuals to mainstream financial services. The paramount goal of First Accounts is to move a maximum number of unbanked low- and moderate-income individuals to a banked status with an insured depository institution. We hope to accomplish this goal through the development of financial products and services that can serve as replicable models in meeting the financial services needs of unbanked individuals without the need for on-going public subsidies. Under First Accounts, financial institutions are encouraged to create low-cost accounts for unbanked families and to help bring more ATMs to safe places in low-income communities.
Additional goals of the program include the provision of financial education to unbanked low- and moderate-income individuals to enhance the sustainability of the new financial relationships. We will also undertake research to evaluate the success of the funded projects and to understand what products, services, educational initiatives, marketing techniques, or incentives are needed to achieve the goals of the First Accounts program. Treasury has great hope that the pilot programs funded through First Accounts will serve as replicable, self-sustaining models for achieving the goal of moving a significant number of unbanked individuals into banking relationships with insured depository institutions.
There are a number of reasons that individuals remain unbanked, including a lack of low-cost account products; a lack of convenient access; a perception of unprofitability; an individual's prior account problems; and a lack of customer financial literacy. First Accounts provides an opportunity and incentive for entities to offer real solutions regarding the supply of and demand for traditional banking products and services in unbanked segments of the population. For example, nonprofit organizations may provide consumer financial education. Employers may provide convenient access. Financial institutions may demonstrate the profitability of serving previously unbanked customers through the development of new products designed to meet the needs of low- and moderate-income Americans.
Treasury's First Accounts initiative was launched this past December 27th with a published notice of funds availability, a NOFA, in the Federal Register inviting applications for First Accounts grants.8 The amount currently available is approximately $8 million to fund projects that can serve as models to connect unbanked low- and moderate-income individuals to mainstream financial services.
First Accounts applicants were required to propose, at a minimum, low-cost electronic, checking, or other types of accounts either directly (if the applicant is an insured depository) or indirectly through one or more insured depository institutions. The NOFA put particular emphasis on trying to reach unbanked employees through their employers, as well as encouraging arrangements whereby employees can obtain account services building from services already provided by their employers' financial institutions. Applications were due March 20th and a wide variety of entities were eligible, and in fact did, apply for the grants. The applicants included nonprofit organizations, insured credit unions and banking institutions, community development financial institutions, for-profit businesses, state agencies, Indian tribal governments, local governments, financial services electronic networks, and other. In total, Treasury received 231 applications from 38 states. 89% of the proposed projects proposed to expand access of affordable financial services, 58% proposed to develop new financial products and services, and 88% proposed to educate unbanked individuals, employers, and institutions.
During the last few weeks, we have been busy completing our review of the applications. The competitive review process involved evaluating the applications based on a number of different criteria including: likelihood of success, reasonableness of approach, extent to which a project becomes self-sustaining, extent to which projects are replicable, timeliness of rollout and estimated timeframe to achieve objectives, performance goal setting, applicant's experience and track record, and management capability. The application reviewers dedicated many hours to assessing the applications and preparing their recommendations, considering not only those factors listed above, but also geographical and institution diversity.
After careful consideration, the Treasury Department is announcing its selections for First Accounts grants. The 15 awards totaling $8,357,235 promise to assist 35,445 "unbanked" low- and moderate-income individuals in opening accounts at insured depository institutions. A complete list of grant awardees is attached to my testimony for inclusion in the record.
The First Accounts grant awards are going to nonprofit organizations, insured depository institutions, insured credit unions, a community development financial institution, a faith-based organization, and a foundation. The awardees will carry out projects that provide financial literacy training, connect individuals to insured accounts, develop low- or no-cost products and services, and increase access to financial services through installation of automated teller machines. The projects are focused on a wide variety of unbanked people, including youth, new entrants to the workforce, recent immigrants, residents of low-income communities, residents in rural areas, native Americans living on reservations, people living in public housing, and families using child care facilities. Awardees pledge that the funded projects will cause 35,445 unbanked people to move to a banked status with an insured depository institution.
Grant recipients will be targeting unbanked people in 25 states: California, Colorado, District of Columbia, Georgia, Idaho, Iowa, Illinois, Kentucky, Maryland, Michigan, Montana, New Jersey, New York, Nevada, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.
Information on the 15 projects awarded grants and on First Accounts can be found at www.treas.gov/firstaccounts.
Treasury's role in the First Account's program will not end with its selection of grant recipients. Treasury's on-going involvement with First Accounts will include evaluating the programs for progress, deliverables, and effectiveness on a regular basis. In addition, Treasury will receive periodic reports from the grant recipients. Once we have data on the success of programs, the Administration will consider the cost effectiveness of continuing First Accounts or other similar types of programs.
Another Federal program that is supported by the Administration and shares First Account's goal of encouraging the unbanked to move into the mainstream financial services sector is the Electronic Transfer Account (ETA) program. The ETA program, which is administered by Treasury's Financial Management Service, provides low-cost electronic bank accounts to Federal benefits recipients. To date, the ETA is offered in every state, the District of Columbia, and Puerto Rico through appoximately 600 banks with more than 16,000 branch locations. Treasury plans to continue to examine the benefits of the ETA programs and, if necessary, make recommendations to the Administration and Congress on how to coordinate its ETA efforts with First Accounts to ensure that the unbanked receive valuable services in the most cost-effective manner.
