Facebook’s Libra cryptocurrency is part of a disturbing financial trend

In June, Facebook announced plans to effectively create its own currency, called Libra — and eventually a financial system to go with it. Libra was, of course, cloaked in corporate-speak that promised lower costs and more freedom for consumers and businesses through “innovation” or “inclusion” or “scalability.” But the hubris, from a company with such a mottled record complying with privacy, data and other laws, was so galling that it sparked something rare these days: bipartisan condemnation.
What should really concern critics, though, is that Libra is a small part of a larger, more troubling trend: the blurring line between finance and commerce. This trend, now a few decades old, has significant implications for customer privacy, competition, financial risk, and concentrated economic and political power. Stopping Libra would be a sign that policymakers are starting to take these issues seriously, but unwinding the threat of the industry-finance colossus will be much harder.
In his 1936 message to Congress, President Franklin Roosevelt warned of the risks from “domination of government by financial and industrial groups, numerically small but politically dominant.” With such concerns in mind, our nation has held that it’s critical to separate banking from commercial business — even enshrining this principle in policy. In practice, however, legal loopholes created by lawyers and lobbyists let financial and commercial companies combine under the same corporate structure.
First, industrial companies opened their own banks because, as the robber Willie Sutton once put it, “That’s where the money is.” These “industrial loan” companies are state-chartered banks owned by nonfinancial corporations like Harley-Davidson and Target to make loans, offer credit cards or process transactions. They are allowed to take customer deposits without the same oversight that applies to most banks. For example, their nonfinancial parent companies are not subject to oversight by a banking agency, regulators have fewer tools to address solvency issues, and these banks have fewer restrictions on their activities in the event that they fail to serve the credit needs of their communities. It’s an attractive proposition because deposits are a cheap source of funding, government-provided deposit insurance covers losses up to a certain amount, and retailers are able to drum up business by financing customer purchases.
Industrial loan companies were a sleepy part of the financial marketplace until big retailers like Walmart and Home Depot saw an opportunity and applied to open their own banks, in the face of opposition from community banks, consumer groups and labor unions. In the lead-up to the financial crisis, giant commercial lenders GMAC and GE Capital used their banks to access cheap deposits to fund some of their risky activities, like packaging securities backed by risky mortgages, leading to billions of dollars in taxpayer bailouts.
Unfortunately, instead of eliminating this loophole, the 2010 Wall Street reform law called only for a three-year pause to study industrial bank charters. While there were no industrial charter applications from 2011 to 2016, Big Tech is now looking to come through the door that Congress left open, and regulators in the Trump administration have signaled willingness to entertain their applications. So far, these applications have largely been limited to firms that already offer financial services, such as the $28 billion payment company Square. But companies like Facebook and Amazon probably aren’t far behind. (Amazon founder and chief executive Jeff Bezos owns The Washington Post.)
Meanwhile, the 1999 law that repealed the Depression-era Glass-Steagall Act also allowed banks to own and operate commercial businesses. In congressional testimony, a JPMorgan executive argued that becoming a diversified financial holding company would allow it to offer new conveniences such as opening an in-house travel agency to serve its credit card customers.
It’s one thing for a bank to make a loan to, or hold publicly traded shares in, a company with millions of shareholders. But things get more treacherous when a bank is the owner and operator of a company that gives it special insights, market advantages, and the ability to influence nonfinancial businesses in a way that benefits its own financial positions but costs everyone else. For example, a bank that owns an oil terminal could give its commodity traders special insights on regional oil supplies or even seek to control the flow of oil, depending upon its bets in the oil futures markets. That is why banks are supposed to keep the businesses they own at arm’s length through financial and management firewalls, such as limits on the amount of capital a bank can commit to these businesses and prohibitions against involvement in day-to-day operations.
But investigations in 2013 and 2014 by two Senate committees revealed that banks were regularly exceeding legal limits on ownership and control. Businesses that rely on aluminum, for instance, reported that a metals warehouse owned by Goldman Sachs was driving up the cost of that commodity, raising the price of products such as canned beer and soda. JPMorgan used its energy trading business to manipulate energy markets, making consumers pay higher electricity rates. After these scandals, regulators promised reforms, but five years later, they have done nothing.
This is the real threat of Libra. Facebook could eventually open its own bank and provide a full suite of credit and payment services. Under that arrangement, it could offer favorable credit terms and faster transactions to customers who use its banking services at affiliated retailers. Conversely, Citigroup could open an online retailer, offering lower prices to its bank customers. Either of these scenarios would spell trouble for small banks and retailers forced to compete on an unlevel playing field against big businesses with outsize market power.
Then there’s the question of privacy. Commingling a digital marketplace with all of a customer’s financial information, including purchases and deposits, is bad for consumers and taxpayers. First, it centralizes sensitive information — contradicting the supposed purpose of decentralized cryptocurrencies — giving banks and tech companies the ability to mine customers’ data and determine the maximum price that each is willing or able to pay. Second, concentrating so much customer information in a single entity also makes it extra vulnerable to data breaches and abuse. Third, combining a merchant with banking, payment and credit services has the potential to undermine important consumer protections, including credit reporting, debt collection and wage garnishment, giving a single company powerful leverage over its customers by reporting negative information about them, denying their transactions, accessing their bank account funds and so on.
Finally, allowing nonfinancial businesses access to the federal financial support programs that backstop our banking system could lead to taxpayer-funded bailouts for troubled retailers, tech companies and others. There are supposed to be firewalls preventing this, but those contain holes of their own.
Consider how all of this is already playing out: The largest Japanese online marketplace, Rakuten, has applied for a U.S. industrial loan company charter, prompting the banking industry’s largest trade association to raise concerns about “the free flow of credit, consumer privacy and possible conflicts of interest.” Walmart recently filed a patent application to create its own cryptocurrency, and Amazon is targeting its less-creditworthy customers with a subprime credit card, which has higher rates, that can be used only on its platforms.
Louis Brandeis said of the early-20th-century trusts that “both the financial concentration and the combinations which they have served were, in the main, against the public interest.” Big banks and big tech may rely on fancy algorithms and apps instead of railroads, but his words are just as true today.
Regardless of whether Facebook backs away from its proposal voluntarily or is forced to do so, public officials need to send a clear message that any other companies contemplating a similar scheme should think again. It wasn’t the first company to have this idea, and it surely won’t be the last.


