Banking bills doomed in Congress still credited with fostering change

WASHINGTON — In an extremely polarized Congress, the odds of Democratic leaders advancing progressive reforms to shake up financial services are slim to none.

It may not matter.

Democrats such as Senate Banking Committee Chairman Sherrod Brown, D-Ohio, and House Financial Services Committee Chairwoman Maxine Waters, D-Calif., have pushed bills to offer free, federally backed accounts, restrict overdraft fees and cap consumer loan interest rates at 36%.

Such proposals have little chance of passing. Democrats hold a razor-thin majority in the Senate where 60 votes are required to pass legislation. But analysts say Democrats’ message focused on consumers having affordable financial services options is helping effect voluntary measures in the industry. Banks, experts say, want to preempt more credible legislative efforts and the perception that they don’t care about consumers.

“Being a member of Congress provides for a bully pulpit, and many banks, many financial institutions and businesses, as a general rule, want to avoid that press, avoid appearing in any way against the benefit of their customers,” said Ed Mills, a policy analyst with Raymond James.

In certain cases, banks are taking steps that are not as extreme as ideas proposed in Congress, but have objectives that resemble lawmakers’ policy goals.

For example, Brown has spent more than a year advocating for his plan to offer free digital accounts, or FedAccounts, held at the Federal Reserve to all consumers. (Consumers could access their accounts through a bank, credit union or post office.)

Democrats such as Senate Banking Committee Chairman Sherrod Brown, D-Ohio, and House Financial Services Committee Chairwoman Maxine Waters, D-Calif., have pushed bills to offer free, federally backed accounts, restrict overdraft fees and cap consumer loan interest rates at 36%.

Bloomberg News

The idea of a Fed-backed competitor to private financial institutions is a nonstarter for banks. But the industry has responded to demands for accessible and affordable products with accounts endorsed by Bank On, a national program through the Cities for Financial Empowerment Fund that connects consumers with attractive options at participating banks. Bank On accounts typically charge low or zero fees, and lack overdraft charges.

In October, the American Bankers Association called on all of its member banks to participate in the Bank On program.

“Banks offering Bank On-certified accounts now make up more than 50% of the U.S. deposit market share and are available in more than 41% of all active FDIC-insured bank branches nationwide,” said Naomi Camper, chief policy officer at the American Bankers Association. “So while there’s still a ways to go, we’re seeing that intentionality is creating scale. So for those sort of other proposals that go to the same policy goal, our view is we have a market-based solution that’s ready now that’s actually happening.”

Bank of America, Truist Financial, JPMorgan Chase, Wells Fargo and U.S. Bank are among institutions with Bank On-certified accounts that cost no more than $5 per month in fees.

Bankers are more prone to offer affordable products if they fear Congress will create a government-backed account for all consumers free or charge, said Isaac Boltansky, director of policy research at Compass Point Research & Trading.

“The more that you see progressive lawmakers pushing for that type of offering, which would be at its heart a means of disintermediating traditional banks, you’ll see more of a willingness within the C-suites in the boardrooms of banks to take more consumer-friendly stances to counter the messaging bills from the Hill,” Boltansky said.

Some see a similar connection between Democrats’ criticism of large banks’ overdraft policies and subsequent changes to overdraft fee structures announced by certain institutions.

At two hearings in May, CEOs of the largest banks — notably JPMorgan Chase CEO Jamie Dimon — took heat from lawmakers for overdraft fees collected during the coronavirus pandemic.

Not long afterward, Ally Financial’s online-only bank said that it was scrapping overdraft fees altogether. In August, TD Bank will raise the minimum transaction threshold triggering an overdraft fee to $10 from $5, and lower the maximum amount of overdraft fees per day to three from five. The Birmingham, Alabama-based Regions Financial will soon change the order in which it posts transactions, so that credits post before debits, in order to reduce overdraft charges.

These plans come as Rep. Carolyn Maloney, D-N.Y., who chairs the House Oversight Committee, has introduced legislation that would restrict the number of overdraft charges a bank can impose on a customer.

“This is policy by threat,” said Jaret Seiberg, an analyst at Cowen Washington Research Group. “But it’s achieving the goals of progressive Democrats. The industry is putting more attention and effort into low-cost accounts for consumers. Banks are dropping overdraft fees. And there’s a broader effort to reduce the number of unbanked consumers.”

Democrats’ messaging may also influence other policymakers. As Waters and other progressive have pushed a legislative plan — which has thus far failed to pass — to cap consumer loan interest rates at 36%, state legislatures have enacted their own interest rate caps.

“In terms of the practical side, I’m of the view that the more they push the 36% rate cap, the more likely it is that we will continue to see state legislatures adopt similar rate caps, like we’ve seen in Illinois and Virginia and California,” said Boltansky. “And furthermore, I think that the headline pressure from the Hill is going to lead to more regulatory action and scrutiny in particular from the [Consumer Financial Protection Bureau].”

Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said Brown and Waters have wielded power even if their legislation never becomes law.

“People overestimate Congress’s hard power in making laws and underestimate the impact on Congress’s soft power in shining a spotlight,” said Aaron Klein, senior fellow in economic studies at the Brookings Institution. “Chairmen of committees have a remarkable ability to change industry practices through hearings, letters, having a conversation, and I think you’re seeing Chairman Brown and Chairwoman Waters intelligently use the power of the gavel to move industry in the direction of lowering costs for services.”

Others say there is a benefit to banks offering new products consistent with the goals of proposed legislation rather than waiting for Congress to force their hands.

“For the industry, there are a number of ideas that get proposed that in the near term, have next to no chance of passage,” Mills said. “But when there is a crisis, when there are shifts in majorities … the more they resist change, the more they become susceptible to that change being forced upon them.”

Despite the unlikely path forward for legislative proposals such as the FedAccounts, restricted overdraft fees or a 36% consumer loan interest rate cap, a spokesperson for Brown said the senator still believes Congress should pass his legislative proposals while Democrats are in power.

“Senator Brown believes that the Biden administration and the Democratic majority in Congress represent a real opportunity to make sure our economy serves working families — not big corporations and Wall Street,” the spokesperson said. “Bills like the Banking for All Act and a 36% interest rate cap are central to that effort, and would show the American people that government is on their side.”

But industry representatives worry that the legislative proposals offered by congressional Democrats could ultimately restrict product offerings to consumers.

“The problem with legislating in this area is it doesn’t necessarily account for what customers want,” said Ed Hill, senior vice president and head of government affairs at the Bank Policy Institute. “The best way to meet these needs are by going out and speaking to consumers, by designing products by testing them, by sometimes failing, and developing new products or changing features, and that sort of thing. And legislation is just too inflexible to do that.”

Some argue that the recent product changes announced by banks are a response to industry competition and consumer demand rather than Congress.

“You know what’s driving change in the industry? The consumer,” said Richard Hunt, president and CEO of the Consumer Bankers Association. “Banking is a highly competitive market with nearly 5,000 institutions for consumers to choose from. To meaningfully compete, banks must respond to the evolving demands of their customers, or they risk losing market share to another financial institution whose products and services better suit them.”

Still, observers believe that lawmakers’ public and private comments are having an impact on industry practices.

A former Senate staffer said banking industry changes responding to legislative proposals are similar to lawmakers influencing worker salaries without having enacted a minimum wage increase.

“It’s a little bit like what Chairman Brown’s big push used to be on a $15 minimum wage,” the former Senate staffer said. “That didn’t become law. But he would ask every CEO that he met with if they paid a minimum of $15 an hour for their employees. … You’ve seen now across the industry, that’s pretty standard. Some companies have announced a $20-an-hour minimum wage.”

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