Testimony of Daniel L. Krieger
On Behalf of the American Bankers Association
Before the
Committee on Banking and Financial Services
United States House of Representatives
June 27, 2000

Mr. Chairman, I am Daniel Krieger, Chairman, President and CEO of First National Bank, Ames, Iowa, and Chairman of the Community Bankers Council for the American Bankers Association (ABA). ABA brings together all elements of the banking community to best represent the interests of this rapidly changing industry. Its membership – which includes community, regional, and money center banks and holding companies, as well as savings institutions, trust companies, and savings banks – makes ABA the largest banking trade association in the country.

We are pleased to testify on opportunities to encourage greater use of banking services, particularly by those individuals who do not currently have an ongoing account relationship. We agree with you, Mr. Chairman, that there are significant benefits for individuals, who often rely on alternatives to banks, to establishing an account with a bank. Alternatives to banks are often considerably more expensive, and do not provide the same level of safety and convenience that traditional bank account relationships offer. Promoting access, as the First Accounts Act of 2000 seeks to do, is certainly a worthy goal.

In my statement today, I would like to emphasize three things:

(1) The banking industry is committed to providing low-cost accounts to encourage greater use of banking services;

(2) The First Accounts program holds promise; and

(3) Any program must be realistic in its expectations and forward looking in its approach – particularly with respect to electronic banking accounts.

I. The Banking Industry is Committed to Providing Low-Cost Accounts to Encourage Greater Use of Banking Services

As you noted in your letter of invitation, Mr. Chairman, there has been a significant decrease in the number of individuals without any type of transaction account over the last decade, from 14.9 percent in 1989 to 9.5 percent in 1998. There are many reasons for this, including the most obvious, which has been the remarkable success of the economy and the corresponding improvements in real income and employment opportunities.

The past decade has also been characterized by a redoubling of efforts by the banking industry to meet the needs of its communities, particularly those of low- and moderate-income individuals. It is no surprise, therefore, to learn that over 93 percent of large banks offer basic, no-frills checking accounts.¹

My bank, First National, is an example of the kind of outreach to low- and moderate-income individuals that is typical of community banks across the country. We offer a low cost checking account for our unique local market, comprised of a large student and government employee population, as well as an increasing number of elderly and young families living on a fixed income. We have no ATM fees on any First National Bank account, and offer a free checking account with no monthly service charges and unlimited ATM and/or debit transactions. So far we have had a positive response to our low cost accounts.

Further, my bank feels a responsibility to help the less fortunate members of our community maintain a banking relationship. We do this by helping them with their day-to-day transactions and balancing their records. For example, we cash checks, at no cost, for residents of the Curt Forbes Facility, most of whom are recently released from correctional facilities and without bank accounts. We also serve most of the residents of a low-income housing complex that is within walking distance of my bank. We are proud of our record in helping our community and giving our customers a little extra help when they need it.

My town of Ames, Iowa, has its own unique population and needs. Thus, the best account and outreach for us is likely to be different for that of other banks in other communities. Simply put, banks tailor their basic account services to the specific needs of each community. There is no one account, with or without government-mandated features and prices, that could possibly work across all the varied communities from rural to college towns to retirement communities to the big city.

While it is difficult to generalize, there are studies that have tried to look at a "typical" basic banking account. These accounts are characterized by low monthly fees (the median fee is $3.00) with 8 free checks per month (which generally covers the water, gas, electric and telephone services). Instead of a monthly fixed fee, some basic checking accounts have a per-check charge which typically is 25 cents per check. The account at my bank, as I noted above, is an even better deal for customers.

The vast majority of basic banking accounts also provide additional services including image statements, ATM use, point-of-sale (POS) use, telephone banking, and personalized check printing. All these basic accounts have a direct deposit option.

These account options are good values considering the convenience, security, and deposit insurance coverage that come with them. Certainly, the price of these accounts is low enough that they should be a value to anyone in the market for a checking account. Indeed, many consumer advocates have found that even regular checking accounts are less expensive than non-bank alternatives. Furthermore, according to the Federal Reserve study, convenience is not a significant factor as it was sited by only 1.2 percent of respondents as the reason they did not have an account at a bank.² Simply put, there are transaction accounts available that would meet the needs of nearly all customers at very reasonable prices.