What issues face the approximately 28% of Americans with limited or no access to traditional banks?

Granting retail stores like Walmart, Target, and Safeway bank charters will help the 10 million underbanked Americans unable to afford the costs associated with traditional banks. Studies indicate that the unbanked depend on lower fees offered by prepaid debit cards and/or money orders to pay bills or cash checks instead of the using payday loans or cash checking services. Eliminating some government regulations and having more retail stores offer prepaid debit cards such as Walmart's successful Bluebird American Express card which does not require credit checks will help the underbanked better manage their finances. Exclude documents related to loans.

Find research that supports this financial question.

Wal-Mart introduces money-transfer service

Wal-Mart is launching a new domestic money transfer service called "Walmart-2-Walmart" to compete directly with Western Union. (John Gress/Reuters)
Wal-Mart introduced its own money-transfer service Thursday, moving one step closer to becoming one of the biggest financial services providers in the nation.
The service, called Walmart-2-Walmart, allows customers to transfer funds between any of its 4,000 U.S. locations, enabling the big-box retailer to claim a cut of the market now served by Western Union and MoneyGram.
The recipient can access the money with a personal identification number. Wal-Mart will charge $4.50 for any transaction under $50 and $9.50 for larger transfers up to $900. That’s substantially cheaper than MoneyGram, which has branches inside Wal-Mart stores across the country.
“We are leveraging our size and our scale to make a difference for our customers,” Daniel Eckert, vice president of financial services for Wal-Mart U.S., said in a call with reporters.
Officials at Wal-Mart say the new service will have broad appeal among the “unbanked” and “underbanked,” the 28 percent of Americans with limited or no access to the traditional banking system. That population tends to use alternative financial firms such as check cashers that also offer bill pay and money order services. Over the years, Wal-Mart has tried to siphon off those customers by providing the same products at lower rates.
“Walmart-2-Walmart is really an extension of our broad assortment of everyday financial services that we offer to our customers,” Eckert said. “This is about providing those everyday financial services for less and making sure that they can save a little here and there.”
The company broadened its reach two years ago with the introduction of Bluebird, a prepaid American Express card that functions like a bank account. Wal-Mart aimed the card squarely at customers of the banking industry, which has fought vigorously to keep the retailer from obtaining a bank charter.
Company executives have said Wal-Mart is no longer interested in delving into banking, especially when its current strategy affords many of the same benefits without the regulatory headaches. Indeed, the retailer capped the transfer amount at $900 to avoid triggering regulations that require companies to file activity reports.
“By capping the amount at $900, we could reduce some of the additional complexities that come with sending and receiving money in the U.S.,” Eckert said. “If you could structure your service in a way to operate for less at a certain break point, it allows us to provide a simple and straightforward architecture at an everyday low price.”
Walmart-2-Walmart will be available starting next Thursday. The company, despite its global reach, will limit the service to the United States. Ria, a subsidiary of Euronet, is the licensed money-transfer operator for Wal-Mart transactions.