Let me also highlight a number of other initiatives that Treasury is working on related to the unbanked. First, we have a number of efforts underway that are aimed at improving financial education. As part of our long-term commitment to improve financial education for all Americans, we are establishing a new office at Treasury. The Office of Financial Education (OFE) will be under the leadership of the Assistant Secretary for Financial Institutions and will be headed by a new Deputy Assistant Secretary. OFE will develop and implement financial education policy initiatives, and will oversee and coordinate our outreach efforts.
One of Treasury's financial education initiatives is "Bank on Your Schools," a partnership between schools and financial institutions that will promote financial education in low- and moderate-income areas. This initiative will encourage financial institutions to open student-run branches in high schools. Students will get hands-on experience running a bank or credit union, and they will learn about financial issues. We have been meeting with the major financial institution trade groups and gathering information to develop ways to expand these programs into low- and moderate-income communities. Through "Bank on Your Schools" programs, young people gain actual experience in opening and managing a bank account that can be carried over into their adult lives.
Another topic that is often overlooked in the discussion of the unbanked is the remittance industry. The Inter-American Development Bank estimates that Latin American immigrants living in the United States send an average of $200 to their native countries an average of seven to eight times per year.9 These remittances have reached a level that surpassed $23 billion last year - about one fifth of total worldwide remittances.10 If current growth rates are maintained, cumulative remittances could reach $300 billion by 2010. Most immigrants send remittances through a small number of alternative financial services providers. Lack of competition in the remittance industry has contributed to high remittances costs. Although remittance charges have declined in the past two years, they still range from $15 to $26 for a typical $200 remittances. The cost varies depending on the type of institution used to send the money and the country where the money is being sent, but can often exceed 20 percent, when transmission fees and losses on the exchange rate are both factored in.
But this is changing. With our encouragement and support, more and more traditional financial institutions and credit unions are recognizing that there is a concrete opportunity to attract a diverse consumer base by offering low cost remittance products. Offering remittance features as part of basic bank accounts can be an important marketing tool in reaching out to unbanked migrant workers. One important product that banks and credit unions can offer that money transmitters cannot is a federally insured checking or savings account. This can lay the foundation for new customers to save and build assets, establish a banking relationship, and learn about important tools in personal finance. At the same time, the increased competition should result in lower remittance costs. We support any efforts made to make the process of sending remittances more affordable for the people who use it - most of whom are low-wage earners according to available data.
Conclusion
In closing, I would like to commend the efforts of the many banks, credit unions, and community- and consumer-based entities and groups - some of whom are represented on the panel that follows me this morning - who have recognized the problems faced by the unbanked segment of the population and undertaken initiatives to bring these individuals into the financial mainstream.
Expanding access to financial services is a bi-partisan issue that contributes to improved financial well being among many low- and moderate-income individuals. Opening an account at an insured depository institutions provides the account holder with a number of benefits: the opportunity for wealth building; lower costs for financial services; security; knowledge of and familiarity with the fundamentals of personal finance; and the chance to build a credit history and qualify for credit on better terms. Because of these benefits, Treasury is committed to promoting policies that will encourage unbanked individuals to establish traditional account relationships with insured banks and credit unions.
To accomplish this goal, Treasury has focused on both educating individuals about the benefits of being banked and persuading depository institutions to expand and tailor services for this underserved segment of the population. First Accounts addresses both of these goals. In addition, by developing replicable and sustainable models, the achievements of the First Accounts grant recipients do not have to be limited by the parameters of the original proposals. Other entities hopefully will see the success stories, and establish similar types of programs to serve the needs of a segment of the unbanked population that they may be uniquely qualified to reach. As a result, Treasury hopes that the effects of the First Account program will reach far beyond the initial group of pilot programs.
Thank you for the opportunity to appear here today. I look forward to working with Committee on these issues in the future.
1 Michael H. Moskow, Fostering Mainstream Financial Access: www.chicagofed.org/unbanked, Chicago Fed Letter, Number 162, (Feb. 2001)(http://www.chicagofed.org/publications/fedletter/2001/cflfeb2001_162.pdf).
2 John P. Caskey, Bringing Unbanked Households Into the Banking System, Capital Xchange (Jan. 2002) (http://www.brook.edu/dybdocroot/es/urban/capitalxchange/article10.htm).
3 Id.
4 Moser, supra note 1.
5 Caskey, supra note 2.
6 CUs Testify Provisions of the Patriot Act Could Harm Immigrants, Credit Union Journal (Feb. 25, 2002).
7 Angela Shah, Money in the Bank: Accounts Helping Wary Immigrants Park Cash Safely, Send It Home, The Dallas Morning News (Aug. 19, 2001).
8 66 Fed. Reg. 66,975 (Dec. 27, 2001).
9 Remittances to Latin America and the Caribbean, Multilateral Investment Fund/Inter-American Investment Bank (Feb. 2002)(http://www.iadb.org/mif/website/static/en/study3.doc).
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