II.  The First Accounts Program is a Promising Approach

Promoting access to financial services, particularly for low- and moderate-income persons who lack access to such services, is certainly a laudable goal. Providing positive incentives, as H.R. 4490 does, is the best way to accomplish this goal. These include offering financing or technical assistance for providing low-cost financial services such as electronic transaction accounts, savings accounts, or other services. The challenges should not be underestimated, however. Currently, those individuals who choose not to have an account relationship with financial

institutions do so for a wide variety of reasons. The availability or cost of accounts are not the primary reasons. Rather, according to the Federal Reserve’s 1998 Survey of Consumer Finances, the top three reasons why individuals did not have a bank account were: they did not write enough checks to make it worthwhile (27 percent said they did not like dealing with banks (22.8 percent), and they did not have enough money (20.5 percent). Research by Booz-Allen & Hamilton and Shugoll Research on behalf of the Treasury Department’s, Financial Management Service confirmed these findings.³ That report also noted that many individuals are worried about overdrafts, overuse of ATM machines, want to keep information about their financial resources private, prefer or need to deal in cash, and fear having their assets frozen in the event of a legal judgment. Studies have also indicated that illiteracy, innumeracy, and the lack of minimal fluency in English are also contributing factors.

Importantly, the Federal Reserve Survey revealed that the reasons individuals have forgone bank accounts have remained relatively constant over time. Thus, it is important to be realistic about the effectiveness of any government program to reduce the percentage of individuals without banking accounts. More importantly, any program should be designed to clearly identify the reasons people do not have accounts and target those reasons very specifically.

These challenges are illustrated by the Dove Associates research on preferences of federal benefit recipients.⁴ Dove found that 96 percent of unbanked recipients were satisfied with the location where they currently cash benefit checks, 93 percent were satisfied with the hours of operation, and 97 percent were satisfied with the location’s staff. Even though electronic alternatives were available, it was hard to change the preferences and habits of the recipients. The Dove research also dispelled the notion that it was discomfort with banking institutions that led to individuals shunning bank accounts. The research found 61 percent of benefit recipients saw no need to have a bank account. "Overall," the report concluded, "it appears that unbanked federal check recipients do not have any major issues with banks and are comfortable in a banking environment."

Moreover, in spite of the banks’ efforts to provide low-cost basic banking accounts, the number of check-cashing outlets has tripled since 1986 and now exceeds 6,000. As the Federal Reserve, and many community groups point out, utilizing the services of check-cashing outlets can be very costly. Barbara Good of the Federal Reserve Bank of Cleveland noted that:

Assuming that an unbanked individual cashes one government check for $500 and two personal checks worth $100, and buys three money orders monthly, he or she could pay as much as $26.50 each month. The person would generally pay considerably less for a simple checking account, as low-cost checking accounts with limited privileges are available for under $10 a month at some traditional financial institutions.

Indeed, as noted above, the median cost of a basic, no-frills account is $3.00 per month. Thus, for less than 70 cents a week, low-income Americans can readily obtain an insured bank account which meets both their check-cashing and check-writing needs.

In looking at the specific proposal, we note many positive aspects. The first is the emphasis on education. As Barbara Good of the Federal Reserve notes: "Lower-priced financial services are available to these consumers, but they may not be aware of their options." H.R. 4490 seeks to promote access to financial services by providing financial education, technical assistance, and training to depository institutions or community groups. ABA worked closely with Treasury’s Financial Management Service, federal bank regulators, community groups, and other trade associations in a partnership called the Financial Services Education Coalition. This coalition produced a guide to teach basic financial services called Helping People in Your Community Understand Basic Financial Services. It is this kind of educational partnership that would benefit from H.R. 4490. Moreover, ABA’s Education Foundation is deeply involved in providing materials for bankers to educate consumers in their local markets. An example of this is a brochure call "Managing Your Checking Account."

Second, we believe that the research and development provision in the proposed legislation is extremely important in understanding the myriad of reasons for individuals preferring not to use the banking system and identifying reasonable approaches to changing this situation. Again, we believe it is critical to identify the precise reasons these accounts are not being used more often.

Third, the incentives considered – including grants, cooperative agreements, and contracts, and designating depository institutions as financial agents of the Treasury to provide technical assistance, education, training and financial services – are a positive way to approach the issue. Care in selecting the recipients will be crucial, as is noted in the proposal. The experience with the CDFI fund will be invaluable in setting standards for the distribution of incentives.

Fourth, while we would leave up to Congress the decision concerning the appropriate level of funding for such a program, a regular review is certainly in order to assure taxpayers that their tax dollars are being spent appropriately. The review procedure and the authority to fund only through 2005 are appropriate to ensure that this does not become another expensive program in search of a mission.

In spite of the very positive provisions, several questions arise. We believe that this program should be limited to providing research grants and other arrangements in order to improve financial education and encourage participation in banking account services. We would be opposed to additional regulations mandating account features or price controls of fees. Care must be given so that this program does not become a handout to any community group or financial institution. Performance criteria must be established in order to measure the success of any program.