Growth of prepaid could be boon for banks on the back end

Prepaid cards are attractive for banks because they are exempt from an amendment in Dodd-Frank that restricted the amount banks could earn from debit and credit card fees. (John Terhune)
The entrance of more retailers such as T-Mobile into the prepaid debit card market could entice more retailers to launch their own cards and more banks to back them.
Behind every prepaid card is a bank that routes transactions and holds deposits in exchange for fee income. A handful of regional banks have dominated this niche market, but as the industry grows, more institutions could latch onto the service to offset diminishing revenue.
Gaining a foothold as a sponsor, however, entails a level of management and regulatory compliance that few banks can handle or afford. And as government agencies crack down on banks for failing to oversee their third-party partners, the risks of the business could outweigh the rewards.
“There’s great demand for bank sponsors,” said Karen L. Garrett, a partner in the banking and financial services division of Stinson Leonard Street. “But it’s not something to be done without an enormous investment into the infrastructure to manage the whole thing.”
Still, in the age of the Dodd-Frank financial overhaul, banks have become adept at dealing with regulation and are better equipped to comply with government demands than other financial institutions are, said Greg McBride, senior financial analyst at Bankrate.com.
Banks back a variety of prepaid products, including ones used for general purchases, corporate payroll and government tax refunds or benefits. Prepaid card sponsors make money off deposits, the charges consumers incur for using the card and interchange — the fees merchants pay when people purchase goods with plastic.
“Our goal is to balance our portfolio,” said John Barbella, senior vice president at Bancorp Bank, which sponsors the Visa prepaid card that T-Mobile introduced on Wednesday. “With benefit cards, there are significant dollars being spent at much lower margins. General purpose products might be a bit more profitable on the front end, but it’s difficult to retain those consumers because often there’s not a consistent stream of income tied to the card.”
Barbella said the industry has benefited from an explosion in the use of prepaid cards since the credit crisis. Consumers made 2.78 billion prepaid Visa and MasterCard transactions totaling $99.5 billion in 2012, up 19 percent from the prior year, according to the most recent data from Nilson Report, a trade publication.
Bancorp Bank is the largest prepaid sponsor, with nearly 25 percent of the market share, according to Nilson.
The firm, along with its main competitor MetaBank, has held top rank in the sponsorship business during continued consolidation. As government regulators raise concerns about safeguards and fees tied to benefit and payroll cards, some banks have exited the market.
Earlier this month, JPMorgan Chase said it planned to stop issuing prepaid cards for corporations and the government, in light of a New York state probe into the fees workers encounter for using the cards.
“The barriers to entry are so much more significant now than they were eight or 10 years ago,” Barbella said. Banks have to ask themselves: “Can you really afford to comply at the levels required when you don’t have a portfolio in place to generate the revenues to offset that expense?”
McBride contends that regulatory and reputation risk are a part of the calculation in every service that banks offer, and the growth opportunities in sponsorship may be enough to offset that gamble.
“Payment transactions have been an area that banks have identified as a potential for revenue stream where if they’re not careful,” they can be pushed out of the business altogether, he said. “They understand the risks.”
There is more than one avenue for banks to participate in the prepaid market, McBride said, noting that more banks are offering their own cards to existing customers and people who might not qualify for a checking account.
About a dozen of the country’s largest banks, including JPMorgan and PNC Bank, offer their own prepaid cards. It is unclear how much banks are making from these cards, as they don’t break out the revenue in their earnings. But the cards are attractive because they are exempt from an amendment in Dodd-Frank that restricts the amount banks can earn from debit and credit card fees.


