Growth of ‘public banking’ will attract major private sector consumer groups

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State-owned and operated financial institutions are not a new concept. The oldest documented was in ancient Mesopotamia, and they existed in the early days of the United States. After President Andrew Jackson closed the United States’ Second Bank in 1836, almost all states attempted to establish their own banks, but only one survived. – in North Dakota.

Last year, however, there was renewed interest in so-called state-owned banks. Most recently, the San Francisco Board of Supervisors unanimously approved an ordinance in mid-June 2021, which would authorize public banks in the city.

“A public bank can and should balance both fiscal solvency and investments in residents, businesses and industries that reflect San Francisco values, advancing issues of social, economic, gender, racial equity. and environmental, among others ”, we read in the ordinance.

In another move, think tank The Public Banking Institute, highlighted and promoted the campaign for a public bank in Massachusetts, fueled by the Black Economic Council of Massachusetts (BECMA). The board’s CEO – Segun Idowu – says he and the rest of the board stand up for state banks to correct racial injustice.

This begs the question: why should existing financial institutions care? They face many other challenges as overdraft fees run out, neobanks gain a foothold, and the federal government clamps down on mergers and acquisitions.

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Yet advocates of public banks argue that public banks could better cater for minorities and other populations who they say are generally overlooked by the banking sector. Finally, a new federal bill that would support public banks could ensure that public institutions spread quickly in the United States, gaining ground that private banks might not be able to beat.

Federal support for public banks

A new bill proposed by U.S. Representatives Rashida Tlaib of Michigan and Alexandria Ocasio-Cortez of New York, both Democrats, could ensure the success of public banks this time around – with help from the federal government.

The bill – called the “Public Banking Act” – would establish a subsidy program for public banks, administered by the Secretary of the Treasury and the Federal Reserve, that would ensure that public banks could obtain the financing to train, charter and capitalize.

Women in Congress both argue that a flood of public banks would strengthen communities of color.

“It is high time to open the doors to people who have been systematically excluded and to provide a better option for those who are grappling with the costs of simply trying to participate in an economy in which they are perfectly well served. right, but that was rigged against them, ”Tlaib said. competition.

There was opposition to the commercial banking groups bill. New York Bankers Association president Clare Cusack, for her part, acknowledges the problem Tlaib and Ocasio-Cortez are tackling, but maintains that public banks are not the best solution.

“While the New York Bankers Association recognizes that low-income communities and communities of color have been hit hardest by the pandemic,” she explains, “a public bank is not the answer and would create in made false hopes for a quick fix which could in fact be long, long, untested and unpredictable.

The bigger picture:

For now, it seems public banks are only targeting an audience that banks and credit unions overlook. However, it remains essential that traditional institutions keep an eye on the trend as it could lead to a new competitive foray.

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Catering for the less served

The debate that racial minorities do not receive the same banking privileges as other Americans is not the only point of contention.

A related, but broader, argument within the banking sector concerns “underbanked” and “unbanked” populations. It is a bitter fight between traditional financial institutions and a group of consumers, advocacy groups and even fintechs arguing over who does not have equal access to banking services.

The unbanked and underbanked account of a good part of the population. The Federal Reserve estimated in a May 2020 survey that 6% of adults were unbanked (those without any form of a traditional bank account) and 16% were underbanked (meaning they had a bank account, but were also using an alternative financial service product).

Creep mission:

Public banks can be a great option for the world’s unbanked and underbanked consumers. But that does not mean that they would not also respond to the segments on which traditional institutions focus.

Saira Rahman, vice president of finance at digital bank HMBradley, says a state bank would open the doors for these populations.

“By creating a public banking option, the government would give unbanked and underbanked people the opportunity to finally avoid predatory lending practices and give them the opportunity to opt out of horrific practices like check cashing services at high fees, ”Rahman told US News.

Traditional institutions may think that while public banks are reaching out to these underserved groups, they are not encroaching on the domain of private sector banks. But, if implemented nationally, public banks could usurp key markets served by traditional banking providers.

According to the Public Banking Institute, “public banks are able to reduce taxes in their jurisdictions because their profits are returned to the general fund of the public entity,” which means that a public bank is primarily profitable for the State, not for the leaders of the financial institution.

( Dig deeper: Expand your base by serving the unbanked and underbanked)

Then, since state-owned banks could likely offer reduced interest rates, there could also be a lack of fees in addition to the lower interest rates on loans to students, homeowners and farmers, explains. a member of the Economic Liberty for Main Street (ELMS) consumer group, as reported by The Union.

“It’s not just good for big business, but for our local government,” ELMS member Pamela Hall told the publication. “If the local government, county, and city could put their money into a local public bank, there would be no charge, and interest would be low, and any profits earned could be returned to the county. “

What the competition can boast:

Because they would be state-run – and therefore would not be subject to the same profit-based regulations as most traditional financial institutions – public banks can offer lower lending rates and lower fees.

Public banks are not as much of a threat to credit unions as they are to banks. In fact, there are only two main differences between credit unions and public banks, according to the Foundation for Intentional Community: 1. The former belong to their members, and 2. are only able to grant funds. commercial loans less than or equal to 12.25% of their total assets.

On the other hand, public banks are owned and managed by government entities and are able to make much more loans.

( Read more: The future of banking: more competition means more disruption)

The only one to date

The Bank of North Dakota was established in 1919 and persevered even after the movement for other state-run banks died down at the turn of the 20th century.

North Dakota Bank Logo

Its structure is quite different from other financial institutions. It is not FDIC insured and does not offer traditional convenience banking products, such as debit cards, credit cards, or bill payment, but it does offer a wide range of products and services. Here are some examples of what BND offers:

  • Student loans
  • Commercial loans
  • Mortgage loans
  • Chequing and savings accounts
  • Credit lines
  • Electronic transfers
  • Repurchase agreements

Based in Bismarck, BND has just under 200 employees and a seven-member board of directors. It does not have physical branches, but does have loan officers located in Fargo, Grand Forks, and Minot.

Operating profits are returned to the state and used in three ways: appropriation by the North Dakota Legislature, the state general fund, funding mission-oriented loan programs, and building capital for the state. BND, according to the bank’s website.

When it was first launched, the bank was intended to be used primarily as a resource for farmers and the agricultural industry, which is crucial for the state of North Dakota. More than 100 years later, his initial goal is still at the center of his concerns.

“Although the record earnings streak was broken this year, I think it was our best year ever,” Eric Hardmeyer, chairman of the bank, said in the company’s 2020 annual report. “We have tripled the number of loans we have made to the commercial and agricultural sectors,” adding that the bank has also reached a record level of SAVE accounts for colleges – one of its product offerings for students.

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