III.  Any Program Must Be Forward Looking, Emphasizing Electronic Accounts

We believe that the most important contribution a program like First Accounts could make is to support and promote the use of electronic accounts. As noted above, some of the big concerns for those without banking accounts are that there are not enough reasons to write checks and the fear of overdrawing accounts. Electronic accounts help to resolve these and other concerns. In addition, electronic accounts are safer, reduce the incidences of fraud and account theft, and are easier to use and are less expensive than alternative accounts or check cashing outlets. Importantly, merchants are increasingly offering cash back at point-of-sale for debit card use. This expands the opportunities to convert accounts into cash and reduces reliance on ATMs and tellers.

The work underway by the Treasury to move to electronic provision of benefits payments should provide an invaluable base upon which to build this program. The banking industry is working in partnership with the Treasury Department to develop the electronic account so that it will be an attractive and accessible product. In fact, the Electronic Transaction Account (ETA) may provide a very forward looking approach to basic banking for those who do not currently have a bank account.

The ETA account is a low-cost account at a financial institution in which a federal benefit, wage, salary or retirement payment is deposited. Since Treasury published the account’s final structure on July 16, 1999, five hundred and fifty nine financial institutions with over five thousand locations have begun offering ETA accounts. Another twenty-four financial institutions will soon be offering ETA accounts from over eleven hundred additional locations.

The maximum monthly account fee for an ETA is $3.00, but it can be offered for less at the discretion of the financial institution. No minimum balance is required for an ETA. Other types of deposits other than federal benefit, wage, or retirement payments may be allowed at the option of the financial institution. Financial institutions offering ETAs allow their customers at least four free withdrawals per month. ETA customers may withdraw cash over-the-counter at branch locations, as well as at ATMs. ETA account holders receive the same consumer protections available to all other account holders at the depository institution.

The ABA sees many positive aspects to the ETA account:

• The account is not mandatory, allowing for voluntary participation of depository institutions.
• The account allows a large number of depository institutions to participate, rather than relying on a very small number of institutions to provide this service.
• The account structure is simple, which reduces potential problems such as overdrafts.
• The account’s structure recognizes that mandating certain features would raise the cost of providing ETA accounts and would reduce the willingness of institutions to provide them. For example, free withdrawals are limited to four transactions, but can be raised at the option of the depository institution. Also, the account does not require that interest be paid, although the institution has the discretion to offer such an account at additional cost to the customer.

Electronic accounts structured similarly to the ETA represent the greatest promise for offering financial services to individuals currently without bank accounts. An example of variations inspired by the "ETA model" is the initiative taken by banks such as the Citizens Trust Bank of Atlanta, a $245 million-asset bank with 11 branches. Citizens Trust will offer a product called Direct 2 Cash, a simple, straightforward, and inexpensive way for people who do not want a traditional checking account to gain access to cash with a bank account. Customers are eligible for these accounts if they are employed and their employer offers direct deposit.

Working through employers shows great promise. A Virginia bank, Cardinal Bank N.A., is working to enroll businesses that want to encourage their employees to establish banking relationships. One of the attractive features of the direct deposit account, particularly for the immigrant community, is that employees can establish a transfer account that can be accessed at ATM locations overseas. Relatives of the employee can then get a PIN-based debit card and obtain funds from the United States at significantly lower costs, about one-third what non-bank firms charge.

Other banks are also aggressively trying to serve those currently without bank accounts. For instance, American Community Bank of Charlotte, N.C. offers a combination smart card, money-transfer service, called "giro paisano," that allows customers to wire money to Mexico from an American Community branch. In Mexico, the money can be picked up at one of the 1,800 offices of the government-owned telephone service, saving up to 25 percent of the cost of other services.

These innovations serve to point out how creative the banks are in finding ways to meet the needs of their communities. Importantly, mandating a one-size-fits-all account would certainly stifle this type of innovation. With electronic provision of payment services evolving so rapidly, we should not lock in an approach that would surely become out-dated in a short period of time.

In conclusion, Mr. Chairman, the ABA believes that the goal of the First Account program is certainly laudable. The challenges should not be underestimated, however, and there needs to be a realistic sense of what can be accomplished. There are many reasons for not choosing to have a bank account. It is not a question of accessibility or affordability. The vast majority of banks offer basic banking accounts, generally priced at less than a $1 per week. Surmounting the other obstacles that lead individuals to choose not to have an account will require a considerable educational effort – something that should be a top priority for the First Account program. Finally, any program must be forward looking. New electronic payment vehicles are expanding quickly, offering customers lower cost, greater convenience and superior safety.

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1. Retail Banking Survey Report, American Bankers Association, Ninth Edition, 1999.