Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

Before the

National Community Reinvestment Coalition

Washington, D.C.

March 6, 2001

Winston Churchill used to say of democracy that it was the worst form of
government ever devised \-- except for all the others. Churchill's
comment can also be applied to banking. Although little loved, banks are
nonetheless the best instruments yet invented for the promotion of
thrift, wealth, and general prosperity. That's why we focus so much on
what banks can do to help improve the lot of Americans who remain
outside the financial mainstream. And that's what I want to focus on
this afternoon.

Bankers have never had a monopoly on the provision of financial services
in this country. They have always shared that market with a host of
other providers \-- many of them unregulated \-- and that's never been
truer than it is today. A walk through virtually any town or city in
America gives a sense of how diverse the financial marketplace is, and
how many different kinds of financial providers operate and compete in
our communities. All of them have a role to play in meeting a wide
variety of financial needs. Choice, after all, is an essential element
of our economy, and to suggest that banks can be, or should try to be,
all things to all people would be unrealistic.

Yet not all financial providers are created equal. As the risk of
sounding parochial, let me suggest that banks add unique value to the
services they deliver. Though there may be no end of places to cash a
check, get a loan, or pay a bill, the millions of Americans who \-- for
whatever reason \-- don't obtain those services through a bank lose
something important in the process.

What they lose are the tangible and intangible benefits that a
relationship with a mainstream financial institution can provide. That
may include the incentives and institutional support necessary for
individuals to build assets, transaction services at prices below those
of unregulated fringe providers, and financial services that fringe
providers can't offer at all, such as safe repositories for funds, and
cheap and efficient payment services. For a small business loan, a loan
for education or job training, or an affordable mortgage, only a bank or
other mainstream institution will usually do.

There are also the benefits of building a formal credit history and a
long-term financial relationship with a bank. The importance of those
intangible benefits cannot be exaggerated for anyone who wants to climb
the ladder of success in this country today.

If all this is so, why then do some 10 million American families still
not have an account with an insured depository institution? It's
possible, of course, that the benefits I've just described are not well
understood by those who don't presently enjoy them. Thus, the work that
you, and a host of government, community, and consumer organizations
around the country do to enhance basic understanding of financial issues
is a crucial aspect of tackling this problem. Educating people about
making wise choices and avoiding the pitfalls that dot the road to
financial security will always be an important facet of any strategy to
address the problem of the unbanked.

Another explanation is the physical shortage of banking outlets in
communities that are home to the unbanked \-- a situation that could be
related to the consolidation that has taken place in the banking
industry. A recent government study found, not surprisingly, that
low-income central city neighborhoods have fewer bank offices than
higher-income neighborhoods and those outside the central city. Affluent
neighborhoods, where the median income was 120 percent or greater than
the area median income, had three times as bank offices per 10,000
residents as neighborhoods where the median income was 50 percent of
area median income. In New York City, at last count, only 2.5 percent of
all bank branches were located in low-income areas that housed more than
six percent of the city's total households. In those areas, unregulated
check-cashing establishments outnumbered bank branches by as much as two
to one.

When we look for explanations from banks that have a low profile in low-
and moderate-income neighborhoods, what they tell us is usually valid
\-- but not necessarily sufficient. Some have tried to make a go of it,
only to find that they were unable to make a profit. Some have pulled
out of certain communities \-- or chosen not to enter them in the first
place \-- due to security concerns. And others have decided that service
to the unbanked was inconsistent with the upscale image they were
seeking to cultivate.

It's obvious, I think, that in order to serve the community effectively,
an institution should have a physical presence there. But the lack of
physical access to banks cannot be the entire answer to the problem of
the unbanked. Many of those who remain outside the banking system are
there by choice. Neighborhood residents will walk right past the local
bank branch \-- which is usually pretty hard to miss \-- to get to the
check-cashing outlet next door. Obviously, even where banks do operate,
they're not always meeting the needs of the local community.

