Remarks by Barry Wides

I would like to talk with you for the next few minutes about policies that the bank regulatory agencies in the United States have pursued to encourage participation in the mainstream banking system by consumers who do not hold a deposit or transaction account.

In the United States, financial services are largely provided by FDIC-insured depository institutions, credit unions, and alternative financial services providers, such as check cashing businesses, payday lenders, pawn shops, and tax preparation services.

There are about 8,000 banks and thrifts with a combined total of about 95,000 FDIC-insured depository institution branches throughout the United States. This translates to about one bank branch for every 3,200 people. In addition, there are more than 12,000 federal and state credit unions nationwide.

Studies conducted by the Federal Reserve Board report that, for more than a decade, the proportion of families without a transaction account has steadily declined, falling to 7.9 percent by 2007.

These “underbanked” consumers use a combination of mainstream and alternative financial service providers, such as check cashers and payday lenders, to satisfy their financial services needs. The Center for Financial Services Innovation, an affiliate of ShoreBank Corporation, estimates that the number of underbanked is roughly 40 million consumers.

More than 80 percent of the families without checking accounts have annual incomes below $25,000 and more than 60 percent of families without a checking account are minorities.

Federal banking regulatory agency policy in the United States encourages bank participation in initiatives to bring unbanked low- income customers into insured depository institutions. Among the potential benefits to consumers who obtain financial services from mainstream providers are:

  • financial services that may be less costly than what can be obtained from “alternative” financial services providers;
  • a safer place to hold funds;
  • deposit insurance protection of funds held in a checking or savings account;
  • greater potential for asset accumulation when combined with positive savings habits; and
  • potential to develop a relationship with a financial institution, which over time can provide consumers with greater access to credit for other needs such as small business loans and education loans.

The Community Reinvestment Act, passed in 1977, requires bank regulatory agencies to conduct examinations to assess a bank’s (or thrift’s) record of meeting the credit needs of its entire community, including low- and moderate-income (LMI) neighborhoods, consistent with the safe and sound operation of such institution.

CRA encourages financial institutions to provide financial products and services in the communities which they serve, including LMI areas. A bank’s programmatic efforts to bring LMI unbanked individuals into the financial mainstream may be considered community development services.

These efforts may include a bank’s collaboration with nonprofit organizations that provide financial education and other services relevant to LMI individuals and communities.

Banks can also earn CRA consideration for offering:

  • financial services with the primary purpose of community development such as low-cost savings or checking accounts, including individual development accounts (IDAs), and free or low-cost check cashing services of government and other payors to increase access to financial services for LMI individuals
  • reasonably priced international remittance services in connection with a low-cost deposit accounts.

According to a recent FDIC survey of almost 700 banks:

  • 62 percent reported offering entry-level checking with no minimum balance and 8 percent more said they offered “no fee” checking accounts for customers who use direct deposit;
  • 97 percent stated that they offer low-balance basic savings accounts; and
  • 25 percent reported offering second chance checking accounts.

One-quarter of the banks surveyed said that they engage in targeted marketing to reach unbanked and underbanked consumers.

Dynamic changes in the financial services industry have influenced the products and services offered to unbanked and lower-income consumers. Reloadable, network branded (e.g., Visa and Mastercard) prepaid cards are being increasingly offered by financial institutions who are partnering with retailers, city and state government, and employers to provide prepaid card products to unbanked and LMI consumers. For example, the U.S. Treasury Department offers “Direct Express” prepaid cards to recipients of federal benefits such as social security payments.

Initiatives, such as the U.S. League of Cities’ “Bank of Cities” program and the U.S. Treasury’s nine city pilot to reach the unbanked, focus on low-cost transaction accounts and the use of alternative forms of identification, often in combination with financial education and related support from the nonprofit community

We at the OCC, often in collaboration with other financial regulators, frequently conduct seminars and forums for bankers interested in learning about best practices for reaching the unbanked and underserved market.

Through our publications, the OCC also disseminates information about financial literacy initiatives of interest to bankers. For example, we have written publications on best practices for payroll cards, remittance products, school banking programs. We also provide financial literacy and education bi-monthly updates on the OCC’s public website:
www.occ.treas.gov/cdd/finlitresdir.htm#OCCFinancialLiteracy

In addition, we maintain a Financial Literacy Web Resource Directory for banks:
http://www.occ.gov/cdd/finlitresdir.htm

You can receive information about our upcoming events and publications by signing up to receive electronic notices on the Community Affairs Web page at:
www.occ.treas.gov/cdd/commfoc.htm

If you would like more information about the OCC’s financial literacy activities, please feel free to contact our office at (202) 874-4930.