The article from the December 23rd New York Times reads "Banks Reject New York City IDs, Leaving "Unbanked" on Sidelines" talks about the new municipal card NY Mayor de Blasio created a year ago. The card was designed to act as a valid source of primary identification to help people on the financial margins obtain bank accounts. But, some major banks which include JP Morgan Chase, Bank of America and Citigroup will not be accepting the id cards.
This announcement was made in spite of the fact that according to the New York Times “Last spring, officials from the Federal Reserve, Treasury Department and Office of the Comptroller of the Currency said that banks could use the New York identification cards known as IDNYC to satisfy certain requirements of federal anti-money laundering laws.”
The only surprising thing to me in this story was learning how much discretion banks have in deciding on acceptable forms of identification. A U.S. resident opening up a bank account does not need to show their citizenship or legal status. Government issued documents or other documentation that prove residency are merely needed to prove that person is who they say they are according to “Know Your Customer Requirement” under federal anti-money laundering laws. Some banks and credit unions in New York, such as the Neighborhood Trust Federal Credit Union, will accept the IDNYC card (photo below taken at the branch). Nevertheless, according to a report issued last June by the New York City Controller, “28 percent of New York City banks did not appear to offer, or widely advertise, a “basic checking” account, also known as a “Lifeline” account, as required by New York State law.”
Sure it makes perfect sense that lowering the cost of banking services would increase access for the Underserved. The Lifeline Bank Account rules have been around since the 90’s. Newer initiatives like CFE’s Bank On National Account Standards and efforts by the Federal government to regulate overdraft fees and account screening reporting agencies are all well intentioned. Yet by most measures, the cost of a checking account for most Americans has actually risen mainly due to other federal regulations and its unintended consequences. Rates of unbanked and underbanked consumers have decreased by just .05 to .1 percentage points, from 2011 and 2013. This is very little real change, while the alternative financial services marketplace has ballooned from $82B to $103B in revenue in the same period. Also, the number of bank accounts that were free dropped from 76% in 2009 to a mere 38% in 2013.
With these facts firmly established, and I could site many more, why do so many non-profit, NGO and government institutions keep pushing an agenda that insists we should find ways to make banking more affordable and accessible to the underbanked?
Insisting and enforcing rules that banks offer free accounts to low income consumers is not the answer. The announcement about rejecting the IDNYC cards is really proof of a larger problem. There is no free lunch. Major banks will continue to reject these customers because they are just not profitable compared to other customers and products they can offer.
According to an insightful and in-depth report “Reimagining Financial Inclusion” recently issued by Ideas 42 and Oliver Wyman; “Financial institutions find it challenging to serve LMI consumers profitably because of low and volatile deposit balances, high risk, and heavy branch usage among other factors and have historically charged higher fees to cover costs.”
The report goes on to describe certain characteristics of LMI consumers that makes offering traditional banking products quite costly for FIs. The typical LMI consumer behavior is high in person visits to branches, low unstable account balances, and the need for small loans and thin or no credit files that most banks can’t underwrite.
To propose a solution, I will share and agree with the conclusions of the Ideas 42 – Oliver Wyman report. “So what needs to change to crack the code on financial inclusion? Instead of trying to squeeze lower income consumers into existing financial products, we propose a solution that integrates deposits and credit to meet their cash management needs as well as the needs of financial providers.”
Simply put, stop trying push everyone without a bank account into a free low cost checking account. Start designing and offering innovative financial products with features, delivery mechanisms and cost structures that will work for all parties.