The pros and cons of ditching cash for electronic currency

David Wolman can envision a time when we won’t need to use cash. In his cashless society, people can text money.
But I’m not buying it. Didn’t we learn something from the Great Recession, when an over-reliance on all things not cash nearly took down our economy?
Nonetheless, I was quite intrigued by the mobile money world Wolman advocates in his book “The End of Money: Counterfeiters, Preachers, Techies, Dreamers — and the Coming Cashless Society.”
I’ve selected “The End of Money” for this month’s Color of Money Book Club — not because I agree with Wolman that we ought to ditch our dollar bills and coins but because he presents a fascinating and engaging thesis.
Wolman, a contributing editor at Wired magazine, writes: “Although predictions about the end of cash are as old as credit cards, a number of developments are ganging up on paper and metal money like never before: mistrust of national currencies, novel payment tools, anxiety about government debt, the triumph of mobile phones, the rise of virtual and alternative currencies, environmental concerns, and a wave of evidence showing that physical money is the most harmful to the billions of people who have so little of it.”
Wolman provides a crucial look at the role of cash starting with the Yuan Dynasty in 13th-century China, when coins were replaced with paper money. He introduces a Georgia pastor who believes the end of cash will signal the beginning of Armageddon.
From the start, Wolman knows it’s going to be tough to get people to part with their cash. But, he writes, “The challenge of convincing people that a technology is trustworthy is nothing new. . . . Luckily, humanity has a solid track record of warming to innovations, including money-related ones.”
I’ll concede that point. It was only recently that I felt comfortable depositing checks at an ATM.
Wolman describes meeting electronic experts in Japan who are developing biometric technology to make our easy plastic payments even easier. “One of these technologies uses the unique three-dimensional pattern of veins within every person’s fingertip. Touch your finger to a register, vending machine or subway turnstile and you can instantly settle up without having to break your stride. . . . I have a hard time seeing this kind of technology as negative,” he says.
Yet, the technophobe that I am, I see so many negatives.
I have faith in my cash. I see the value in using it over electronic means such as credit and debit cards. Studies show that using plastic influences people to overspend. Paying with plastic doesn’t register in people’s brains the same way as when they use cash.
I don’t trust that the minds behind electronic money will not manipulate people into spending more than they can afford. With cash, you have limitations. If you go to a store and have only $100 on you and no other form of payment, you can only spend up to that amount. Cash is a stopgap.
Wolman shares my concern about credit and how it can be a catalyst for personal debt. But don’t use the problems with plastic to dismiss the argument that we should get rid of cash, he says. He wants to see someone build an app that will “simulate the pain in spending currently only associated with cash.”
What about the people who rely on cash for tips, you might ask?
Perhaps soon you will be able to tip by aiming your electronic device at the tip receiver’s smartphone, Wolman says.
The most compelling argument for getting rid of cash comes when Wolman talks about the poor, whose lives are financially marginalized because they don’t have easy and affordable access to basic banking services. He visits Kenya and India to look at ways some are helping the poor transact without cash by using cellphones.
“When your only option is cash, your assets are stuck in the material world,” he writes. “The poorer you are, the more crushing the costs and risks of cash become. . . . A fire or natural disaster can obliterate your meager savings.”
Wolman is probably right that someday we will transition from physical money to electronic currency. I’m not ready to embrace his futuristic digital world, but he did come closer to convincing me that we are coming to an end of money.
I’ll be hosting a live online discussion about “The End of Money” on April 5 at 1 p.m. at washingtonpost.com/conversations. Wolman will join me to talk about his hope for a cashless society. For a chance to win a copy of this month’s book club selection, send an e-mail to colorofmoney@washpost.com with your name and address.
Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071, or singletarym@washpost.com. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested. To read previous Color of Money columns, go to postbusiness.com.


