The Problem Isn’t Financial Literacy, It’s Financial Fairness
In California, no-fee accounts would combat systemic discrimination in banking services.
By Terri Friedline & Darrick Hamilton, THE AMERICAN PROSPECT – April 22, 2024
As “Financial Literacy Month” nears the end, we have been treated to another year of pundits offering up familiar admonitions, specifically targeted to Black, brown, and poor communities, to “pay down your credit cards,” “check your credit score,” and “save for a rainy day.” Better than most, however, these are the very groups that already understand the problems of credit card debt and the value of savings and high credit scores. What people really need is money to manage in the first place, and financial products and services designed to promote their financial well-being and protect their meager financial resources from extraction, exploitation, or depletion.
In California, 3 in 10 Black and Latinx residents do not have a bank account or rely on higher-cost payday lenders and check cashers to manage their money. Banks also tend to require higher minimum balances to avoid account fees at branches in Black and brown communities. Taken together with existing income inequalities, this can mean the state’s racially marginalized residents have to keep more of their money in their bank accounts where it cannot be used.
There has been some progress from the private sector. Banks have begun lowering their overdraft fees in part due to competition from financial technology, or “fintech,” companies. Yet fintech is not enough. Like traditional banks, the companies offering online banking are not adequately serving Black, brown, and poor communities, either. Online banking can replicate discriminatory lending practices similar to redlining. And fintech companies have sometimes closed hundreds of consumer accounts with little or no explanation.
CalAccount, being developed in California, has the potential to succeed where banks and fintech companies have not and avoids the finance-splaining of what Black, brown, and poor people already know.
CalAccount is a publicly sponsored, privately managed retail banking option that would allow Californians to manage their money without worrying about overdraft fees, monthly service fees, or minimum balance requirements.
In 2021, Gov. Newsom signed a law authorizing a commission to study CalAccount, which is being overseen by State Treasurer Fiona Ma. Once the commission finishes its work, and if the legislature votes its approval, CalAccount will guarantee Californians a fee-free way to access their wages and public benefits.
Many banks currently charge multiple $35 fees on the same day customers overdraw their accounts. Some banks have even claimed that fee-based overdraft protections are “an important form of short-term liquidity to customers.” The reality is that the $8 billion a year generated nationally from these fees benefits banks, not customers. What’s more, it is their customers with less money, including Black, brown, and poor people, who pay these fees.
CalAccount is designed to provide universal no-fee banking, which would mitigate the possibility of discriminatory fees in financial products and services. A Bankrate survey revealed that banks charged their Black and Latinx customers, respectively, double and triple what they charged their white customers in checking account fees.
Importantly, CalAccount will remain fee-free regardless of the fate of federal regulations. While the Consumer Financial Protection Bureau has proposed new limits on overdraft fees, banks are planning to spend millions to kill the rule. Even if they succeed, though, the fee-free option provided by CalAccount would remain in force in the nation’s largest state.
Banks can certainly play a positive role in the economy. As currently constructed, however, banks’ financial products and services too often are either not available or designed in ways that exploit rather than help poor and marginalized communities. This is why we need baseline public options that ensure access to essential financial services for everyone, such as CalAccounts, public banks, and postal banking.
Poor and marginalized people know how to budget better than many: They juggle to pay multiple bills on incomes that jump and plunge with unpredictable schedules. On top of everything else, Black and brown people have to manage racist discrimination both as customers and as workers in the labor market. It is not financial literacy that they’re in need of; it is fair and affordable financial alternatives.
Terri Friedline is an associate professor of social work at the University of Michigan. Darrick Hamilton is a University Professor and the Henry Cohen Professor of Economics and Urban Policy at The New School. He is the founding director of the Institute on Race, Power and Political Economy.
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