California legislation seeks no-fee debit cards for ‘unbanked,’ many in minority communities

A new California bill designed to create a public banking system with no-fee debit cards to all citizens presents a balancing act for the state from the entities that know the financial organizations like the back of their hand.

Although considered well-intended, the California Public Banking Option Act (Assembly Bill 1177) is receiving a lukewarm response from banks, credit unions and even state Controller Betty Yee.

It was introduced in February by Assemblyman Miguel Santiago, (D-Los Angeles) as a means of providing a leg up to low-income communities. It now stands in the state Appropriations Committee.

The bill cites that one of two Black and Latino households are either “unbanked” or “underbanked,” with the notion that most banking services are fee-based. A quarter of Californians do not hold accounts, the bill’s summary states.

It adds: “Californians earning less than $15 per hour make up 80.7% of the unbanked in the state. Black and Hispanic Californians make up 78.4%. Nearly half (45.9%) of all Black-identifying households in California and 41.1% of all Hispanic-identifying households are unbanked or underbanked, compared to 15.5% of white-identifying households.”

The bill is as much about social equity as finance.

“When we talk about economic recovery from COVID, there’s no need why we can’t bridge the racial wealth income gap. When you’re rich, your money makes money. When you’re poor, it doesn’t,” said Tom Steel, Santiago’s legislative aide.

By eliminating restrictions such as a minimum balance requirement and overdraft, the poor have a better chance at getting ahead. A Fintech-type, third-party administrator would assist the state in processing the transactions on the backend of the program.

Following a $1 million investment, the hope is the program would be cost neutral in six years.

“We’re hopeful it has a chance with 17 co-authors,” Steel said.

Santiago may have discovered the idea in the city of Los Angeles, which offers its citizens the Angeleno Card, a no-fee debit card offered to households whose income fell below the federal poverty line before the COVID-19 crisis began and who had their income reduced by at least another 50% due to the outbreak.

The state proposal would form the BankCal program, which establishes a quasi public bank run by the government.

That’s part of the sticking point for financial institutions and their advocacy groups.

“We’re very much in opposition to the principle of the state getting into the banking world,” said Robert Wilson, the vice president of state government affairs for the California Credit Union League based in Sacramento. “We applaud the intent, but we really want them to look at other options.”

The credit union League wrote a letter dated March 31 to the lawmaker urging him to rethink the proposal.

“While CCUL acknowledges the laudable goal and appreciate the intent of the bill, we believe the bill is duplicative to what credit unions are already offering in their communities,” the letter states.

Many of the nearly 290 credits in California already offer checking accounts with no fees and “second-chance opportunities,” the policy paper points out.

Within the credit union community, 22 are also Community Development Financial Institution credit unions. These designations indicate a majority of their membership meeting low-income thresholds. CDFIs are developed to promote economic vitality in distressed communities. In January, they were the first in line for the latest round of Paycheck Protection Program funds, which enabled small businesses in low-income and minority-based communities to gain access to capital.

“Credit unions already view themselves as the ‘bank of the people’ due to their unique structure and ability to meet the needs of their communities,” the letter indicates.

The credit unions’ opposition came with some other high-powered backup.

“Banks aren’t easy to manage,” California Bankers Association spokeswoman Beth Mills told the Business Journal. “This is something the private sector has a good handle on.”

Something for nothing might not be the answer.

To Mills and others in the banking and finance world, fee-based services are necessary to keep the system afloat and operating.

Otherwise, why would California residents pay taxes, she points out.

“We certainly share some concern and level of interest to giving people access to people who don’t have a bank account,” she said.

But there are other ways to accomplish the same goal. Mills suggested the state should help promote the programs banks already have to help those in need.

The state’s top financier expressed objections to the bill as the top officer and watchdog to California’s finances.

Yee also wrote a letter in March that shared concerns over the bill’s “unlimited general fund (access) for startup and administrative costs to be continued in the annual Budget Act for at least the first six years of the program,” it stated.

“As California’s chief fiscal officer responsible for paying the state’s obligations, I believe it is fiscally imprudent for the state to run a public bank as it would expose the state to excessive unknown financial and legal liability,” she said in the letter.