Say goodbye to your neighborhood bank branch

report, which was published late last month. The number of bank branches in the United States — represented by the dashed blue line in the chart below — could shrink by a third within the decade, according to their forecasts. Banks per capita. (Citi) Branches just don't matter as much to customers Customer preferences are key to that industry transformation. What they want and expect from banks has changed dramatically in just a few years. In just two years, the local branch went from being a concern of half of banking customers to just a fifth. Results from a banking consumer survey. (Accenture) Separate data, from industry analysts Mercator Advisory Group and cited by Citi, paints the same picture: The share of customers who reported going to a branch to speak to a teller at least once in the previous year fell from 79 percent to 70 percent from 2011 to 2014. The share that reported visiting a branch to speak with a customer service representative fell from 62 percent to 45 percent. The rising importance of Internet services As branches matter less, online banking matters more. For the first time in Accenture's research, good online services ranked as the top reason to stick with a bank. Some 38 percent of consumers surveyed last year cited that as a reason to stay with their bank, while just 28 percent cited branch location. Twenty-eight percent also cited low fees. That holds true for populations that have long been used to visiting branches, too: Among customers over the age of 55, the preference for online banking leads the desire for convenient branch locations by a similar 10-percentage-point margin. "This evolution in consumer preference signals a redefinition of banking convenience," the report's authors wrote. "It is no longer always measured in miles to the branch or extra service hours — it is increasingly measured in clicks and apps." A deeper dive into the Accenture data, represented in the Citi chart below, shows how little branches factor into most bank interactions. Overall, customers engage with their banks an average of 17 times a month. Yet only two of those interactions involve human contact. In the United States, only two out of 15 monthly bank interactions involves a branch. "Banks will follow consumer behavior and close branches as they see their consumers shift away from branches to digital," the authors of the Citi report write.

A customer uses an ATM in Athens in this 2012 file photo. (Angelos Tzortzinis/Bloomberg)
That bank branch on the corner — and the one on the way to work — may not be there much longer.
As technology transforms banking, like it has so many other sectors, the consequence could be a dramatic decline in the industry's outposts over the next decade, experts say.
Former Barclays chief executive Antony Jenkins laid it out in particularly stark terms in a speech last fall: The global industry, under pressure to meet customer demands for automation and cheaper services, will slash employment and branches by 20 percent to 50 percent over the next decade, he estimated.
"I have no doubt that the financial industry will face a series of Uber moments," he said in the late-November speech in London, referring to the way that Uber and other ride-hailing companies have rapidly unsettled the taxi industry.
And that's not just the opinion of one well-informed man.
A sharp drop in fixed-income trading slammed results at Bank of America. Profit also fell at Wells, but the bank managed to grow revenue.
In a recent report, analysts with Citi said they agreed with Jenkins's view that the number of bank branches could be cut in half over the next decade. A separate survey from Accenture, the management consulting company, shows why: Shifting consumer behavior.
"We believe the consumer banks in the US and Europe are at a tipping point," wrote the authors of the Citi report, which was published late last month.
The number of bank branches in the United States — represented by the dashed blue line in the chart below — could shrink by a third within the decade, according to their forecasts.
Banks per capita. (Citi)
Branches just don't matter as much to customers
Customer preferences are key to that industry transformation. What they want and expect from banks has changed dramatically in just a few years.
In 2013, Accenture found that 48 percent of Americans surveyed said they would switch banks if their current provider's local branch closed. In last year's survey, that share shrank to just 19 percent.
In just two years, the local branch went from being a concern of half of banking customers to just a fifth.
Results from a banking consumer survey. (Accenture)
Separate data, from industry analysts Mercator Advisory Group and cited by Citi, paints the same picture: The share of customers who reported going to a branch to speak to a teller at least once in the previous year fell from 79 percent to 70 percent from 2011 to 2014. The share that reported visiting a branch to speak with a customer service representative fell from 62 percent to 45 percent.
The rising importance of Internet services
As branches matter less, online banking matters more.
For the first time in Accenture's research, good online services ranked as the top reason to stick with a bank. Some 38 percent of consumers surveyed last year cited that as a reason to stay with their bank, while just 28 percent cited branch location. Twenty-eight percent also cited low fees.
That holds true for populations that have long been used to visiting branches, too: Among customers over the age of 55, the preference for online banking leads the desire for convenient branch locations by a similar 10-percentage-point margin.
"This evolution in consumer preference signals a redefinition of banking convenience," the report's authors wrote. "It is no longer always measured in miles to the branch or extra service hours — it is increasingly measured in clicks and apps."
A deeper dive into the Accenture data, represented in the Citi chart below, shows how little branches factor into most bank interactions.
Overall, customers engage with their banks an average of 17 times a month. Yet only two of those interactions involve human contact. In the United States, only two out of 15 monthly bank interactions involves a branch.
"Banks will follow consumer behavior and close branches as they see their consumers shift away from branches to digital," the authors of the Citi report write.
How consumers interact with their banks. (Citi)
But geography matters
While Citi expects an industrywide decline, it expects the transformation to play out differently both globally and within countries.
Generally, developed markets can expect branch numbers to dwindle, while emerging markets can expect the opposite, the authors write. That applies to the United States, too, even though it seems to lag its European and Nordic peers by about five and 10 years, respectively.
While the number of branches per capita remained unchanged in the United States from 2004 to 2014, it dropped 30 percent in Nordic countries, 22 percent in East Asia and the Pacific and 17 percent in the Euro zone, according to World Bank and Citi data. The number of branches per capita rose 26 percent in Latin American and the Caribbean.
Despite the "massive pressure" that Barclays's Jenkins predicts, there will be regional variation in the trend toward closing branches even within countries. Wealthy cities, such as New York, and fast-growing suburbs may see an increase, even as branches are shuttered elsewhere in the country.


