Program to Spur Bank Accounts for Poor Falling Short

A Clinton administration program designed to prod banks into offering no-frills accounts to the poor has signed up just 700 people nationwide during its first year of operation, a disappointingly slow start to those who hoped the program would rescue families from high-cost check-cashers.

The federally subsidized electronic transfer accounts were supposed to draw about 6 million low-income Americans into the mainstream financial industry by paying U.S. banks $12.60 for each new participant they attracted.

But a year after the much-hyped accounts were introduced, only one major U.S. bank, Wells Fargo, has even begun offering them, and only in certain states. In California, no major bank offers the so-called ETAs.

With just 700 accounts nationwide, the federal program serves fewer low-income families than a single check-cashing outlet in South-Central Los Angeles, or about one-tenth of 1% of its potential market.

Bankers have been slow to embrace ETAs because they fear that the accounts will be unprofitable and risky, despite the federal subsidy. For one thing, banks are required to accept applicants even if they have bounced checks at other institutions--a requirement the banks say leaves them vulnerable to fraud.

But consumer advocates say the low numbers are proof that traditional banks don’t want to serve the poor and that voluntary programs like the ETA don’t work.

“This thing is a complete failure,” said Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group. “The idea of paying banks a $12.60 bribe to open affordable accounts clearly isn’t working.”

Inner-city leaders say ETAs were ill-conceived from the start, placing too many restrictions on the accounts and relying too heavily on traditional banks, which have been steadily moving out of low-income neighborhoods.

“Who has the infrastructure and offices in inner cities? It’s not the banks,” said John Bryant, founder of Operation Hope, an inner-city nonprofit that provides banking services to 20,000 families. He noted that the government’s goal in creating the ETAs was to save postage costs from mailing government checks.

“The benefit to the government is clear,” he said. “The benefit to consumers is not so clear.”

The program was born after a 1996 law required the government to start shifting all federal payments from paper checks to electronic transfers. This created a problem for the nearly 6 million households--mostly low-income seniors, the disabled and others receiving government aid--who don’t have bank accounts in which they could accept direct deposits. In most cases, low-income families say they don’t have traditional bank accounts because they can’t afford the fees, don’t trust banks or don’t write enough checks, according to a recent Federal Reserve study.

So in June 1999, the Treasury unveiled the ETA. In addition to the onetime subsidy, banks can charge users $3 a month. Customers receive a debit card that they can use at the bank’s automated teller machines at least four times a month at no charge.

The plan was to give low-income families a federally insured alternative to check-cashing outlets, where aid recipients might have to shell out $15 or more each month to cash their government checks.

The government would save too, by avoiding processing and postage costs. But instead of saving $20 million a year by shifting aid recipients to electronic accounts, the government so far is only saving about $10,000.

Treasury Aide Sees Program Growing

Treasury officials concede that the program is off to a slow start but predict more banks will start to offer ETAs by the end of the year and in early 2001.

“The numbers are disappointing,” said Donald V. Hammond, assistant Treasury secretary in charge of the program. “We would like to have seen more institutions actively marketing accounts by this point in time. But we’re seeing a lot of momentum from large institutions, who will carry this program. This is a gradual process.”

Hammond noted that about 600 financial institutions now offer ETAs, though most are small community banks or credit unions.

Wells Fargo offers ETAs in 14 states and hopes to expand nationwide by next year. Bank of America plans to begin an ETA pilot later this year or in 2001.

Other large institutions, including Citibank, First Union, Washington Mutual, U.S. Bank and California Federal, don’t know when, or if, they’ll offer ETAs.

Consumer groups point to another reason why banks might be avoiding ETAs: competition.

In recent years, mainstream financial institutions have jumped into the lucrative check-cashing business themselves, either by buying stakes in or forging alliances with check-cashing chains. In March, Union Bank of California bought a 40% stake in one of California’s largest check-cashing chains. Wells Fargo is developing check-cashing ATMs.

“ETAs compete with the banks’ other accounts and products,” said Margot Saunders, managing attorney at the National Consumer Law Center in Washington. “Why would a bank offer a $3 account when they can make $15?”

Officials at San Francisco-based Union Bank see no conflict. The bank plans to offer ETAs later this year, even though it already offers low-cost alternatives through its check-cashing unit, Cash & Save, and through its investment in Carson-based Nix Check Cashing.

For example, the bank offers a savings account to any recipient of government aid--regardless of past credit problems--that accepts direct deposits, just like an ETA. However, the account does not include an ATM card, and withdrawals are subject to a 1% fee per transaction.

Low Enrollment Tied to Lack of Marketing

Because of the lack of participation by big banks, Treasury officials say they have delayed advertising the new accounts or inserting notices along with government checks, alerting potential users to the program. The lack of marketing has contributed to the low enrollment.

Officials at Wells Fargo cite their 1998 merger with Norwest Corp. as the reason for the delay in offering ETAs. The bank is rolling out ETAs as it converts its computers in each state to a new post-merger system.

“It doesn’t make sense for us to start offering this [account] on two or three different systems,” said Laura Groschen, a Wells Fargo vice president. “But we absolutely believe in the concept.”

Other banks declined to comment on why they aren’t offering ETAs or expressed concerns that the accounts will be money-losers, since it is expected that ETA users will withdraw their funds quickly, preventing banks from earning interest on the float.

“Low balance accounts typically are not profitable,” said Rick Kusserow, senior vice president at Fullerton Community Bank, which has set up one ETA. “We think we’ll probably break even.”

Another concern of banks is the program’s requirement that they open accounts for all eligible participants, regardless of past credit problems. Currently about 80% of banks screen account applicants against ChexSystems, a national database of people who have been accused by their banks of bouncing checks or fraud. Consumers who end up in the Chex database are often unable to open accounts at any bank for several years.

Under the ETA guidelines, banks must accept applicants even if they have been reported to Chex or other consumer credit agencies. Banks opposed such a requirement when the ETA rules were drafted, saying it could lead to more fraud.

But officials at Puerto Rico-based Banco Popular, the largest ETA provider so far, say they have not observed any unusual problems with overdrafts or fraud.

“So far, [ETAs are] behaving just like any other checking account,” said Manuel Chinea, a senior vice president at Banco Popular.

Government rules specifically prohibit banks from giving ETA account holders check-writing privileges; using ATM cards rather than paper checks eliminates the risk of overdrafts or check kiting.

Lawmakers are beginning to take notice of the ETA program’s low participation. At a recent congressional hearing in Washington, Treasury Department officials sheepishly conceded that two banks in Puerto Rico have been the only active ETA issuers, signing up 2,000 users in the tiny U.S. territory as of June.

“Two banks in one territory have four times as much as the entire 50 states and all other territories combined?” asked an incredulous Rep. John J. LaFalce (D-N.Y.).

LaFalce is now pushing a bill that would force banks to offer low-cost accounts, similar to state laws in New York and New Jersey. Rep. Maxine Waters (D-Los Angeles) tried to insert a similar requirement into banking legislation last fall.

Distrust of Banks Seen in Inner Cities

Bryant of Operation Hope said he’s not surprised that ETAs aren’t catching on, saying mutual misunderstanding between banks and the inner city doomed the project from the start. Banks have shuttered their inner-city branches, Bryant said, while inner-city residents distrust banks and often are uncomfortable with technology, such as direct deposits and ATMs.

Community-based groups such as his own may be able to bridge the gap, but Bryant disagrees that new laws are needed to mandate that banks offer low-cost accounts.

“You can’t just force banks to do this,” he said. “You need to convince banks that it’s not just the right thing to do, it makes business sense too.”