The recently enacted $1.9 trillion relief bill will go a long way to help struggling Americans, but it won’t address the sources of inequality. In the short-term, the bill provides a massive redistribution of wealth and resources to the bottom half of Americans, but it doesn’t alter the systems that actively redistribute wealth from the bottom to the top (like our upside-down tax system or rising rents for low-income people or stagnant wages in the face of massive profits). 

Many Americans understand this dilemma. A poll from March shows that 56% of registered voters feel “wealth inequality is a significant problem facing the country” and want the government to address it. The extraordinary response of the federal government during the pandemic (totaling nearly $5 trillion in relief over three bills) may have contributed to the sense that the state can play a role in producing positive economic change. Indeed, polling shows that 75% of Americans support the latest relief bill. As such, many Americans don’t just want a return to the status quo, they want a system that is more equal and humane, and they want the state to play a part in shaping that system.

Our financial system is one source of inequality. With 55 million people unbanked and underbanked, the lowest income consumers bearing disproportionate levels of fines and fees, persistent racial discrimination in mortgage lending, and declining levels of bank branches in poor areas, rural areas and communities of color, there is plenty to fix. We need institutions that are structurally designed to work in every community and provide affordable and impactful products. We spoke with experts to explore how community-owned and public banking can do just that.

Community-owned Banks

Community-owned banks are sometimes considered “relationship” banks because they are small and develop close relationships with communities. They are often locally controlled and have a long tradition of serving working-class people.

Credit unions are one type of community bank, and perhaps the most prevalent and visible form of community bank. They are owned by members who use their services and are governed by a board comprised exclusively of members. Anyone can become a member of a credit union when they open an account and maintain a small deposit.

The unique governance model of credit unions forces them to be accountable to their members and community, an arrangement that can produce powerful benefits. As Elizabeth Escobar, Chief Business Officer at Express Credit Union, explains, “The philosophy of the credit union industry is People helping People, therefore it’s baked into all that we do. [We commit] to support the most vulnerable and underserved.” In this model, credit unions must be responsive to the unique needs of their members. Express Credit Union, for example, serves a large Spanish-speaking population, and as a result, “We’ve focused on hiring bilingual staff and create content in Spanish to ensure we have the support and resources people need to access the services they are looking for,” Escobar explains.

Mutual Banks are another type of community bank. The first Mutuals were formed in the early 1800s by working-class immigrants in the Northeast who were shut out of the mainstream banking system. Mutuals were designed to place control of their services in the hands of the community. Like credit unions, Mutuals are owned by their depositors.

Mutuals have a lot of promise, as Doug Faucette, Director and General Counsel at America’s Mutual Banks, explains. “A mutual bank’s primary constituency is the community it serves. It exists for the community and is run by the community for the community.” The very structure of Mutuals requires that they take a long-term interest in the financial well-being of the community because, as Faucette explains, “Mutual banks by their legal form of organization cannot transfer wealth out of the community. All profit remains within the bank as accumulated earnings or net worth.”

Community banks have a lot of potential to help, but they don’t have the resources to compete with big banks. There are more community banks than noncommunity banks (a category which includes the biggest Wall Street banks), but noncommunity banks continue to grow in asset size and overall market share. In 2009, the average asset size of a noncommunity bank was $15 billion and rose to $38.4 billion in 2019. The average community bank asset size stayed virtually the same at roughly half a billion during that same time. In 2010, noncommunity banks controlled $11.4 trillion in assets vs. $1.9 trillion for community banks. In 2020, noncommunity banks owned $18.7 trillion in assets vs. $3.2 trillion for community banks (see graph).

Public Banking

Postal banking, universal accounts and public banks are promising tools that could produce significant changes to the banking system and improve the financial well-being of low-income people and communities of color.

