Other experts voiced misgivings about public banking.
James Hamilton, an economics professor at University of California San Diego, said where a public bank gets its money to lend and how transparent it is will be important. A public banking system could mask lending practices that deserve public oversight, he said.
“Expenditures of taxpayer dollars should be approved by the legislature and open to public review,” he said. “If the bank’s loans were funded entirely with legislatively approved allocations of tax revenue, I would have no problem with it. But if they are funded by borrowing, this can mask the losses and procrastinate handing the ultimate bill to taxpayers.
“That is how the federal student loan program became a trillion-dollar public loss. California should not repeat the same mistake.”
Banking on minorities
Being unbanked greatly impacts people of color and low-income families. Nearly 1 in 2 Black and Latino households in California is unbanked or underbanked, state officials said.
One reason: low-income consumers are often burdened by bank fees that others with higher balances don’t have to pay. Black households are almost 2 times more likely to pay overdraft fees than white households, and Latino households are 1.4 times more likely, says a study by the Roosevelt Institute, a liberal think tank.
In 2021, 11% of U.S. adults with bank accounts paid at least one overdraft fee, but 20% of Black and 14% of Latino account holders paid such fees, according to the Federal Reserve.
Banks charge overdraft fees — typically around $35 — for each transaction. Some banks charge a single customer multiple times for the same error and charge them each day their account remains overdrawn, the Roosevelt Institute said.
Anneisha Williams at a park with her daughters Kamaya, 9, and Nevaeh, 6, in El Segundo on Feb. 20, 2023.Lauren Justice / CalMattersFrequent overdrafters generate about half of banking companies’ checking account profits, according to a 2020 study by the global consulting firm Oliver Wyman. Overdraft-related fees generated $17 billion for banks in 2019, and among the 25 largest banks, about 9% of annual pre-tax profits.
Due to public pressure, some banks in 2021 reduced fees. But by third quarter the fees were back up and banks collected $11 billion that year, the Roosevelt Institute said.
Add that to what unbanked customers pay check cashers and payday lenders and Californians are losing hundreds of millions of dollars a year in fees, Santiago said.
Customer service test
Julia, a 61-year-old McDonald’s employee in Richmond, Calif., said her bank takes a $12 fee from her account every month her balance is below $1,500.
“That $12 is important,’ said Julia, who did not disclose her last name because she fears deportation as an undocumented immigrant. “For a poor person, every single dollar is important. We have to pay for lights, gas, trash service, and buy food. You have to work two or three jobs just to get by.”
Online banking through a financial tech company, like Williams did, is an option. But those companies aren’t registered banks. They often partner with banks to offer their services. And some have attracted hundreds of complaints.
If the state operates a public bank, people could get their paychecks, public assistance benefits and tax returns directly deposited, proponents say.
This option may be years away, however. After bank industry lobbying, lawmakers amended the public banking bill. Instead of creating a bank, the bill created a Blue Ribbon commission to conduct a market analysis to determine if it’s feasible.
So far that commission has held few meetings. It is just beginning the process of hiring a market analysis consultant.
Meanwhile state and federal governments should more actively regulate banking and protect consumers, wrote Emily DiVito, author of The Roosevelt Institute’s report.
To back that up, her study includes research purporting to show how staff at some California banks treat minority or low-income customers.
Researchers posed as potential customers and went to 80 bank branches, requesting information about opening accounts. Bank staff turned away minority canvassers nearly a third of the time, DeVito wrote, but turned away white canvassers once out of 23 visits.
The staff gave various reasons: customers needed to make appointments, staff was too busy or at lunch, or relevant information about bank accounts was on the bank’s website.
