For the millions of low-income “unbanked” people, EFT may unlock the doors to financial services. But it may also mean windfall profits for banks and a new form of financial redlining.
Beginning in earnest on January 1, 1999, federal benefit payments will be in the form of electronic transaction, and only after that as cash if, that is, you have a bank account and can find an ATM, point-of-sale terminal, bank lobby, or other venue capable of electronic funds transfer (EFT).
For millions of people, the EFT law (officially Section 31001(X) of the Debt Collection Improvement Act of 1996) threatens a revolution in financial services that could evolve into the institutionalized electronic redlining of an economic caste system. Waivers from the central feature of EFT, replacing paper checks to individual addresses with electronic deposits to institutional accounts, will be easy to come by early on at least. Not overnight but increasingly, however, paper checks and “unbanked” status – individuals without accounts – will be attributes of a second-class citizenry.
Preparations for the EFT revolution are advancing in many quarters. Transitioning Social Security, various agency benefits, payroll, vendor disbursements – everything except tax returns – to electronic conveyance sounds like a typical, inherently unachievable government fire drill. But unlike many other intended technological feats of the federal government, this mandate is taken seriously. That’s because the savings figures alone would galvanize even the most ground-down bureaucracy. Approximately 980 million payments are issued annually by the U.S. Treasury Department and other federal agencies, such as the Department of Defense, at a cost of 43¢ per paper check but only 2¢ per electronic transfer. Estimated annual savings to the government and taxpayer range from $100 million to $500 million. Electronic transfers are also more secure because handling and processing are minimized.
Properly implemented, EFT and its companion, Electronic Benefits Transfer (EBT), involving public assistance payments, could reduce or eliminate social stigma as a byproduct of, say, food stamps and welfare checks. For anyone with experience holding a bank account, EFT accounts promise to be no more complicated than the federal government’s current Direct Deposit program. For the estimated 10 million people who receive federal payments of one kind or another yet maintain no bank account, EFT is perhaps a toehold on the future of mainstream financial services. Among isolated inner-city and rural populations whose banking relationships must take place outside their neighborhoods and communities, EFT can perhaps provide a key to community reinvestment.
From the Needy to the Greedy
“Perhaps” is the operative word in both of these optimistic scenarios. Although both could come to pass, EFT could preordain nothing good for disinvested communities. Like other impending government reforms, the momentum of this transformation will be away from the more needy if it doesn’t come with education. The gold rush of the “cyber-49ers,” banks and their potential partners, to pan up a profit from the swift-moving EFT current suggests that if anything is preordained, it’s more apt to be the following scenarios:
A rural benefits recipient decides to get a waiver from the Electronic Funds Transfer law, based on the 40-mile round-trip she would face following the closure of the bank that had long served her small town. She also feels more comfortable with a paper check, and she can collect it with the mail, which she picks up almost every day. She cashes the check locally and spends the cash around town. No one mentions any problem with it. But the post office in town is ruled out for EFT purposes because it doesn’t typically have enough cash on hand to meet large withdrawals. Then a key merchant closes up shop. Suddenly it’s time to wonder if even paper checks will be cashable in this town for much longer.
In an inner-city neighborhood, an unbanked benefits recipient isn’t about to get banked, or so he thinks. He sets up an account instead with a currency exchange boutique that works in partnership with a bank to transfer his federal funds to him electronically. Sure, the check cashing service takes a chunk out, but the man is convinced he’s ahead of where he’d be if he had to pay bank overdraft fees. Besides, he’s noticed that the few point-of-sale terminals and ATM machines in the neighborhood are always crowded, always some crook around, and you have to pay an arm and a leg at most of those ATMs anyway. His basic attitude comes to be that if banks don’t like him, they can leave him alone. They don’t, and they do. And because the nearest bank’s regulatory agency hasn’t added EFT monitoring to its agenda, no one calls it electronic redlining.
The Treasury Department, which is charged with implementing EFT policy through its Financial Management Services division, is putting together a “default account” for unbanked federal benefit recipients. Treasury intends to describe this electronic transfer account (ETA) in a request for proposals on which banks will have the chance to bid. Once contracts are awarded, Treasury will begin to assign ETAs through which benefit recipients who have not designated an account can receive their benefits.
Mixed Signals from Treasury
So far, signs are that Treasury is getting the outline right, though the fill-in detail ranges from uncertain to disturbing (a recent sampling to determine what the typical default account should look like excluded non-English speakers and the unbanked at the first segmentation, a stark reversal of the triage most community groups would consider proper). The goal as indicated by various officials is to come up with account attributes that will both appeal to unbanked individuals and maximize bank competition for this new market segment. Among the attributes to which various Treasury officials have publicly committed are some number of free initial withdrawals, low subsequent-use fees, minimal service charges, debit cards permitting the electronic transfer of funds from bank to merchant, and possibly such pricier features as third-party payment capacity and mixing of other funds in the ETA (these options hike the price of doing business by admitting more paper to the process).
Treasury officials also insist that transfers will go only to regulated, insured, depository financial institutions. The weak point in Treasury’s approach is that it cannot legally police how people use their money once it is transferred to the recipient’s EFT account. As many civil rights and community reinvestment advocates have noted, electronic transfer capabilities between recipient banks and downstream unregulated partners, especially currency exchangers (“check cashers” in a pre-EFT environment), open the door to higher poverty surcharges. Currency exchangers that partner with a bank may add a second layer of “fee for service” charges, or they may find ways to pressure the EFT account-holder into parting with money unnecessarily, for instance, by selling money orders that are cashed on the spot. In any event, they will not have the fiduciary responsibility toward EFT beneficiaries to which banks can be held accountable.
