How the Other Half Banks

1. Banking Requires Government Support and Serves Public Needs

The essential relationship between banks and the governments that enable them has largely been forgotten, yet it makes banks completely unlike any other corporation or commercial enterprise.

Banks are not typical businesses. Unlike other corporations operating solely on market principles, banks rely on government support for their very existence. This support includes deposit insurance, access to the Federal Reserve's lending facilities, and a regulatory framework that enables them to operate.

Government support fosters trust. Government backing is crucial for maintaining public confidence in banks. Deposit insurance, for example, prevents bank runs by assuring depositors that their money is safe, even if the bank fails. This trust is essential for banks to attract deposits and function effectively.

Banks have a social contract. In exchange for government support, banks have a responsibility to serve the public good. This includes providing access to credit and financial services to all segments of the population, not just the wealthy. This social contract is often forgotten in modern banking, leading to inequalities in access and exploitation of vulnerable communities.

2. Banking Policy Reflects the Prevailing Social Contract

Throughout U.S. history, the people, through their representative government, have had a social contract with the banks.

Banking is deeply intertwined with politics. The structure and regulation of the banking system reflect the dominant political ideologies and social priorities of a given era. From the founding of the nation to the New Deal, banking policy has been shaped by debates over issues such as centralized power, economic equality, and public welfare.

The social contract evolves over time. The terms of the social contract between banks and the government have changed throughout U.S. history. In the early years, the focus was on limiting bank power and ensuring access to credit for farmers. During the New Deal, the emphasis shifted to stability and consumer protection. In recent decades, deregulation has prioritized bank profitability and efficiency, often at the expense of public needs.

Deregulation skewed the social contract. The deregulatory era of the late 20th century led to a lopsided social contract, where banks enjoyed significant profits and reduced regulation, but failed to uphold their public-serving duties. This culminated in the 2008 financial crisis, where banks were bailed out by the government without being held accountable for their actions.

3. Banks with a Soul Prioritize People Over Profit

Just remember this, Mr. Potter, that this rabble you’re talking about … they do most of the working and paying and living and dying in this community.

Alternative banking models emerged. Throughout history, various banking models have emerged with a specific mission to serve the poor and marginalized. These include credit unions, savings and loans, and Morris Plan banks, each with unique structures and objectives.

Credit unions emphasize mutual ownership. Credit unions are cooperative financial institutions owned and controlled by their members. They prioritize serving their members' needs over maximizing profits, offering lower interest rates and more personalized service.

Savings and loans promote homeownership. Savings and loans were established to provide affordable mortgage financing to working-class families, enabling them to achieve the American dream of homeownership. However, deregulation and economic pressures led to the decline of these mission-driven institutions.

4. Fringe Lending Exploits Financial Vulnerability

One of the great ironies in modern America is that the less money you have, the more you pay to use it.

Fringe lenders fill the void. As mainstream banks have retreated from low-income communities, a "fringe banking" sector has emerged to fill the void. This sector includes payday lenders, title lenders, and pawnshops, which charge exorbitant fees and interest rates.

Payday loans trap borrowers in debt. Payday loans are short-term, high-interest loans that often trap borrowers in a cycle of debt. The average payday loan customer is indebted for 199 days of the year, paying hundreds or even thousands of dollars in fees.

Title loans risk asset loss. Title loans are secured by the borrower's car, putting them at risk of losing their vehicle if they cannot repay the loan. These loans also carry high interest rates and fees, often exceeding 300% APR.

5. The Unbanked Pay a High Price for Financial Exclusion

The very existence of the fringe banking sector is a symptom of a deep-rooted problem at the core of our financial system.

Millions lack access to traditional banking. Approximately 70 million Americans are unbanked or underbanked, meaning they do not have a bank account or rely on alternative financial services. This financial exclusion has significant economic consequences.

The unbanked pay more for basic services. The unbanked pay a disproportionate share of their income on fees for basic financial transactions, such as check cashing, bill payments, and money transfers. These fees can amount to as much as 10% of their income, exceeding what they spend on food.

Lack of access hinders wealth building. Without a bank account, it is difficult to save money, build credit, and access affordable loans. This perpetuates the cycle of poverty and makes it even more difficult for low-income families to improve their financial lives.

6. Market-Based Solutions Alone Cannot Solve the Banking Gap

Any effort to bank the poor must recognize that centralized, national, and large banks won a decisive victory over small community banks.

Community banks struggle to compete. While community banks and credit unions can play a role in serving low-income communities, they often lack the scale and resources to compete with larger institutions. Market forces tend to favor consolidation and efficiency, making it difficult for small banks to thrive.

Financial education is not enough. While financial literacy is important, it is not a sufficient solution to the problem of financial exclusion. The poor need access to affordable and reliable financial services, not just education on how to manage their money.

Technology has limitations. While technology can lower costs and increase convenience, it does not necessarily address the underlying issues of access and affordability. New technologies may simply replicate existing inequalities or create new forms of exploitation.

7. Postal Banking Offers a Public Option for Financial Inclusion

A public option in banking balances the scales of government support for the banking industry and could potentially drive out the usurious fringe-lending sector, which profits from Americans down on their luck.

Postal banking has a proven track record. Postal banking has a long history of success in the United States and around the world. It provides a safe, reliable, and affordable way for people to save money and access basic financial services.

The post office has a unique reach. The U.S. Postal Service has a vast network of branches in communities across the country, including many underserved areas. This makes it uniquely positioned to provide financial services to those who lack access to traditional banks.

Postal banking can drive out predatory lenders. By offering low-cost financial services, postal banking can compete with payday lenders and other fringe lenders, driving them out of business and protecting vulnerable consumers from exploitation.

8. A Public Option Rebalances the Social Contract

A banking system supported by the people must serve all the people and not merely a subset.

Government support demands public service. Because the banking system relies on government support, it has a responsibility to serve all members of the public, not just a select few. A public option in banking can help ensure that this responsibility is met.

Postal banking promotes financial equality. By providing affordable financial services to the unbanked and underbanked, postal banking can help level the playing field and promote greater economic opportunity for all Americans.

A public option strengthens democracy. When all citizens have access to basic financial services, they are better able to participate in the economy and in the political process. This strengthens democracy and creates a more just and equitable society.

Last updated: February 23, 2025