The best way to find out what those needs are is to ask, and when we do,
we usually hear the same thing. People who lack banking relationships
tell us that they are uncomfortable in banks and, especially in
communities in which English is not the dominant language, that it's
sometimes difficult to communicate with bank personnel. Some express
concerns about confidentiality. But more than anything else, they tell
us that conventional banking services simply cost too much for small
customers. And the evidence suggests they're right.

According to a 1999 study by the U.S. Public Interest Research Group,
the average minimum balance required to avoid fees for checking accounts
at large banks was \$616. Consumers who were unable to meet that minimum
balance requirement paid an average of \$217 a year, or \$18 a month, to
maintain a checking account. That's about the same price that a
full-time worker earning the federal minimum wage would pay to cash his
or her paychecks at a typical check-cashing outlet. Even for "no frills"
accounts, which provide limited check-writing with no minimum balance,
consumers paid an average of \$148 a year. Most banks also levy high
charges for bounced checks \-- as much as \$20 to \$25 each. Indeed, I
once heard a representative of one of our major money center banks boast
about how bounced check fees were an important profit center for his
institution \-- which, if true, is shocking and, in any event, not a
very smart thing to say publicly. Households with low incomes may be at
greater risk of paying these fees, both because they maintain low
balances and because they may have less experience in managing household
finance.

Given these realities, it's no wonder that so many low- and
moderate-income Americans choose not to conduct financial transactions
at a bank. But it's a decision that carries serious long-term
consequences \-- for the unbanked, for the economy, and for banks
themselves, which lose customers whose business could well be profitable
over time. The challenge, then, is to find a way to build relationships
between the unbanked and the mainstream financial institutions that make
economic sense for both, over the short- and long-terms.

We have a prototype for such a relationship in the Electronic Transfer
Account, or ETA, which was developed under my direction when I served as
Under Secretary of the Treasury for Domestic Finance. It would be
superfluous for me to describe in detail the features of the ETA to an
organization that has been as intimately involved as NCRC has been in
its development and promotion. The opportunity should not pass to
congratulate you on the important role NCRC continues to play in this
effort.

But in the context of our discussion today, it's important not to forget
that that ETA concept evolved from a business decision by Congress,
embodied in the Debt Collection Improvement Act of 1996, to reduce the
cost of delivering Federal payments by requiring that they be delivered
electronically. Projections were that, when fully implemented, the
conversion from paper to electronic funds transfer would save the
government upwards of \$100 million per year \-- 28 cents for every
paper check that would no longer have to be printed, issued, and mailed
\-- and replaced when the first one went astray.

Of course, it was widely understood that these savings were not going to
materialize unless those required to receive payments electronically had
the means to do so, and we estimated that nearly 20 percent of all
Federal benefits recipients did not have accounts at a financial
institution. The Debt Collection Improvement Act mandated that the
Secretary of the Treasury assure that anyone required under the Act to
receive a payment directly have access to an account at a bank for that
purpose at a reasonable cost. It was in response to this mandate that we
developed the ETA \-- a model for a utilitarian, all-electronic account,
which, for a fee of no more than \$3 a month, allows recipients of many
kinds of Federal payments, including salaries and retirement benefits,
to access their funds automatically through electronic funds transfer.
The ETA was purposely designed as a "bare bones" model, in order not to
preempt the development of more elaborate accounts by banking
institutions.

With the help of NCRC and more than 1400 local community-based
organizations, consumer groups, and faith-based groups who are
participating in the nationwide ETA campaign, we're making tremendous
progress in getting the word out to potential account holders. And
financial institutions, which receive \$12.60 for every ETA they open,
are rapidly signing up to offer it. Right now the ETA is available at
more than 600 financial institutions with thousands of branches
nationwide.

