Financial stability was a central priority during Barack Obama’s presidency. As soon as Donald Trump took office, deregulation became a key focus. If Joe Biden gets elected, the issue of financial inclusion may finally gain prominence in the banking policy realm.
In past administrations, the question of how to bring more Americans into the mainstream financial system was typically treated as peripheral to policy matters that were deemed more pressing.
But progressives have focused a lot of attention in recent years on financial inclusion, championing ideas such as postal banking, reform of the credit reporting system and universal accounts for U.S. consumers. Their efforts have elevated the prominence of inclusion policies in Democratic Party politics, as has the unprecedented recent nationwide focus on racial wealth disparities.
“In the 21st century, everybody should have an account — period,” argued Darrick Hamilton, an economist at the New School who supported Sen. Bernie Sanders of Vermont during the Democratic primaries. “And it’s not so costly to do.”
The increased prominence of these issues does not mean that progressives’ preferred policies are likely to prevail in a potential Biden administration. Ideas promoted by Sanders and other progressives face strong opposition from banks. But with the former vice president showing a clear polling advantage in the run-up to the Nov. 3 election, progressives and moderates are jockeying for positions of influence, according to recent interviews with more than a dozen people in and around Democratic policy circles.
Several disputes between the two camps hinge on whether the private sector can be relied upon to help bring more Americans out of the financial shadows, and conversely, the extent to which the federal government should serve as a provider of affordable financial products and services.
Government vs. private sector
Consider the U.S. credit reporting system, which has long faced criticism for reinforcing racial disparities, among other faults. Last year, the progressive think tank Demos proposed replacing today’s private credit bureaus with a new public credit registry.
This public system would be phased in over seven years and housed within the Consumer Financial Protection Bureau. It would use new algorithms that draw on alternative data sources — perhaps including rent and utility bills — in an effort to minimize racial disparities.
“It’s just become very clear that our private credit reporting system is failing American consumers,” said Amy Traub, associate director of policy and research at Demos.
The Biden campaign has embraced the concept of a public credit reporting agency, but not necessarily the idea that it would replace the likes of Equifax, Experian and TransUnion.
Recommendations published in July by a Democratic unity task force — members included both Biden supporters and backers of Sanders — included a call for the establishment of a public credit reporting agency that would provide an alternative to today’s private-sector system. Under this plan, federal mortgage and student lending programs would be required to use this public option.
Richard Cordray, who served as CFPB director under President Obama, is among those who question the practicality of a public credit reporting system in the United States. “It’s not an easy thing to do, and it’s not going to be done quickly,” he said. “It’s a big, big undertaking.”
A similar split over the proper role of the public and private sectors is shaping discussions about postal banking. Sanders, an independent, favors giving the U.S. Postal Service the authority to offer checking and savings accounts, remittance services and small-dollar loans.
Biden, who has a more moderate record on financial services policy than Sanders and Democratic Sen. Elizabeth Warren, has also expressed general support for the concept of using the post office as a way to deliver affordable banking services to households that lack such access today. But that stance does not necessarily mean that the Postal Service would get into the consumer lending business, as Sanders favors.
One way to implement the vision that Biden has endorsed would be to allow private-sector banks and credit unions to offer products and services that meet certain specific criteria at postal locations across the country.
“If there was a certified roster of consumer-friendly products — offered by third parties, including banks and credit unions — then you’d have broad access to financial services,” Cordray said. “And if you did that, the postal role in this would simply be brick-and-mortar access.”
“To me, that would make a great deal of sense,” he added. “It wouldn’t be that radical a proposal.”
If this more moderate vision were to prevail, it would still mark a leftward shift from the Obama years, when discussions of financial inclusion usually focused on the potential of technology-focused startups to bring more people into the financial mainstream.
Personnel is policy
Within the Democratic coalition, the increased focus on financial inclusion can be traced partly to the Black Lives Matter protests earlier this year and related discussions about systemic racism in the United States. The net worth of a typical white family in 2016 was nearly 10 times higher than that of a typical Black family, according to Federal Reserve survey data.
Greater awareness about the size and persistence of racial disparities has added both urgency and clarity to policy discussions about financial inclusion. “You’ve got to look at it through a racial equity lens,” said Diane Thompson, a former CFPB official.
In 2019, 5.4% of all U.S. households were unbanked, meaning that no one in the household had a checking or savings account, according to data from the Federal Deposit Insurance Corp. But among Black households, the figure was 13.8%.
“Even though the national unbanked numbers aren’t massive, if you break them down by age, and gender and race, they are,” said John Thompson, chief program officer at the Financial Health Network.
If Biden gets elected, the critical decisions about financial inclusion policies are likely to fall to the officials he installs in several top jobs, including Treasury secretary. Given the continued health emergency caused by the coronavirus pandemic and other major issues facing Congress, a sweeping banking policy bill is unlikely to be high on the agenda.