One solution is for Treasury to come up with account attributes that are widely preferred in the public eye to any other way of doing EFT business, according to Margot Saunders of the National Consumer Law Center in Washington. Banks that bid on Treasury’s “default accounts” and obtain a contract would then be assured of the volume needed for EFT profitability, while banks seeking EFT accounts would be forced to compete by coming up with still more attractive account attributes.
The following examples illustrate additional strategies that advocacy and other groups are developing to make the EFT revolution serve the unbanked and low- to moderate-income communities.
- Alan Fisher, Executive Director of the California Reinvestment Committee in San Francisco, advocates two standing criteria for EFT-eligibility among financial service providers:
- 1) Only banks with a current “Outstanding” Community Reinvestment Act rating should be permitted to establish EFT accounts. Otherwise, banks could be rewarded with windfall EFT accounts despite poor lending records. The policy would also act as an incentive to improved CRA performance.
2) No bank that has a partnership with currency exchange institutions should be designated as an EFT recipient. Currency exchange operations have flourished because of bank disinvestment, and banks should not now be enabled to penalize communities yet a third time through proxies they indirectly created. Banning these partnerships would foreclose the option of currency exchangers to purchase banks for purposes of profiting on the EFT revolution.
- The Woodstock Institute in Chicago is working to create EFT partnerships between banks and Community Development Credit Unions (CDCUs) and between banks and neighborhood grocery stores. Both are difficult solutions, the first because CDCUs must line up an ATM network and address security issues as well as take on extra training tasks to acquaint clients with EFT, and the second because many banks are pulling financial service desks out of smaller neighborhood grocery stores – where EFT access would fulfill a signal need – in favor of supermarkets. But however it is done, one goal of community-driven EFT intercession must be to create alternatives to the poverty surcharges that are likely to rise otherwise after January 1999, said Senior Policy Director Marva E. Williams. Executive Director Malcolm Bush notes that unbanked individuals already pay two and a half times more than account holders for their financial services, and still receive fewer of them.
- Opportunities arise for unlikely coalition-building, as EFT-access issues and bank branch closures highlight the flight of capital from many communities. The National Community Reinvestment Coalition (NCRC), a Washington-headquartered membership organization of more than 600 community groups, is ideally situated to facilitate such EFT intercession. NCRC has devoted significant resources to getting ahead of the curve on EFT, and its Legislative/Regulatory Committee Chairman, Morris Williams of the Coalition of Neighborhoods in Cincinnati, recently appointed a subcommittee to recommend official coalition policy on the issue. Facilitating the cooperation of diverse groups that have been galvanized to intercede on EFT policy will be one of the subcommittee’s leading recommendations.
- First Nations Development Institute, a Native American economic development advocacy organization, believes the advent of EFT should require wider use of mobile units to serve reservations and remote rural settings. Technology allows it, security issues can be resolved, bank regulators can be satisfied, and tribal governments have been supportive of establishing mobile unit banking initiatives in the Southwest and Northern Plains. In the nation’s poorest county in South Dakota, Nebraska-based Stockmens Financial Corporation has built a mobile, EFT-capable unit, though the unit will function without this service for a year so the people of the Pine Ridge reservation can become accustomed to a bank-on-wheels. About January 1999, however, the mobile unit and its EFT capability may give Stockmens a distinct competitive edge. Even before then, it will have been the first bank branch to operate on the reservation. And with small banks closing at an epidemic pace in parts of the country, mobile units could be the first bank branches to operate again in many disinvested rural communities.
- Treasury is in discussions with the U.S. Postal Service that could lead to the designation of post offices as EFT access points. But the deal is far from done. The Postal Service would probably have to partner with banks for an ATM network, and preliminary talks indicate a difficult negotiation process. The Postal Service is also concerned that its reputation as a cumbersome bureaucracy with deep pockets could lead to liability problems other ATM venues do not face. Japan’s equivalent has been mentioned as a model, but the Japanese Postal Savings Bank is deeply entrenched and genuinely valued. However, Americans were once glad to invest in postal savings bonds, and the service has a vested interest in selling money orders and could be counted on to at least exceed the service standard of currency exchangers. If the number of unbanked Americans remains high after January 1, 1999, the postal service could provide a feasible EFT alternative in disinvested communities.
- Electronic Funds Transfer is a material revolution that requires people to adapt. For many, especially those unaccustomed to depositing money into the bank, EFT will require basic hands-on education on ATM use, personal budgeting, and account management. Treasury is hard at work enlisting community groups in that effort. But at the department’s first Community Outreach Initiative meeting on Nov. 21 1997 in Washington, community groups took strong exception to Treasury’s overly cost-conscious approach, typified by a misguided reliance on tapped-out foundation resources and openly expressed doubts about the affordability of an 800 number for technical assistance.
- The consensus among community groups was that EFT sets up a system with potential to either end or reconfirm the status-quo of the poor – overpriced financial services for those least able to pay. Treasury’s investment on the front end of a long process may make all the difference.
If EFT establishes a public profile as a valuable service available to everyone, twisting its beneficial potential to narrow political ends or the financial industry’s vested profit motives will become that much more difficult. But if a half-hearted education campaign leads to lukewarm public acceptance and an entrenched low profile for EFT issues, the future promises to revisit the past, and the poor will pay again.