What's particularly encouraging is that many of these institutions are
aggressively marketing the ETA as part of their basic retail banking
strategy. Some banks are waiving or reducing the monthly service charge,
making low-cost money orders available as an additional benefit to
account holders, and allowing ATM withdrawals in excess of the four they
are required to allow under Treasury rules. Some banks are offering cash
bonuses to the account holder when the first government payment is
received. Some are holding promotional events with local government
officials. Others encourage tellers to talk about ETA with customers
trying to cash a Federal check, and offer tellers a bonus for every ETA
customer they sign up

Any program so new is inevitably a work in progress, and we certainly
have a long way to go before we can declare the program a success. How
shall we measure that success? Not so much, I believe, in the number of
ETAs that are opened, though that's important. I think, rather, that the
ETA's greatest value is as a stepping stone \-- for customers who use
them to get a foothold into the financial mainstream [and]{.underline}
for financial institutions who use the ETA as a model to bring the
benefits of a banking relationship within reach of others. I see the ETA
as a prototype for a technology-intensive, low cost account capable of
generating profits \-- or at least paying its own way \-- for the banks
that offer them and attracting millions of Americans who do not
currently receive Federal payments into the banking system. That's what
I meant by the importance of building relationships between the unbanked
and mainstream financial institutions that make economic sense for both.

Technology, I believe, is crucial to the solution. The savings generated
by a shift from paper-based systems, like traditional checking accounts,
to electronic delivery should make it possible for banks to offer low-
and moderate-income customers basic banking services at prices both can
afford. That was the logic behind the ETA, but it doesn't require
government involvement to make it work. The importance of technology has
significant implications for legislators and community groups that have
typically focused on traditional paper-based delivery in promoting
so-called "basic banking" legislation as a solution to the problem of
the unbanked.

The ETA, and similar types of electronic accounts, also have important
implications for the spread of unregulated fringe providers.
Check-cashers and payday lenders offering high-priced services flourish
where there are no lower-cost alternatives. But with the cost savings
possible through electronic delivery, surely banks could offer these
services at lower prices.

Indeed, we see more and more banks drawing inspiration from the ETA but
going well beyond it, developing their own low-cost electronic accounts
that link direct deposit of payroll with a menu of services that can be
accessed through ATMs, debit cards, and even personal computers. Banks
are targeting local employers to publicize the advantages of direct
deposit \-- advantages that, according to one research study, can add up
to more than \$1.25 for each payroll check that doesn't have to be
issued. Savings like that help explain why more than 50 percent of
private sector employers participate in direct deposit today \-- a
fivefold increase in little more than ten years. Still, that takes us
only half way to what our goal should be \-- a goal that other countries
with advanced economies are far closer to achieving.

Expanding participation among employees, of course, is crucial, and
banks are making significant headway in this area, too. Bankers may
visit work sites to distribute informational materials and answer
questions about direct deposit and the accounts that are based on them.
They're structuring these accounts in ways that make them increasingly
appealing. In at least one case, employees receive a debit card that, in
addition to its customary functions, can be used to transfer funds to
individuals in other countries at lower cost than a traditional wire
transfer. Other types of accounts offer electronic payment features,
enabling employees to pay recurring bills. And I know of a bank that
offers customers short-term loans of up to 50 percent of their regular
incoming direct deposit directly from an ATM. I can think of no better
or more constructive response to the payday lenders and others like them
who prey on our communities. It's one more way that mainstream financial
institutions can help low- and moderate-income Americans get off the
treadmill of debt and onto the road of greater financial security.

I believe that technology offers great potential for bringing the
unbanked into the financial mainstream, with all of its benefits. It
also offers new possibilities for financial institutions to develop
deeper and more profitable customer relationships. In order for these
possibilities to be achieved, banks, employers, and community
organizations must work collaboratively and creatively to understand the
needs of the individuals they serve. We in government have an important
role to play as well, but it's the work you do in our communities, day
in and day, that will make the most enduring difference in the lives of
our citizens.