Most of the key decisions would likely be made by executive-branch appointees.
Biden would likely move to replace Kathy Kraninger as CFPB director after the Supreme Court granted sitting presidents more discretion to choose the head of the consumer bureau. He would also have the opportunity to nominate a new comptroller of the currency to replace the acting comptroller, Brian Brooks.
Fed Chairman Jerome Powell’s four-year term ends in February 2022, although he could be reappointed in a Biden administration. And while the term of FDIC Chairman Jelena McWilliams does not expire until 2024, she could soon be outvoted by Democratic-appointed members of the agency’s board.
During his more than three decades in the Senate, Biden was viewed as friendly with the credit card industry, which has large operations in his home state of Delaware. He famously clashed with Warren, then a Harvard Law professor, over a 2005 bankruptcy bill.
The co-chair of Biden’s transition team, Ted Kaufman, is a former Biden Senate aide who showed a progressive streak during his own brief tenure as a senator. In 2010, Kaufman sponsored Senate legislation that would have forced big banks to shrink.
Members of the Biden transition team’s staff include Don Graves, a former Obama administration official who later served as head of corporate responsibility and community relations at KeyBank, and Julie Siegel, an aide to Warren and a onetime CFPB official.
“It seems like their campaign is going out of their way to have a big tent,” said a former Democratic congressional staffer who is aligned with the party’s progressive wing.
Universal accounts, overdraft fees and small-dollar loans
One broad question that would confront a Biden administration is how to ensure that many more Americans can maintain a bank account.
“If you have money, it’s very cheap to access your money. And if you don’t have money, it’s very expensive,” said Aaron Klein, a fellow at the Brookings Institution. “That is the core problem.”
Sen. Sherrod Brown of Ohio, a member of the party’s progressive wing who is poised to lead the Senate Banking Committee if Democrats win control of the chamber, is sponsoring legislation that would allow all Americans to set up a digital wallet known as a FedAccount. These accounts would be free and would have no fees or minimum balance requirements.
The concept gained traction during the pandemic, since FedAccounts could be used to receive government stimulus payments. As of last month, some 9 million Americans had yet to receive COVID-19 relief checks of up to $1,200, often because they did not file federal tax returns.
Universal accounts could also serve as a mechanism for encouraging savings by low-income households. America has a long tradition of such efforts, said Timothy Flacke, executive director of Commonwealth, a nonprofit organization that focuses on building financial security. He cited appearances that Bob Hope and John Wayne made in ads for U.S. savings bonds.
“Most Americans are saying, ‘I can’t do that on my own,’ ” Flacke said. “I think we need a message of, ‘We can help.’ ”
The Biden-Sanders unity task force expressed support for the idea that everyone should have a bank account and endorsed a role for the Federal Reserve. But skeptics warn that the construction of such a system would likely take a long time.
Support for government intervention could also be countered by steps the banking industry is taking on its own. Earlier this week, the American Bankers Association encouraged all banks that do not already offer accounts designed for unbanked consumers to start doing so.
Another approach would be to impose new regulations on bank overdraft fees, which are frequently blamed as the reason why consumers who live paycheck to paycheck lack access to the mainstream financial system. A new CFPB director could initiate a new rulemaking on overdraft fees.
“First up will likely be a ban on charging more than one overdraft fee per day,” Jaret Seiberg, an analyst at Cowen Washington Research Group, wrote in a note to clients early this month. “We also expect banks will be required to process transactions in a way that minimizes overdraft fees.”
Seiberg said that he also expects a requirement that banks waive overdraft fees if the customer is waiting for a deposit to clear. With real-time payments options still limited in the U.S., there is often a lag between when an account holder is paid and when the money is available to pay bills. However, the Fed’s development of the faster payments system FedNow is supposed to address that mismatch.
Also on the agenda for a potential Biden administration is how to crack down on predatory loans while still ensuring access to credit.
Traditional payday loans, which are typically due every two weeks, would likely face opposition from a Biden administration. If a Democrat is installed to run the CFPB, the agency is widely expected to take steps to revive the payday lending rule that was written during the Cordray era and since been partially rescinded.
But efforts during the Trump administration to encourage banks to offer small-dollar loans seem less likely to draw strong opposition from potential Biden appointees.
Earlier this month, Bank of America dipped its toe into these waters, unveiling a loan that will allow customers to borrow up to $500 for a flat $5 fee. The advance will be paid back in three equal installments over 90 days.
The joint regulatory guidance on bank small-dollar lending that was issued earlier this year was designed and implemented by career agency staffers, said Alex Horowitz, a senior officer on the consumer finance project at the Pew Charitable Trusts. “So it’s likely to persist regardless of who’s president,” he said.
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