Joint Opposition Letter to Assembly Bill 1177: California Infrastructure and Economic Development

The Honorable Miguel Santiago
Member, California State Assembly
State Capitol, Room 6027
Sacramento, CA 95814

Dear Assembly Member Santiago:

The organizations above representing the financial services and the business sector in California andacross the nation write to share our opposition to Assembly Bill 1177, the California Public BankingOption Act. AB 1177 creates an unwieldy government banking system that carries exorbitant risk andcost to the state of California, without any real benefit. This measure establishes the BankCalprogram within the state treasurer's office, to provide financial services to California residents. Thepurported need for this program is to help unbanked residents who lack access to traditional banks.The measure creates a mandate for all employers with five or more employees, even if they do notalready offer direct deposit, to provide direct deposit into the BankCal fund as an option for paymentof wages. The mandate is accompanied by a new civil penalty for employer non-compliance.

Defining the Problem

According to the measure, this bill is needed to address California's unbanked population and relieveCalifornia borrowers of reliance on high-cost payday lenders. We strongly agree with the publicpolicy goal of giving all Californians access to safe, affordable banking products at insureddepository institutions. Indeed, the latest FDIC and Federal Reserve data shows that efforts to bringhouseholds into the banking system are making progress, but more must be done. According to theFederal Reserve's Report on the Economic Well-Being of U.S. Households in 2018 - May 2019, sixpercent of adults are unbanked, with 16 percent utilizing non-traditional, high-cost loan products.The Federal Deposit Insurance Corporation's most recent biennial report is consistent, showing that5.4 percent of American households do not have a bank account (2020 How America Banks:Household Use of Banking and Financial Services, FDIC).

However, according to AB 1177, the number of Californians lacking access to banking servicessurpasses 40 percent. We question the validity of this data, which is inconsistent with highly regardedfederal data, and strongly caution against passing such a dramatic policy change based on themisleading statistics presented in the bill. Public banking proponents often conflate the term"unbanked" and "underbanked" thereby making the assertion that California residents lack adequateaccess to financial services. The FDIC itself has raised definitional concerns about the term"underbanked" which is inconsistently applied. In fact, the FDIC removed the term "underbanked"from its study title because of these definitional issues. This is a critical distinction that must bemade; individuals who utilize payday lenders and other high-cost loan products do so because theyhave inadequate cash flow, not because they lack access to banking services. Even payday lendersrequire a consumer to be banked to use their services. BankCal and its proposed network of publicbanks will not remedy this problem because being underbanked isn't about not having a bankaccount; rather, it;s the result of an individual's economic condition. Nor is it the case that individualsare unbanked simply because they utilize alternative payment systems such as Zelle or Venmo asthere must be a bank account on either side of the transaction when using these services. Yet, it isnot uncommon for public bank advocates to assert that individuals utilizing these products areunderbanked, resulting in a vastly inflated estimate of "underbanked" households.

Alternative Solutions

Californians do not lack access to financial services. Californians are served by 150 banks and nearly290 credit unions, the overwhelming majority of which offer low, or no-cost banking account optionsspecifically designed to assist the unbanked. Additionally, there is a network of more than 100Certified Community Development Financial Institutions, supported by the U.S. Treasury andcommercial banks, structured specifically to serve low-income communities. If the Legislature trulywishes to address the issue of non-traditional bank products, then policymakers should focus onmore narrowly tailored solutions, rather than mandating an expensive and risky new bankingprogram that will not resolve the problems stated in the measure.

We agree that bringing Californians who do not have bank accounts into the financial mainstream isof utmost importance which is why banks and credit unions are joining the BankOn program. Run bythe Cities for Financial Empowerment Fund the BankOn initiative works to ensure everyone hasaccess to a safe, affordable transaction account. BankOn certified accounts must meet robustNational Account Standards, developed by consumer advocates and based on the FDIC's SafeAccount pilot in 2011. These accounts must have low monthly fees, no overdraft fees, robusttransaction capabilities such as a debit or prepaid card, online bill pay, and free and unrestrictedcustomer service. All the major banks and credit unions with a California presence participate in theBankOn program and offer a geographically expansive network of free ATMs. The BankOnmovement also emphasizes local coalitions that bring together banks, nonprofits and governmentagencies to help guide unbanked households into an account that meets their needs and will helpthem succeed. Building a strong, collaborative California BankOn coalition would be enormouslyconsequential, and the legislature could play a supporting role in helping to promote both bank andconsumer adoption of BankOn accounts by supporting development of a strong coalition. Doing sowill invariably be less expensive and risky than the proposed banking structure contemplated by AB1177.

Relative to other financial products, there exist an array of less costly, less risky alternatives.Community Development Financial Institutions (CDFI) are private financial institutions with a primaryfocus on developing low-income and low-wealth communities by providing personal and businesslending and investing opportunities. CDFIs often receive federal funding from the U.S. Department ofthe Treasury but their primary source of capital comes from commercial banks. The legislature couldchoose to pursue legislation to help capitalize CDFI’s with an appropriation rather than creatingBankCal, which would be redundant to the existing network of financial offerings.

