In the News

BANK ACCOUNTS ARE passports required for admission to the mainstream economy. About 10 million Americans don't have them. That means they don't save. They pay hefty fees to cash checks or pay bills. And they aren't building the credit record needed to get reasonably priced mortgages.

These unbanked Americans, mostly poor, would be better off if they had bank accounts. Yet left alone, few banks seek this business aggressively. To most, it promises hassle without much profit.

Over the past decade, the government has been creative in trying to alter this. First there was the stick: The Community Reinvestment Act forced banks to serve poorer neighborhoods. Then the carrot: The Clinton administration tried to lure banks with subsidies and government-designed bank accounts. It made some noise and had some good ideas but achieved only a modest dent. Now comes the Bush administration, which is skeptical of such Clinton initiatives.

Poor folks, immigrants especially, often distrust banks or find them forbidding. Most banks, eager to cut costs and boost stock prices, find other customers more appealing. But poor folks still need to cash checks, wire money to relatives, pay bills and borrow in a pinch.

If they can't or won't go to a bank, they go elsewhere. The number of check-cashing outlets has doubled in the past five years. Revenues of payday lenders, which make small, very short-term loans to those who need cash between paychecks, rose to more than $2 billion last year from $800 million in 1998. The market works. So what's the excuse for government action?

One issue is that these companies often charge fat fees to cash checks -- 3% of the check's face value is common -- and charge interest on loans at an annual rate of 300% to 400%. (Many states allow this breach of usury laws because, among other things, it spares people going to illegal loan sharks.) With more competition from banks, those fees might fall.

Another issue is that people who buy money orders at well-fortified check-cashing storefronts aren't moving into the financial mainstream. They don't build credit histories and they aren't offered a way to save a bit so that they won't need payday lenders the next time the car breaks. "Banks cannot help the unbanked if they do not get them in the door," says John Caskey, a Swarthmore College economist.

TECHNOLOGY APPEARS to offer a way out. Eliminating paper checks saves money, reduces fraud and can erase the risk of bounced checks. So why not offer a low-cost bare-bones account with a debit card for ATM withdrawals and grocery purchases? And, where ATMs are scarce, why not try putting them in post offices?

That's what the government thought. To save money, the Treasury in the mid-1990s intensified efforts to replace government benefit checks with electronic direct deposits. So it did some product development that it felt banks weren't doing, and came up with Electronic Transfer Accounts for people who get federal checks.

To cover the cost of opening the accounts, the Treasury offers banks a one-time fee of $12.60 an account. It also promises a steady stream of deposits. Banks may charge no more than $3 a month, must allow four free ATM transactions a month and can't reject applicants with a habit of bouncing checks, as banks do for other accounts.

The program is off to a slow start. Although the Treasury promotes the accounts in leaflets accompanying checks and has signed up 600 banks, only 11,000 accounts have been opened since November 1999. In some places, banks don't push them. But even where banks seem enthusiastic, customers don't seem to be. Firstar Corp., a Midwestern bank known as US Bancorp after a recent merger, instructs tellers to push the accounts, distributes its own brochures and has opened more than any bank outside Puerto Rico, a special case. The net result: only 800 accounts in a 12-state territory.

MARKETING THESE accounts, it turns out, is as tough as inventing them. Yet no bank will invest in splashy ads for a product with so little profit potential. A Treasury experiment with putting surcharge-free ATMs in a few urban and rural post offices, though still being analyzed, isn't encouraging either.

Last fall, the Clinton Treasury turned its attention to the unbanked who don't get federal checks. With a $10 million appropriation from Congress, it planned an experiment in which four banks would get a one-time fee of about $150 an account to offer "First Accounts," similar to the ETA. The Bush Treasury quashed the initiative. It plans instead to use the money to get banks to offer accounts to high-school students, betting on a get-them-while-they're-young approach.

There's a temptation here for the government to walk away, leaving the unbanked to the check cashers, payday lenders and the few banks that court poor folks because they may someday be more profitable customers. It's a good bet the Bush administration will do that. That's unfortunate. Bringing left-out Americans into the financial mainstream is a small step toward healing wounded cities and sharing American prosperity more broadly. A few more experiments, and we might find a way to do that.

-- David Wessel