Our recent report, Financial Access For All: Putting Banking Within Reach Through a Universal Account System, explains that a new postal banking bill “would authorize USPS locations across the country to act as nonprofit banks, offering low-cost checking and savings accounts, automated teller machines (ATMs), mobile banking and low-interest loans.” We had a postal banking system as recently as 1966 which, for more than 50 years, offered savings accounts to millions of working-class people.

Christopher Shaw, historian and author of Money, Power, and the People: The American Struggle to Make Banking Democratic, explained the impact of the postal savings system: “[It] welcomed millions of working-class Americans whom banks shunned. Fortunately, instead of hiding their money in a mattress or jars buried in the backyard, for more than a half-century, millions of people could access basic banking services through post offices in communities both large and small throughout the nation.”

A modernized version of the postal savings system would significantly impact millions of people. As our report explains, “Postal banking could benefit those living in banking deserts—especially in rural areas” and “could reduce reliance on predatory services.”

That same report defines universal accounts as “transaction or savings accounts that are accessible to all people, including those who are currently excluded from the financial system.” A universal account offered in the “FedAccounts [concept] would [establish] government-issued bank accounts, administered by the Federal Reserve, that are low-cost and accessible to all individuals.” In essence, universal accounts amount to what we think of as a public option in the health care debate.  

Prosperity Now’s expert on universal accounts, Myrto Karaflos, explains that universal accounts could help low-income people in several different ways. First, “Universal accounts would be accessible to low- and moderate-income people, who are often excluded from the financial system due to the high cost of banking.” Second, the accounts would be affordable, “with minimal fees and no minimum balance requirements.” And finally, “The accounts could help streamline the disbursement of government payments, like stimulus checks, which is especially relevant during an economic and health crisis like the current pandemic,” Karaflos explains.  

A public bank is one that is operated “in the public interest, through institutions owned by the people through their representative governments.” There is only one public bank in the continental United States: The Bank of North Dakota (BND). The BND was established in 1919 at a time when North Dakotans did not have access to affordable bank products and were charged up to 12% interest for loans. 

Public banks like the BND are proven to deliver significant benefits. They improve job growth, mitigate negative outcomes during recessions and support the growth of community banks. Dr. Amara Enyia, Policy and Research Coordinator for The Movement for Black Lives, and Advisory Board member of The Public Banking Institute, explains further: “Public banks can create a structural mechanism through which the revenues that are collected from working-class communities and the poor can actually be recirculated back into improved infrastructure in their communities (water systems, streets, walkways, etc.), or [create] access to capital for things like home loans, small business loans or even student loans that have typically been out of reach to them from traditional banks.”

The Public Banking Act introduced by Reps. Rashida Tlaib (D-MI-13^th District) and Alexandria Ocasio-Cortez (D-NY-14^th District), would allow for the creation of new public banks and even provide seed capital from the federal government. However, this bill, like the FedAccounts legislation and the Postal Banking Act, faces an uphill battle to be enacted anytime soon.

Structures that Incentivize Financial Well-Being  

Noncommunity (or traditional) banks certainly play an important role in the economy and provide invaluable services to many low-income communities, rural areas and communities of color. But on the aggregate, the financial system suffers from a market failure: their structure provides weak incentives to serve hard-to-reach communities or those deemed too risky. Conversely, institutions that are owned by the very communities that are underserved and viewed as high-risk, have strong incentives to serve their communities with high-quality products.

Dr. Enyia explains this point further: “Private banks are singularly motivated by profit, so lending to communities -- particularly economically marginalized communities -- is always viewed as a ‘high-risk’ undertaking.” And Christopher Shaw underlines the point, explaining, “Banks deem low- and middle-income Americans inadequately profitable. Meeting these people's needs requires postal banking to place public service ahead of profits.”

Community-owned banks and public banking can correct this market failure. But more importantly, these ideas are rooted in the spirit of solidarity. The purpose of these institutions is not just to produce revenue, but to invest in the well-being of our neighbors and fellow humans. Community-owned banks and public banking could bring millions of people into the banking system, position institutions to be more responsive and accountable to marginalized people and make the financial system more equal and humane.