There are additional legislative opportunities for existing loan products already supported byCalifornia. The California Infrastructure and Development Bank’s Small Business Loan GuaranteeProgram has provided $509.6 million in capital to California businesses and the California CapitalAccess Program helps small businesses who have a difficult time obtaining traditional financing.

This Measure is Premature

If the intent of AB 1177 is to provide California residents access to banking, the aforementionedopportunities are more effective, less costly and pose far fewer risks to taxpayers than creating a newstate bank. However, if the purpose of AB 1177 is to create a deposit base for public banks, we mustask the question, why now? In 2019, the Legislature passed AB 857 (Chiu) (Chapter 442, Statutes of2019) to allow local governments to apply for a public bank charter. Doing so requires municipalitiesto complete a business plan, apply for and receive regulatory approval from the Department ofFinancial Protection and Innovation and the Federal Reserve Bank and obtain approval for FDICinsurance. AB 1177 creates a Public Bank Options Board as the primary governance structure for theprogram and relies on a network of public banks to be a receptacle for deposits flowing fromBankCal. Yet, to date not a single municipality has developed a business plan - the first step inapplying for a public bank charter. Local governments are years away from receiving approval for apublic bank charter, which requires sizeable collateral and capitalization. Until such time as a networkof public banks are operating and proven financially viable, AB 1177 should not be considered forlegislative approval.

The Risk to Californians

In addition to the questionable need for this measure, there will be sizeable costs and risk associatedwith creating and supporting the BankCal program. The magnitude of the proposed endeavorcontemplated by AB 1177 puts taxpayers on the hook for what will assuredly be exceedingly highstart-up and operations costs; this coming on the heels of news that California taxpayers will soon beasked to backfill potentially $30 billion dollars in fraud cost associated with improper verification ofunemployment claims. The banking industry spent nearly $300 billion in 2020 on technology,primarily on front-end customer-interfacing systems. As California’s primary face for banking,BankCal will not escape these operational costs. Fee-free banking products are not free at all to thebank offering those products and California taxpayers will be forced to bear the burden of theseexpenses.

More Questions Than Answers

The measure acknowledges that it must rely on at least one major financial institution to issue debitcards. By definition, a debit card is a payment card that deducts money directly from a consumer’sdeposit account when it is used. It is clear, however, that BankCal will broker deposits out to publicbanks, not the partner bank issuing the debit cards. This is incongruous to how debit cards work.Additionally, the measure appears to make BankCal the brand for the front-end customer experience,relying on its banking partners for account fulfillment. In this case, which entity is responsible for theKnow Your Customer (KYC) regulatory obligations under the U.S.A. Patriot Act? The KYC rules dictatean institution’s acceptance policy and customer identification procedures at the time of application,yet AB 1177 is proposing to accept applications with no government identification. Additionally, doesBankCal also have the duty to adhere to the California Consumer Protections and Privacy Act likecommercial banks? How will BankCal safeguard customer information? The measure also prohibitsparticipating merchants from charging debit card swipe fees to a customer using debit cards, but it isunclear to us what this means. Debit card surcharges are already prohibited under federal law. Themeasure prohibits participating banks from charging fees for specified transactions, yet theseservices come at a cost to a participating institution. Is BankCal going to absorb these costs by virtueof its contract with participating lenders? The measure proposes to interface with state and localagencies to be California’s premier payment network for the State Department of Social Services,Office of Systems Integration, Employment Development Department, and other applicablegovernment agencies. Does AB 1177 also contemplate that BankCal will bear the expense ofupdating the legacy computer systems that have plagued these agencies and departments?

Violates Prior Agreement

Finally, this measure violates the principles agreed to in 2019’s AB 857 (Chiu). When that measurewas presented to legislators the sponsors claimed that no state funds would be used, and thatmunicipalities could create a self-sustaining public bank without using general fund dollars. Now, amere two years later, proponents are back to ask the legislature to create liquidity, at the expense ofthe general fund and taxpayers, by developing a guaranteed deposit base for public banks. Given thefact that, to date, every public bank feasibility study indicates a public bank will sustain significantlosses, will legislators next be asked to backfill those losses? The result could be an endless drain onthe general fund for the foreseeable future. Additionally, legislators specifically required that if apublic bank was chartered under the provisions of AB 857, that it not compete directly with creditunions and community banks. Section 4, 100126 (b) of AB 1177, however, specifically allows a publicbank to engage in retail activities in competition with local financial institutions if it is taking depositsfrom BankCal.

For these reasons we must respectfully oppose AB 1177.

Sincerely,

California Bankers Association
American Bankers Association
Bay Area Council
California Chamber of Commerce
California Community Banking Network
California Credit Union League
Card Coalition
Credit Union National Association
Independent Community Bankers of America
National Federation of Independent Businesses