The basics of chip-and-PIN credit cards

We’ve gotten a lot of questions from readers lately about chip-and-PIN credit cards, also known as EMV cards (for Europay, MasterCard and Visa, the originators of the technology). Although they’re almost universal in Europe, credit card companies have yet to widely offer them to American customers. For travelers headed around the globe, here are the basics:
What is a chip-and-PIN card?
A chip-and-PIN card looks pretty much like the plastic you’re used to. But it’s embedded with a special chip that contains the same information that has traditionally been contained in the magnetic strip along the top of a standard card (some cards have both). When you swipe a chip-and-PIN card, you must enter a PIN to complete your purchase, the way you do with a debit card.
Why the move to chip-and-PIN?
(MARCO GORAN ROMANO)
Chip-and-PIN cards are more secure, says Anisha Sekar, vice president of credit and debit products for the consumer site NerdWallet. The chips are harder to clone, reducing the likelihood of fraud. Europe and Canada are much farther along in adopting a chip-and-PIN system.
What’s the impact on travelers?
Americans carrying cards equipped with magnetic strips may encounter problems when making purchases abroad, especially at unattended kiosks, such as at train stations or gas pumps. Merchants on a chip-and-PIN system can still process our dowdy strip cards, but you may need to press them to do so.
Why have American cards been slow to adopt chip-and-PIN technology?
There are costs — new cards, new equipment, etc. — associated with implementing the chip system, for both companies and merchants. Also, priorities have been different over the past few decades, credit card companies say. Europe invested in chip technology early on so that transactions could be approved at the point of purchase instead of over telecommunications networks. Using those networks is cheaper in the United States.
Why does it seem as if American chip-and-PIN cards are targeted to more elite customers?
Credit card companies figure that their top-tier cardholders are the ones mostly likely to be traveling abroad, where chip-and-PIN technology is widespread.
If you’re not sure whether your card has a chip, it never hurts to ask. Sekar says that Citi MasterCard will offer customers a chip card upon request. Some Bank of America cards offer chip-and-signature technology.
Wait, what? Now there’s chip-and-signature?
You bet. It has the same embedded chip, but instead of entering a PIN on a machine to verify your purchase, you sign a receipt, just as you’re accustomed to doing here. Of course, this may not be much better than a traditional magnetic strip card if the terminal you’re at is PIN-only.
How are chip-and-PIN cards different from RFID credit cards?
RFID, or radio-frequency identification, cards are contactless. They have a chip and radio antenna that transmit account information, raising concerns (which people are still arguing about years after the cards were introduced) that criminals may use readers to skim consumer details. Chip-and-PIN cards work only when inserted into a merchant’s reader.
So when will we see more American cards with chips?
American Express, Discover, Visa and MasterCard plan to introduce widespread chip technology in the next two to three years, Sekar says. “All of them will hold merchants liable for fraudulent transactions if the merchant doesn’t accept EMV technology beginning in 2015-2017, depending on the card network and the type of transaction.”
What should we do in the meantime?
Check with your credit card company to see if you can get a chip card. If you travel a lot, you might consider applying for a new one with the technology. The State Department Federal Credit Union, which anyone can join through its partnership with the American Consumer Council, is a good option. (Bonus: The SDFCU cards also have no foreign transaction fees.) In addition to credit cards, SDFCU offers chip-enabled prepaid cards.
And be prepared to gently insist that foreign merchants swipe your magnetic-strip card.
Do your research, because it’s not just chips that you need to worry about. Certain cards aren’t accepted in certain parts of the world, period. Sekar says that Africa, for example, is a dark zone when it comes to Discover cards. One reader reported to us that she hasn’t been able to use her Visa card at some locations in Germany, where she has moved for six months.
When in doubt, carry a little extra cash.
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Facebook’s cryptocurrency won’t help the poor access banks. Here’s what would.

