Why is the market ignoring these 66 million unbanked or underbanked Americans with nearly $ 1 trillion in purchasing power? The answer involves the unintended effects of regulatory actions and turf wars meant to help these neglected consumers, who are more likely to be minorities and areas of persistent poverty. Over the past decade, some state regulators and attorneys general have fought to increase state supervisory power, limit interstate banking, prevent further development of the federal banking system, and adopt measures that protect the most vulnerable.
While the latter goal is clearly laudable, their efforts impose licensing, red tape, and system development rules. These business costs are then passed on to customers in the form of higher fees and minimum balances, which underserved Americans often cite as barriers to financial access. In some cases, banks simply stop offering certain products because regulatory costs make certain products unaffordable.
Small changes in costs have the biggest effects on those on the margin. As a result, more consumers have fewer credit options, and the remaining options they have would come from less regulated providers, often on less friendly terms. Some states put in place more price controls and blocked the ability of banks to sell loans to investors for other states when those loans exceeded state interest rate limits, even when those loans were comply with state laws when they were launched.
For example, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation recently took steps to preserve 200 years of jurisprudence to ensure that markets can operate in an orderly fashion and maintain liquidity that facilitates access to credit. The Office of the Comptroller of the Currency finalized a rule clarifying that a bank is the “real lenderOf a loan and retains the consumer protection obligations associated with that loan. It also protects against fears of predatory loans.
These federal actions also strengthen the ability of lenders, including fintech companies, to forge responsible partnerships with banks that reach customers who might otherwise go unserved. These partnerships allow banks to benefit from innovative technology and better approaches, including wider use of data, to better assess the credit of millions of new consumers who were once invisible in the market.
Ironically, a similar array of players who strive to limit interstate banking are also struggling with efforts to allow innovative companies with particular business models to become chartered banks. Several incumbent banks argue that chartering new companies that engage in certain aspects of the industry, including those whose business models focus on serving the unbanked, can create an unfair playing field, but It’s the opposite that is true.
Those companies whose business models are referred to as national banks would see their activities supervised in the same way as similar activities for legacy banks are supervised, which would make the playing field more level. State regulators oppose additional federal charters because they depend on license fees and argue that federal charters allow businesses to evade certain national consumer protection laws. They ignore the fact that payday lenders, which anger consumer groups for abuse, are licensed and regulated by the states.
Building a wedge around our banking system to prevent new and innovative businesses from obtaining federal banking charters to operate could protect incumbents, but it reduces choice and opportunities for consumers and businesses. It stifles technology and prevents the banking system from adapting to these changing consumer and market preferences. Officials should heed the mountain of evidence on the negative effects of price controls and several regulatory measures aimed at protecting incumbent banks.
Yet many still believe that such actions make a difference since the privilege bias is real. People with low rates and sufficient credit often cannot imagine why someone could be paying a higher rate than them. This equates to a “let them eat the cake” perspective to those living in poverty and ignores the fact that some people are just starting to build credit. They will not climb the ladder of opportunity without a rung at the bottom.
Price controls and charter limits are not the only obstacles to full and fair access to this banking system, but they are among the most apparent and most unfortunate. Civil servants must choose between helping underserved people by giving them more choices and opportunities or hurting them through ill-advised protectionist efforts. Lawmakers and other public officials need to be more careful to understand the unintended effects of decisions that otherwise harm the people they hope to help.
Brian Brooks is the Acting Comptroller of the Currency. Charles Calomiris is the Chief Economist of the Office of the Comptroller of the Currency.
