Two newly reelected Democratic congresswomen, Alexandria Ocasio-Cortez and Rashida Tlaib, introduced a bill, the Public Banking Act, in October that would create public nonprofit banks to address the needs of the millions of underbanked and unbanked Americans.
The Federal Deposit Insurance Corp. said in a 2018 survey that 22% of Americans were unbanked or underbanked, meaning they either did not have a bank account or may have relied on payday loans or check cashing services for some of their banking needs.
The proposed bill would create banks that would operate as a nonprofit entity and not charge consumers monthly fees or require a deposit minimum and would limit the amount of interest that would be charged for small-business loans.
What Is a Public Bank?
The U.S. has operated public banks in the past on a large scale similar to the United Kingdom postal banking system. The postal service offered limited services such as deposit accounts and held them in other banks, but the money was backed by the federal government. The post office banking services operated from 1911 to 1967 and were created under a congressional act.
The only remaining U.S. public bank is the Bank of North Dakota, a state-owned financial institution that was founded in 1919 by the state Legislature.
The bank’s deposits are not insured by the FDIC but by the state of North Dakota. Profits at the bank help fund interest-rate buydowns and programs that “help drive economic development and infrastructure projects across the state,” according to the bank.
Would Public Banks Be Good for Consumers?
The Federal Reserve estimated in its report of the 2018 survey that 6% of adults in the U.S. are unbanked and do not have a checking, savings or money market account. The unbanked population often resorted to using “alternative financial services” that were costly and charged high interest rates and fees, including money orders, check cashing services, pawnshops, auto title or payday loans, and paycheck advance or tax refund advance companies.
Another 16% of adults were “underbanked.” While they had a bank account, they also relied on those alternative services to conduct transactions such as paying bills.
While the unbanked and underbanked could avoid bank deposit minimums and fees and having their transitions tracked, they also did not have access to earning interest or obtaining debt through credit cards and other loans.
By creating a public banking option, the government would give the unbanked and underbanked the opportunity to “finally avoid predatory lending practices and give them the ability to opt out of awful practices like high-fee check cashing services,” says Saira Rahman, vice president of finance for HMBradley, an online bank. “My hope is this also has positive effects on their credit as well, as a bank account is imperative to long-term financial growth, including the ability to purchase a home.”
How Likely Is a Federal Public Banking System?
As long as Republicans remain in control of the Senate, it will be challenging to enact the proposed House bill.
The proposed bill is likely to face gridlock in Washington, says John Popeo, a partner at The Gallatin Group, a regulatory advisory firm that specializes in working with investment companies, banks and technology startups.
“Hopefully, it starts a discussion about how to better serve the unbanked and underbanked, a critical segment of the population that are growing by the minute,” he says.
The requirement by most banks that you need a credit history to open an account tends to work against many Americans.
What Are Existing Better Options for a Consumer?
You could open an account at a financial institution that has no-fee bank accounts and other consumer-friendly features, such as a credit union, CDFI or online bank with free checking and savings accounts without deposit minimums. Credit unions typically offer higher interest rates for savings, lower rates on loans or fewer fees since they operate as not-for-profit organizations.
Another option is to bank with a CDFI that works with consumers who have lower credit scores and income, says Hank Hubbard, president and CEO of One Detroit Credit Union.
“I absolutely see the need,” he says. “Credit unions, especially CDFI credit unions, provide a ready-made framework that is already regulated.”
He recommends finding methods to “uplift the efforts of credit unions” since it would be a better and more cost-effective way to address the issue.
“This could be done with specific funding to the CDFI Fund for providing these services to individuals,” Hubbard says. “It could also be done by offering partnerships between the post office and local credit unions to utilize space in post office branches. This would cost only a fraction of what building a national bank would cost.”
Stessa Cohen, a strategic advisor at Pivot Assets, a consultancy for companies in the fintech industry, recommends boosting the current efforts of community banks and credit unions by upgrading their technology and attempting to eliminate bank deserts.
Here are some banks with no fees for either checking or savings accounts:
Ally Bank. Its savings account has no monthly fees and no minimum balance requirements, and it pays 0.6% on all balances. Its checking account does not charge fees, and checks are free.
Discover. The bank’s savings account includes no monthly fees and no minimum balance requirements, and it pays 0.55% on all balances. The checking account offers 1% cash back on all debit card purchases of up to $3,000, with free checks and no fees on insufficient funds or overdraft protection.
HSBC Bank. HSBC offers a savings account with no monthly fees and no minimum balance requirements, and it pays 0.01% on balances less than $15,000, increasing to 0.05% for balances $15,000 and higher.
Charles Schwab. Schwab’s checking account charges no monthly fee, requires no minimum balance and carries unlimited ATM fee rebates globally. It doesn’t charge foreign transaction fees, and deposits earn 0.03%. Its savings account offers similar benefits, with deposits earning 0.05%.
American Express. AmEx’s savings account carries no monthly fees. It has no minimum balance requirements and pays 0.6% on all balances. AmEx offers no checking accounts.
Marcus by Goldman Sachs. Marcus provides an online savings account with no fees or minimum deposit. It pays 0.5% on deposits. Marcus does not offer checking accounts.