The rapid payout program spawned by the government’s coronavirus response legislation has sharpened an old problem. A small but persistent percentage of Americans entitled to various benefits programs don’t have bank accounts. They’re known as the unbanked. Aaron Klein, former deputy assistant Treasury Secretary for Economic Policy and now with the Brookings Institution, spoke to Federal Drive with Tom Temin about some possible solutions to the whole cycle.
Tom Temin: Mr. Klein, good to have you on.
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Aaron Klein: Thanks, Tom. It’s a pleasure to join.
Tom Temin: And you have written some detail about how this can be fixed. And as you posit the problem, there’s the unbanked situation, there’s also the government’s having the correct information about people that do have accounts. And then there’s the plumbing makes all of this happen. So let’s talk about the unbanked situation, and why it was so difficult for people to get funds that they were entitled to under the CARES Act.
Aaron Klein: So 6.5% of American households do not have a bank account, so roughly about 8.5 million people. These folks most of whom, almost all of whom were eligible to get a federal stimulus check, had no account for the government to deposit it into. When you look into that population, the first thing that jumps off the page is that almost potentially a quarter or a third of them used to have bank accounts, but they had their accounts closed, and they’ve been denied. They’ve tried to get a bank account, they’ve been denied because they’re on some money laundering, a watch list, they had a problem before with insufficient funds. You know, they ran out of money, and they had their account closed. So there’s a common narrative that people don’t have a bank account, because there are banks in their community or their hours or they don’t trust the bank. That’s true for a much, much smaller number of people. In fact, though much larger problems are bank accounts are expensive, and one of the main reasons they’re expensive is we put a very rigorous anti money laundering system into place. That has had that the effect of de-risking or weeding out a lot of lower income people. Either they have the wrong name – you know, there’s another Aaron Klein on my credit report, right? A lot of people have had these problems, and you can’t get your name off the system. So the research kind of dispelled some of the prevailing narratives and myths about why people don’t have accounts and brought to the fore problems that are really plaguing large numbers of households who want an account, but can’t because the account is just too expensive.
Tom Temin: Sure, and there’s also a demographic or racial component to the unbanked situation. Tell us about that.
Aaron Klein: So while it’s six and a half percent of all American households, that number rises to around 15% for black and Latino households. But the driving fact cited by almost half of all people who don’t have bank accounts as to why they don’t have it is the fees in the account. These are the $35 overdraft fees, the minimum balance fees, so it’s not that people don’t want the account. They almost all want an account. The problem is the accounts are just too expensive. And let me ask you, Tom, why is it that we all get free checking in free basic banking, but they don’t? The reason is the banking industry has turned so much of account funding on overdrafts. These are the $35 fees you get when you run out of money. Let me tell you the only people who run out of money or people who are out of money.
Tom Temin: Good point.
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Aaron Klein: The overdrafts are $35 billion a year, three quarters of which are paid by only 8% of Americans. More Americans pay over $300 a year in overdraft fees that don’t have a bank account. You can see why some people have opted out.
Tom Temin: Sure. So what are some possible policy solutions to getting accounts for people?
Aaron Klein: Well, look, there are a couple things. Number one, we ought to make accounts cheaper. One way to do that is to stop – streamline and reduce the costs borne by banks in knowing their customer, which is a very rigorous process that was meant – and I know this because I worked in Congress after 9/11. And look, we need to have a strong anti-money laundering regime. There are a lot of crooks out there. But the people we’re trying to catch are not the people who are desperate to get $1,200 because they’ve run out of money. We need to have a system in which people can get their names off of these do-not-bank lists, just like people got put on the do-not-fly list. We have to have a system, one, that gets you off the do-not-bank list. Two, we have to tackle these overdraft fees. Look, there are safe accounts, it’s a program that the FDIC, the government entity that insures your money in the bank has set up that have no overdraft fees, no minimums. You don’t have the full functionality of a bank account. Sometimes you don’t have a checkbook, but a lot of people can live nowadays with a debit card and a safe place to store their account. Right, what people need is access to electronic money, not paper checks. These accounts have been profitable and very popular in some large national banks, small banks and credit unions. There’s no reason every bank shouldn’t be required to offer a product like that, in my opinion. Look, banking is a privilege, not a right. It comes with a lot of federal government benefits and subsidies. We all know the federal government has pitched in to help the banks. That is the taxpayers have helped out the banks plenty of times. It’s time for banks to do more for lower income taxpayers.