Financial technology Read more: Facebook’s Libra cryptocurrency is part of a disturbing financial trend

When Mark Zuckerberg testified before Congress to advocate for Libra, Facebook’s new venture in blockchain currency, he cast it as a way to alleviate global poverty. Millions of people in the United States, and billions worldwide, lack access to basic banking services in what he characterized as a “stagnant” and exclusionary financial system. “It’s failing them,” said the Facebook chief executive, later adding, “The Libra project is about promoting financial inclusion through a safe, low-cost and efficient way of sending and receiving payments around the world.”
Zuckerberg is absolutely right: Banks no longer serve low-profit customers and communities. Deregulation and waves of mergers and consolidations have created banking deserts across the country, where the only ATM in town can charge up to $7 per transaction, and check cashers and payday lenders have filled the void. Even when they make branches available, banks repel low-income depositors with charges and fees, or with three- to five-day payment processing delays that overburden those who need their weekly paychecks to cover their immediate expenses. As a result, 1 in 4 Americans is unbanked or underbanked. Low-income families spend billions of dollars and valuable time paying for checks to be cashed, refilling prepaid debit cards and paying bills in person.
But the solution won’t come from a new, privately controlled cryptocurrency system, one rife with potential risks.
Financial technology
The blockchain ledger may represent a big technological leap forward, but our financial system’s problems with exclusion and inefficiency don’t result from faulty technology. Our current payments system already can provide services to the underbanked and fulfill Libra’s promise to allow users to send money as fast as one sends a text: Venmo, Square, PayPal, credit card apps and other mobile banking platforms perform that function. But all require users to have bank accounts. Public policy dictates that only banks can access the payments system, and the banks made a business decision to drop their least profitable consumers while regulators have stood by.
In many ways, cryptocurrency is a solution in search of a problem. Or, rather, it solves one particular problem — making fast and anonymous transactions at the touch of a button — and does that only by bypassing regulatory controls.
The Know Your Customer requirements, for example, mandate that banks verify the identity of their customers and stop suspicious activity, which might include funding terrorist groups or sex or drug trafficking. Further restrictions on money transfer attempt to combat the trillions of money laundered annually. Other regulations, including the Bank Secrecy Act, force banks to closely monitor all transactions. All of these laws make the banking system less agile than a new Facebook currency could be, but that built-in friction prevents crime, protects consumers and reduces systemic risk.
In attempting to circumvent other important safeguards, Libra could create liquidity or systemic risks that the entire federal banking framework was set up to prevent. The banking system is insured and protected by a massive federal infrastructure, including Federal Reserve liquidity support, FDIC insurance and a secure payments system. These restrictions, the product of centuries of trial and error, were designed to prevent specific historic harms like constant bank runs, liquidity crises and monetary instability. They are designed to protect customer deposits and the integrity of the payments system. Private companies shouldn’t be allowed to bypass these safeguards in the name of international competition. Zuckerberg has warned that China is “moving quickly to launch similar ideas,” but even the Chinese government prefers to invest in U.S. Treasurys over other options: The U.S. dollar is the world’s preferred currency because of these safeguards — not despite them. Facebook has yet to demonstrate that it can be trusted not to compromise and manipulate our personal information — do we really want to trust them with our money?
By creating and controlling a currency system, Facebook will be positioned to make decisions that will affect the entire economy. (Facebook has promised that it is not trying to compete with the U.S. dollar or create an alternative currency, but that’s exactly what Libra is: a form of value that can be exchanged among businesses and individuals. That is the definition of currency.) Outsourcing important monetary policy decisions to any private company, but especially one as large and reckless as Facebook, carries huge risks. If Libra succeeds in dominating the payments system as it already has in so many other sectors, the Libra will be an independent form of currency, one not issued by the Treasury. Any new currency is inherently volatile, but because Libra is pegged to the U.S. dollar, Libra’s risks will affect the dollar’s risks. Libra also links the dollar to a basket of other currencies, which creates openings for currency speculation, liquidity crises or a situation where the Libra association (a group of tech insiders unlikely to exert any independent control) makes de facto decisions that affect the currency decisions of sovereign nations.
It’s true that financial inclusion would help millions of Americans and benefit the economy. But it can be achieved through time-tested and democratic institutions. In fact, the United States already has a public payments system: the Federal Reserve. Congress created the Federal Reserve in 1913 as a people’s central bank, with a mandate to establish payments markets with an “overall concern for safety and soundness, promotion of operating efficiency, and equitable access.” The Fed’s charter explicitly states that it exists “to serve the public interest” and to increase the integrity, efficiency and equity of U.S. payments. It was a public institution by design and has remained the most secure and trusted network worldwide.
Thus far, the Fed has made its payments system available only to banks, but it could open that system to all Americans with a few easy reforms. FedAccounts, for example, would enable any individual or business to access the payments system. Real-time payments would remove the unnecessary delay in payments processing. Then there’s my personal favorite: retail point of contact operations such as a post office checking account. These would allow the unbanked or underbanked to have a simple checking account at their local post office, to get their paychecks cashed immediately and then to use whatever mobile app they prefer to send and receive money. Such simple policy changes could increase savings, ease access to funds, and help many individuals and communities cross the cash-digital divide.
Zuckerberg says Libra will help the disadvantaged, a highly dubious claim for a massive private corporation that mainly aims to create shareholder profits. It is ironic for “the richest man in the world to come here and hide behind the poorest people,” as Rep. Brad Sherman (D-Calif.) pointed out. That’s because the financial system’s issues are not problems with technology: They are problems of policy. They should be addressed in Congress and the people’s bank, not in Facebook’s boardroom.
Read more:
Facebook’s Libra cryptocurrency is part of a disturbing financial trend
Inside the unscrupulous world of social media manipulation with a penitent whistleblower


