By Ryan Spiegel.
These days “bank” is a four-letter word. With all the headlines about government bailouts, greedy CEOs, and irresponsible lending, banks don’t exactly have the best reputation anymore. But there is one very good thing about banking institutions that are regulated by the Federal Deposit Insurance Corporation: your savings are insured up to $250,000. And in many cases, banks don’t charge you anything to have a personal checking and/or savings account.
Meanwhile, check-cashing venues can charge exorbitant, predatory fees and interest rates for payday loans and similar check cashing “services.” In many cases, those costs are well into double-digit percentage rates on the money that is yours. In other words, people are paying a very hefty price to access their own money, when they could be accessing that money for free – and keeping much more of it for themselves – if they used a bank.
Those who do not use mainstream financial institutions are often referred to as the “unbanked” or as “fringe banking” participants. Perhaps not surprisingly, there is a much higher percentage of “unbanked” people among the most vulnerable demographics in our communities – the poor, the elderly, the uneducated, immigrants, and minorities. A recent FDIC study estimates that 25.6% of U.S. households (30 million households) are unbanked or underbanked. Some might initially be reluctant to keep their money in a bank because they grew up in a foreign country where banks could not be trusted to keep assets safe. Some might have lived through the Great Depression or lost money in the Savings & Loan scandals of the 1980’s. But whatever the reason, stuffing cash under a mattress leaves you vulnerable to burglary or a fire, and it robs you of the interest that your money should be earning for you. (Even today’s low rates are better than nothing.) Usurious check cashing services prey upon these segments of society, charging a maddening 20, 30, or even 40 percent of people’s hard-earned income, which is extracted before it might otherwise circulate in the local economy.
That’s why I spearheaded the cutting-edge “Bank On Gaithersburg” initiative, which leverages the City’s leadership to bring together local banks and credit unions to offer attractive products for otherwise-unbanked members of our community. It costs virtually nothing to the City’s taxpayers, aside from some staff time and some marketing efforts, but the benefits are numerous and have the potential to affect many aspects of the local economy and quality of life. In exchange for agreeing to offer banking products designed with traditionally unbanked people in mind, such as basic checking and savings accounts with no monthly fees and no minimum balance requirements, participating banks and credit unions get the benefit of being identified and advertised by the City as “Bank On Gaithersburg” institutions. Such institutions might also provide informational materials in multiple languages and, in some cases, agree to accept consular documents as a form of identification in lieu of driver’s licenses. The City partners with other organizations, such as non-profits, to conduct outreach to “unbanked” communities and to provide financial education to assist families in becoming more financially independent.
But programs like Bank On Gaithersburg don’t just benefit the individuals who open bank accounts. The ancillary effect of getting more people to save money should actually reduce the demand for local government services. Think about it: if we can encourage a family to put even a modest amount into savings every month, then maybe they’ll be able to pay the mortgage or the college tuition or the medical bills for at least a few months longer if unemployment or other challenges strike, instead of facing foreclosure or bankruptcy right away. Maybe they’ll be able to weather the storm until a parent can get a new job. That translates into less tax dollars spent providing public assistance or administering foreclosure proceedings. Fewer bankruptcies and foreclosures may also mean that overall property values in an area don’t decline as much, which is good for property owners but also good for governments that rely on property tax revenue.
Folks who develop a reservoir of savings and interest income – or even those who just keep more of their regular paycheck by avoiding predatory check cashing fees and interest rates – may also have more freedom and flexibility to spend on extras like an occasional night out at a local restaurant or a shopping spree. By helping these individuals to gain the financial independence to enjoy goods and services sold by our local businesses, we are also helping the local economy.
Many smaller banks were hit especially hard by the Great Recession of 2008-2009, which in turn tightened up the flow of credit to small businesses and individuals at a time when they may have needed it most. But by encouraging the unbanked to open bank accounts, we are also helping to provide a fresh influx of capital to those banks. Lest we forget, banks generally are limited in their lending capacity relative to the amount of assets they hold. As more and more people open accounts and deposit money, banks will free up to lend out more of that capital to individuals and small businesses in the community. (As a condition of a “Bank On” program, a government might even be able to negotiate a requirement that the participating banks issue some of those new loans to businesses and people within the jurisdiction to ensure that the benefits are felt locally.)
Workers with bank accounts can sign up for electronic direct deposit, which helps them get their money faster (and start earning interest sooner). Direct deposit can also reduce the number of people on payday walking down the street with large wads of cash in their pockets, and thus perhaps reduce incentives for street robberies (which may also reduce the cost to government of responding to such crimes and help keep neighborhood home values higher). Additionally, direct deposit reduces the need for paper checks, which helps to save a few more trees for our environment. That’s why, as part of Bank On Gaithersburg, we are transitioning all of our City employees to direct deposit.
Another key aspect of “Bank On Gaithersburg” was the opening of a new Volunteer Income Tax Assistance (“VITA”) site within the City, providing free tax preparation assistance for eligible individuals. In particular, the VITA program helps lower-income individuals apply for the federal Earned Income Tax Credit (“EITC”) refund. This refund is essentially free money for many struggling families, but you won’t receive it unless you fill out the proper tax paperwork. Each year, thousands of EITC-eligible individuals never receive their refund because they simply didn’t apply, often because they don’t know about it. As part of the Bank On Gaithersburg initiative, volunteers from the IRS and area non-profits like Family Services, Inc. are working at VITA service centers to ensure that more eligible residents apply for, and receive, their EITC refund. And they can, in turn, use the refund as an initial deposit in a new savings account with an affiliated Bank On Gaithersburg institution, ultimately putting that money back into the local economy in the form of the aforementioned private spending or reduced need for government services. We are also working to provide Bank On Gaithersburg/VITA clients with similar assistance in applying for the City’s own Homeowner Tax Credit, which also requires homeowners to complete application forms in order to receive the credit.
As a result of the novel, comprehensive vision of this initiative, Gaithersburg was one of only eight cities nationwide to be awarded a grant from the National League of Cities to develop its “Bank On” program. In this dire financial environment, governments are looking everywhere for new approaches and ideas to reduce spending and spur economic growth. It is our hope that Bank On Gaithersburg can serve as a model for Montgomery County and the State of Maryland, and throughout the region, to help struggling families attain financial stability while also boosting local economies and creating long-term benefits for the entire community.
Ryan Spiegel is a Gaithersburg City Councilmember.
Wednesday, May 12, 2010
By Ryan Spiegel.