Thank you for joining this meeting of the Financial Literacy and Education Commission.
Our agenda today will include a number of important issues, including an examination of the financial barriers faced by justice-involved people when re-entering society. We are also going to discuss how the pandemic turbocharged a transition to banking and digital payments.
The United States witnessed extraordinary adoption of different types of financial accounts during the pandemic, but, of course, there are still some key issues and risks. I want to touch briefly on the role of junk fees and how they can push individuals out of the mainstream banking system and into riskier and high-cost alternatives. I’ll also discuss some of the dangers posed by some of the quasi-banking alternatives, including in peer-to-peer apps and payments.
The national health emergency obviously changed how people interact with the financial system. And, as the Undersecretary mentioned, the Economic Impact Payments were one part of that. We saw an uptick in trading individual stocks and crypto-assets. We saw a marked increase in the number of banked individuals, as illustrated through a recent FDIC survey,1 and we saw a jump in consumer reliance on digital payments platforms.2
In our discussion, we are going to hear more about the work done that capitalized on the bankable moments during the COVID-19 pandemic, and I suspect we will be able to glean some important lessons that will allow us to continue the progress made to decrease the unbanked rate in our country.
Role of Junk Fees in Contributing to America’s Unbanked Problem
Federal and state governments charter banks and credit unions to provide the supply of money and the payments infrastructure that our economy needs to thrive. Banks and credit unions lend money and take deposits from businesses and families to finance product inventory or to purchase a new home.
Banks then charge interest to borrowers and pay interest to depositors, making money on the difference between the two. But over time, banks have figured out how to make even more money off depositors for the “privilege” of keeping their money. Rather than compete on the highest interest rate to attract customers, we saw how many of our nation’s largest banks hardly provided any interest on deposits and charged billions in fees.
This continued to play out even during the pandemic. Instead of competing for this potential mass of new customers, some large banks continued to focus on harvesting fees, which had been growing since the early 2000’s.3
According to the FDIC survey, almost three-in-ten unbanked households in 2021 cited a reason related to fees or a minimum balance. They responded with answers such as: “Bank account fees are too high,” or “Bank account fees are too unpredictable.”
The CFPB has previously described how some individuals had a bank account, but then left the banking system due to fees, especially surprise fees or costly overdraft fees.
The CFPB’s recent work on junk fees has revealed practices such as surprise overdraft fees, where consumers might get hit with multiple overdraft fees when they might only anticipate one, due to how the bank ordered their transactions. Other consumers have been penalized with junk fees for depositing a check when the entity that issued the check didn’t have enough money in their account. This is difficult for a consumer to avoid.
Overdraft and non-sufficient fees cost Americans an estimated $15.5 billion in 2019. And while these fees dropped during the pandemic, they still cost people billions.4
The CFPB projects that our actions on junk fees across government will save Americans billions of dollars per year. I appreciate the progress being made at so many financial institutions to ensure they are in compliance with the law.
But, in some ways, and perhaps more importantly, I hope our actions will be another step to help unbanked households gain greater faith that their money will not be in danger of being drained by junk fees.
Digital Payments and Peer-to-Peer Apps
On payments, we have also seen a lot of changes. During the pandemic, we saw further adoption and increased use of apps like Google Pay, Apple Pay, Venmo, and Cash App. According to the FDIC survey, even though unbanked and underbanked consumers are less likely to use certain online payment services than banked individuals, "unbanked households were twice as likely to use prepaid cards or nonbank online payment services to conduct four or more types of transactions.”5
Sometimes, these apps are primarily used in connection with other banking products, like debit cards and credit cards. Peer-to-peer apps are frequently used to pay rent, purchase services, and transfer money to friends and family. While they have become used by millions of households, there are real risks when they serve as a substitute for a bank or credit union account.
The collapse of FTX and other crypto trading platforms was a wake-up call for many Americans who thought they could trust that their money was safe or even insured.
A classic “bank run”, for example, can happen in any part of the financial sector where people are promised quick access to their funds, but the company making that promise has invested those funds somewhere. But in the banking sector, depositors are protected with FDIC and NCUA insurance. They won’t lose money on their insured funds if their institution fails.
Regulators are also tasked with making sure banks are resilient to runs, and that they have some real skin in the game to safely absorb any losses on their investments.
However, storing funds in a payment app does not have the same type of security. Apps like Cash App, Venmo, and PayPal have become part of the digital wallets of so many Americans, but many may not know that their funds are safe or even insured. Those companies face weaker oversight and safeguards compared to other banks. If they were to fail, people could lose their money.
Given these concerns, the question is before us: how do we get the nearly 6 million unbanked households fair access to safe and secure transaction accounts? And, how do we leverage technology to increase safety, rather than create new areas at risk?
The CFPB is hard at work at examining the future of payments and accounts. We are getting ready to propose a rule to accelerate the shift to “open banking.” This will require financial institutions that offer deposit accounts, credit cards, digital wallets, prepaid cards, and other accounts to set up secure methods for data sharing in ways that will reduce barriers to access. By allowing individuals to share their personal financial data in a truly secure way, we can facilitate more switching, lower fees, and higher levels of customer care. And stay tuned on this.
I am looking forward to hearing from both panels today, including how we can increase banking access for families in our country.