Tom Temin: We’re speaking with Aaron Klein. He’s a fellow in Economic Studies at the Brookings Institution and former deputy assistant Treasury secretary for Economic Policy. And the other issue for people getting funds in a timely way that may be outside of the banking system is the government having sufficient and proper information to be able to get the money to the right people in the right way, quickly. The data issue just seems to pop up everywhere you look in some of these programs.
Aaron Klein: So this dwarfs the unbanked issue, in my opinion, in terms of its reach, right? The government – we’re in a pandemic. Everything’s closed, everybody’s out of work. We need to get everybody an emergency payment. We passed a law in March, four weeks go by before we can give anybody $1,200 bucks. Think about that. The federal government in an emergency can’t actually get money to people. And by the way, even when they finally sent the money to the people whose bank accounts they knew where to find and link, which took them almost four weeks, they sent it on Good Friday, and it didn’t show up in people’s accounts until the following Wednesday – another four or five days. I mean Tom, you and I can go home, turn on our TV, and watch almost anything recorded in human history immediately. But the government can’t give us money for a month? But there are two core problems here. One, the government believe it or not, doesn’t know you, your bank account and can’t link that necessarily to your taxes. That’s a problem of information. And the second is the financial plumbing that moves our money is very similar to what it was in 1965. I mean, we are running a system that is vinyl in a world of streaming. And both of these things should have been updated. They’ve been updated across the world, the private sector has gotten around this. You want to buy something online, it doesn’t take them a month to figure out what your bank account is and how to get that money from you. There’s no reason Uncle Sam can’t do as well. This problem in fact, impacted almost half of Americans who had to wait for their money. It impacted all of us who had to wait a month and another half didn’t even get that first slug and they had to wait weeks more for paper checks, or prepaid debit cards. It’s kind of a joke when you think about it.
Tom Temin: Well, what about the privacy and data sharing concerns that often come up in these types of discussions? Can the government know people’s banking information in a way that protects the privacy?
Aaron Klein: Well, look, privacy is important, but let’s realize you know, in an emergency, you want 9/11 to know your address when you call, right? You don’t want to give them your full have to give them your full nine digit zip code and verify where you are. We’re talking about emergency payments. We’re talking about taxpayers who file with the government, right? You have to figure out how to pay the government. The government ought to be able to figure out how to pay you. Right? This is a long two-way relationship. If you want to talk about privacy issues, the bigger sets of questions involve these anti-money laundering rules, which give the government a lot of rights and responsibilities and different rules about who can look at your actual transaction. But in terms of being able to, in an emergency get $1,200 bucks, how is it that I can sign up for PayPal and you and I can send each other money, or, you know, I can sign up to pay any of my monthly bills immediately, but I can’t sign up to get my government payment sent to me within 24 hours? Instead, I have to wait weeks to get a check. There are still people who haven’t gotten that $1,200 bucks that was passed in March, today.
Tom Temin: So we need almost a federal Venmo if you will?
Aaron Klein: Exactly, or put a different way we have a Venmo – why doesn’t Uncle Sam use it? We don’t have to reinvent the wheel to build a separate government operation here. I’ll give you a perfect example: The banks have set something up called the real time payment network that moves money between people’s banks immediately. The Federal Reserve, who had their own operating payment system, they’ve not updated when other central banks all around the world did that. England did it in 2008. They say “Wait, wait, wait -We can’t be out competed. We’re going to get one for you, hopefully in 2024.” So are Americans supposed to wait four years for real-time payments, and pay billions in overdraft fees while they wait, just so the government can build a system that the private sector already has? How long would we be waiting for Uncle Sam to have built Netflix?
Tom Temin: I think we’ll end it right there. Aaron Klein is a fellow in Economic Studies at Brookings Institution and former deputy assistant Treasury Secretary for Economic Policy. Thanks so much for joining me,
Aaron Klein: Tom, thank you very much for having me on.
Tom Temin: We’ll post this interview along with a link to his research at www.FederalNewsNetwork.com/FederalDrive. Subscribe to the Federal Drive at Apple Podcasts or Podcastone.