‘Public Bank’ Growth Will Draw Key Consumer Groups from Private Sector

There's only one public bank in the country today — in North Dakota — and it has a very unthreatening presence. But moves are afoot to create new state-owned banks to serve the needs of people that consumer advocates claim have been neglected by traditional institutions.

State-owned and state-run financial institutions are hardly a new concept. The earliest documented one was in ancient Mesopotamia, and they existed in the early days of the U.S. After President Andrew Jackson shuttered the Second Bank of the United States in 1836, almost all of the states tried to establish their own banks, but only one survived — in North Dakota.

In the past year, however, there has been a renewed interest in so-called public banks. Most recently, the Board of Supervisors in San Francisco unanimously approved an ordinance in mid-June 2021, which would allow for public banks in the city.

“A Public Bank can and should balance both fiscal solvency and investments in residents, businesses, and sectors that reflect San Francisco values, advancing issues of social, economic, gender, racial, and environmental equity, among others,” the ordinance reads.

In another move, think-tank group 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 CEO of the council — Segun Idowu — says he and the rest of the council are championing the state-owned banks to correct racial injustice.

That raises the question: Why should existing financial institutions care? They have plenty of other challenges as overdraft fees fizzle out, neobanks gain a bigger footing and the federal government cracks down on mergers and acquisitions.

Yet, advocates for public banks say public banks could better provide for minorities and other populations they claim are typically neglected by the banking industry. Not least, a new federal bill that would back public banks could ensure the state-owned institutions rapidly spread across the U.S., gaining ground privately-owned banks might not be able to beat.

Federal Support for Public Banks

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

The bill — coined the “Public Banking Act” — would establish a Public Bank Grant program, administered by the Secretary of the Treasury and the Federal Reserve Board, which would ensure public banks could get the funding to form, charter and capitalize.

The congresswomen both argue a flood of public banks would bolster communities of color.

“It’s long past time to open doors for people who have been systematically shut out and provide a better option for those grappling with the costs of simply trying to participate in an economy they have every right to — but has been rigged against them,” Tlaib contests.

There has been opposition of the bill from banking trade groups. President of the New York Bankers Association, Clare Cusack, for one, acknowledges the problem Tlaib and Ocasio-Cortez address, but maintains public banks are not the best fix.

“While the New York Bankers Association recognizes that low-income communities and communities of color were hit the hardest by the pandemic,” she explains, “a public bank is not the answer and would in fact create false hope for a quick solution that could actually be long, drawn out, untested and unpredictable.”

The Bigger Picture:

For now, it looks like public banks may only be targeting an audience banks and credit unions are overlooking. However, it remains essential that traditional institutions keep an eye on the trend as it could lead to a new competitive inroad.

Read More: Jamie Dimon Says Competitive Threats Put Banking’s Future at Risk

Catering to the Under-Served

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

A related, but broader, argument within in the banking industry concerns the “underbanked” and the “unbanked” populations. It’s been an ongoing tug-of-war between traditional financial institutions and a vocal pack of consumers, advocacy groups and even fintechs arguing over who isn’t getting equal access to banking services.

The un- and underbanked account for a good chunk 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 another 16% were underbanked (meaning they had a bank account, but also utilized an alternative financial service product).

Mission Creep:

Public banks may be a great option for the unbanked and underbanked consumers of the world. But that doesn’t mean they wouldn’t also cater to the segments traditional institutions focus on.

Saira Rahman, vice president of finance for digital bank HMBradley, says a state-owned bank would open up the gates to these populations.

“By creating a public banking option, the government would give the unbanked and underbanked the opportunity to finally avoid predatory lending practices and give them the ability to opt out of awful practices like high-fee check cashing services,” Rahman told U.S. News.

Traditional institutions may reason that if public banks cater to these underserved groups, they aren’t infringing on the domain of private-sector banks. But, if implemented on a national scale, public banks could usurp key markets served by traditional banking providers.

According to the Public Banking Institute, “public banks are able to reduce taxes within their jurisdictions, because their profits are returned to the general fund of the public entity,” meaning a public bank is primarily profitable for the state, not for the executives of the financial institution.

Dig Deeper: Expand Your Base By Serving the Unbanked and Underbanked

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

“It’s not just good for big businesses, but our local government,” ELMS member Pamela Hall told the publication. “If the local government, county and city could put their money in a local public bank, there wouldn’t be any fees, and the interest would be low, and whatever profits garnered could be returned back to the county.”

What The Competition Can Boast:

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

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

On the other hand, public banks are owned and operated by government entities and fit to originate significantly more loans.

Read More: The Future of Banking: More Competition Means More Disruption

The Only One So Far

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

Bank of North Dakota Logo

It’s set up quite differently from other financial institutions. It is not FDIC-insured, and it doesn’t offer traditional convenience banking products, like debit cards, credit cards or bill pay, but it does have a wide range of products and services. These are examples of what BND offers:

  • Student loans
  • Business loans
  • Home loans
  • Checking and savings accounts
  • Lines of credit
  • Wire transfers
  • Repurchase agreements

Headquartered in Bismarck, BND operates with just under 200 employees and a seven-member executive board. It doesn’t have any physical branches, but it has lending officers located in Fargo, Grand Forks and Minot.

Profits from operations are returned to the state and utilized in three ways: appropriation through the North Dakota Legislature the state’s General Fund, funding mission-driven loan programs and building BND’s capital, according to the bank’s website.

When first launched, the bank was intended to be utilized primarily as a resource for farmers and the agricultural industry — crucial to the state of North Dakota. Over 100 years later, its original purpose is still the focus.

“Although the streak of record-breaking profits was snapped this year, I believe that this was our best year ever,” said Eric Hardmeyer, president of the bank, in the company’s 2020 annual report. “We tripled the number of loans we made for the commercial and agriculture sectors,” adding the bank also reached a record level of college SAVE accounts — one of its product offerings for college students.

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