The growth of the “public bank” will attract major consumer groups from the private sector


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Government and government financial institutions are hardly a new concept. The earliest documented was in ancient Mesopotamia, and it existed in the early days of the U.S. After President Andrew Jackson closed the United States’ Second Bank in 1836, almost all states tried to set up their own banks, but only one survived – in Northern Dakota.

Last year, however, there was renewed interest in so-called public banks. Most recently, the board of directors in San Francisco unanimously passed an ordinance in mid-June 2021 that would allow public banks in the city.

“A public bank can and should balance fiscal solvency as well as investments in residents, businesses and sectors that reflect the values ​​of San Francisco and advance issues of social, economic, gender, racial and environmental equity, among other things,” it says of the regulation.

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

That begs the question: why should existing financial institutions bother? You face many other challenges as overdraft fees fizzle out, neobanks gain a foothold, and the federal government cracks down on mergers and acquisitions.

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However, proponents of public banks say public banks could better serve minorities and other populations that they claim are typically neglected by the banking sector. Last but not least, a new federal bill that would support public banks could ensure that state institutions quickly expand and gain ground in the US that private banks may not be able to beat.

Federal funding for public banks

A new bill by US Representatives Rashida Tlaib from Michigan and Alexandria Ocasio-Cortez from New York, both Democrats, could ensure that public banks are successful this time – with the help of the federal government.

The bill – known as the Public Banking Act – would establish a public bank grant program, administered by the Treasury Secretary and the Federal Reserve Board, that would ensure that public banks get the funding to set up, charter and capitalize.

Congressmen both argue that a flood of public banks would strengthen colored communities.

“The time has come to open doors to people who have been systematically excluded and to offer a better option for those grappling with the cost of simply trying to participate in an economy to which they have every right have – but was manipulated against them, “Tlaib Competitions.

There was opposition to the bill from banking groups. For example, New York Bankers Association President Clare Cusack recognizes the problem Tlaib and Ocasio-Cortez are addressing, but believes public banks are not the best solution.

“While the New York Bankers Association recognizes that low-income and colored communities are hardest hit by the pandemic,” she explains, “a public bank is not the answer and would, in fact, raise false hopes for a quick fix that might can actually be long, tedious, untested and unpredictable. “

The bigger picture:

At the moment it looks like public banks are only targeting an audience that banks and credit unions overlook. However, it remains important that traditional institutions keep an eye on the trend as it could lead to a new competitive advantage.

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Catering for the underserved

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

A related but broader argument within the banking sector concerns the “bottom bank” and “no bank” populations. It’s been an ongoing tug-of-war between traditional financial institutions and a noisy group of consumers, interest groups, and even fintechs arguing over who isn’t given equal access to banking services.

The un- and sub-banks make up a good part of the population. In a May 2020 survey, the Federal Reserve estimated that 6% of adults did not have a bank account (those without any form of traditional bank account) and another 16% had no bank accounts (meaning they had a bank account but also used an alternative financial services product). .

Mission Creep:

Public banks can be a great option for the world’s no and no banking consumers. However, that doesn’t mean they don’t serve the segments traditional institutions focus on.

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

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

Traditional institutions may argue that in serving these underserved groups, public banks are not violating the private banking domain. However, 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 lower taxes in their territory because their profits flow back into the general fund of the public institution,” meaning that a public bank is primarily profitable for the state, not for the executives of the financial institution.

( dig deeper: Expand your base by using the Unbanked and Underbanked)

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

“It’s not only good for big companies but also for 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 would be no fees, interest rates would be low, and any profits generated could be returned to the county.”

What the competition can offer:

Because they are government-run – and therefore not subject to the same for-profit regulations as most traditional financial institutions – public banks can offer lower lending rates and fewer fees.

Public banks are less dangerous to credit unions than they are to banks. In fact, according to the Foundation for Intentional Community, there are only two main differences between credit unions and public banks: 1. The former are privately owned by their members, and 2. can only take commercial loans of less than or equal to. award 12.25% of their total assets.

On the other hand, public banks are owned and operated by government agencies and are able to provide significantly more loans.

( Continue reading: The future of banking: more competition means more disruption)

The only one so far

The Bank of North Dakota was founded in 1919 and continued to exist for other state-owned banks after the movement died out in the early 20th century.

Bank of North Dakota logo

It is structured very differently from other financial institutions. It is not FDIC insured and does not offer traditional convenience banking products such as debit cards, credit cards, or bills, but it does offer a wide range of products and services. Examples of what the BND has to offer:

  • Student Loans
  • Business loans
  • Home loan
  • Current and savings accounts
  • Credit lines
  • Cable transfers
  • Repurchase agreements

The BND, headquartered in Bismarck, operates with almost 200 employees and a seven-person board. It has no physical branches, but has credit intermediaries in Fargo, Grand Forks, and Minot.

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

When the bank was established, it was intended to be used primarily as a resource for farmers and the agribusiness – vital to the state of North Dakota. Over 100 years later, the focus is still on the original purpose.

“Although the streak of record-breaking profits has been broken this year, I believe this has been our best year yet,” said Eric Hardmeyer, president of the bank, in the company’s 2020 annual report. “We have tripled the number of loans we have given to the commercial and agricultural sectors,” the bank added, adding that it also hit record levels in SAVE college accounts – one of its college student product offerings.

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