If there’s a will – as there surely is – to increase financial inclusion – is there a way?  There is little question that low-and-moderate income households often rely on their own resources or, when these fall short, problematic and even predatory products.  The hazardous landscape these households confront trying to safeguard their funds and obtain affordable credit thus makes it even harder for them to advance and for the U.S. to reduce our stunning levels of income and wealth inequality.  One way to address this critical problem is to craft a public-sector utility such as the U.S. Postal Service in pending legislation.  There’s a lot to be said in favor of putting the post office into basic banking, but also many practical, risk, and even market-theory considerations still be worked out before this idea can be carefully analyzed, let alone adopted.  We sent out a blog post earlier this week laying out these issues.  Given the urgency of increasing U.S. financial inclusion and the obstacles to having the post office take this on, I also outlined an alternative, private-sector utility:  bankers’ banks dedicated to equality finance.  How would this work?

First, what’s a bankers’ bank?  These jointly-owned institutions date back to 1975 and permit insured depositories – including credit unions – to band together to provide services throughout the membership that each institution cannot handle on its own, thus reducing operational costs that would otherwise be prohibitive to member institutions.  As I learned working to set up two of the earliest bankers’ banks, bankers generally play well together, but working in concert is not their strong suit.  Bankers’ banks then and now are small and limited.  Still, understand bankers’ banks as they were chartered by law and considerable equality-financing potential quickly emerges.

The scope of this memo doesn’t permit consideration of all of the ways to use bankers’ bank for low-cost, small-dollar banking.  One option would be to have a trade association establish an equality-focused utility much as several due in areas such as payment processing, managing the to-be-announced mortgage market, and managing securities-market transactions.  In all of these areas, the trade association goes beyond usual membership training, networking, and advocacy functions to provide a service core to the mission and competitiveness of member organizations.  With all the furor sparked by screen-scraping and concerns about data privacy and security, now seems an ideal time to consider if a utility function housed in an industry trade association could offer targeted equality-generating financial services that protect member-company value-add.  The post-office bank threatens this directly, but then it also meets an urgent need the industry has so far been unable to address.

Action by individual banks to create an equality-focused bankers’ bank?  This is certainly possible.  Bankers’ banks are largely freed of the antitrust and other constraints that otherwise bar communal action and thus create an exciting opportunity to craft a truly private-sector utility for this critical public purpose.  Bankers’ banks seem to be a particularly opportune way to build infrastructure for small-dollar, low-cost accounts given that the only profits to be had in them are volume-driven.  With member-bank offices servicing customers – i.e., by answering questions, opening accounts, engaging in community outreach – a backroom bankers’ bank would provide considerable economies of scale impossible to achieve outside of a mega-bank.

Indeed, even mega-banks are challenged to provide basic financial services, as recent decisions to abandon low-dollar checking accounts show all too clearly.  Could one jointly-owned insured depository take funds from under-served customers, invest them both to ensure profitability and service public purposes, and also link under-served consumers to more costly but essential wealth-preservation services such as retirement advice, student-loan counselling, and low-dollar loan origination?  What else could a 21st-Century Equality Bank do for its members, industry competitiveness, reputational and political risk, and even profitability? 

The problems of providing better banking to under-served customers is that it all too often collides head on with problematic regulation and insuperable profitability obstacles.  A bankers’ bank could well solve each of these problems – the charter is flexible and the law gives regulators considerable discretion to interpret it still more imaginatively.  Bankers’ banks thus offer a unique opportunity for the industry to do both good and well.