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Helping the ‘unbanked’: California mulls entering banking business to serve disadvantaged consumers

Anneisha Williams in El Segundo on Feb. 20, 2023. Williams decided to stop using traditional banking systems after a bank declined to refund her for money stolen out of her account by a hacker.
Lauren Justice for CalMatters
Anneisha Williams in El Segundo on Feb. 20, 2023. Williams decided to stop using traditional banking systems after a bank declined to refund her for money stolen out of her account by a hacker. 

Anneisha Williams figures she has paid several hundred dollars in overdraft fees over the years, so when her last bank recently refused to refund about $500 a hacker stole from her checking account, Williams decided she was done with banks.

Williams, 38, works full-time at a Jack-in-the-box in the Los Angeles area and is an in-home care provider. She also is raising six children; she doesn’t have time to hassle with a bank she no longer trusts, she said.

“They told me they couldn’t refund my money, basically, that it was just a loss,” she said. “It was just highway robbery.”


Now Williams does banking online through a financial tech company. It doesn’t charge her monthly fees and offers her free overdraft protection. But state law says such companies aren’t banks and can’t call themselves that.

Williams has joined California’s “unbanked” — some 7% of Californians who don’t have checking or savings accounts at traditional banks.

Another 18% have bank accounts but end up using higher-fee financial services, such as payday lenders or check-cashing businesses. They are considered the “underbanked,” according to banking experts.

In total, 1 in 4 Californians lacks full access to banks, studies say. Many are low-income and minorities who pay high fees to access their cash.

Lawmakers say they’re preparing to help. The state Legislature passed a law in 2021 creating a commission to explore a public banking option called CalAccount. Its report is due to the Legislature July 1, 2024.


CalAccount would be a state-run public bank, but the state would likely involve another bank or financial partner. It would offer such services as free checking, overdraft protection, ATM cards and savings accounts to people who are underserved by banks, state officials said.

Assemblymember Miguel Santiago, a Democrat from Los Angeles who authored the law, said it would bring back into the economy people pushed out by high financial fees.

Financial options

“We can’t create a stable economy when financially underserved households spend an average of 10% of their take-home pay in fees and interest, just to access their own money and pay bills,” Santiago said. “Creating a public option for banking and closing the racial wealth gap isn’t only a moral imperative, but it also creates greater financial security for all of our communities.”

CalAccounts would offer “a voluntary, zero-fee, zero-penalty, federally insured transaction account,” says the California Public Banking Option Act. People could access their accounts in person at post offices, rather than at bank branches.

California has one of the highest concentrations of unbanked families in the nation, according to the Federal Reserve. Workers earning less than $15 per hour make up 81% of unbanked individuals in the state, a study said.

The Federal Deposit Insurance Corp., which regulates banks, says to be unbanked means no one in a household has a checking or savings account at a traditional bank or credit union. Underbanked means they have a bank account but still lack access to many financial services, such as credit cards and loans.

Not enough cash

Critics of CalAccounts say there aren’t enough of the unbanked or underbanked to justify a state-run financial alternative. Many Californians don’t lack access to bank services, they said; they just lack cash.

“This is a critical distinction that must be made; individuals who utilize payday lenders and other high-cost loan products do so because they have inadequate cash flow, not because they lack access to banking services,” a coalition of business and banking groups wrote to legislators.

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 for CalMatters
Anneisha Williams at a park with her daughters Kamaya, 9, and Nevaeh, 6, in El Segundo on Feb. 20, 2023. 

Frequent 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.