What’s behind Virginia’s latest move to fix lending laws and protect borrowers

The bill’s sponsor

Under current law, Virginians pay up to three times as much as borrowers in other states for the payday and similar high-cost loans that are often used by cash-strapped households. But a reform bill on which the state Senate will vote Monday would bring down the price to match what lenders charge in states with recently updated laws, such as Ohio and Colorado, while closing loopholes that high-cost lenders use to avoid regulation. It would also enable installment lenders, who offer lower-cost small-dollar credit, to serve Virginia households.
Virginia used to have workable small-dollar lending laws. But over the past four decades, piecemeal changes slowly eroded state consumer protections and introduced loopholes that allowed lenders to charge much higher prices. And it is Virginians who have paid the price. Every year, hundreds of thousands of Virginia households use payday and other forms of high-cost credit, paying fees that can exceed the amount they originally borrowed.
Although many Americans use small-dollar loans, regulations vary widely from state to state — meaning that borrowers in some states have access to affordable credit while others enjoy few protections from lender overreaching. Proposed federal regulations could have established protections for payday borrowers nationwide, but the Consumer Financial Protection Bureau retracted the rules before they came into effect. As a result, cash-strapped households still depend on state legislatures to protect them from harmful credit terms. That’s what the latest reform bill aims to do.
Virginia first confronted the problem of high-cost, small-dollar lending more than a century ago. By the early 1900s, various “salary loan” and “chattel loan” companies had sprung up across the country to lend to working-class households. As one Virginia newspaper account described the situation, these lenders served those “whom dire necessity has driven to them for small sums of money.” Unable to obtain credit from banks, industrial workers instead sought quick cash from salary and chattel lenders, who operated under the radar and charged high prices. Although Virginia capped interest rates at 6 percent under its general usury law, the law failed to stop the spread of high-rate, small-sum lending. Even if the state shut down one lender, another would appear in its place.
Rather than allow unregulated lending to grow quietly in the shadows, Virginia social welfare groups concerned about the plight of the poor — such as the Legal Aid Society of Richmond and the Associated Charities — urged legislators to place the business under state oversight. In 1918, Virginia was among the first states to adopt comprehensive rules to govern small-dollar loans, based on a bill drafted by a national coalition of small-sum lenders and philanthropists from the Russell Sage Foundation. The drafters designed the bill, known as the Uniform Small Loan Law, to serve as a blueprint for states such as Virginia seeking to legalize and regulate small-dollar lending.
The 1918 law aimed to help working-class families by enabling reputable companies to lend legally, “upon fair and lawful terms.” It granted licensed companies an exemption from the general usury law, allowing them to make loans up to $300 and to charge up to 3.5 percent per month on unpaid balances. The legal rate was high enough to permit lenders to make a profit, while protecting borrowers from sky-high prices.
And the law was a success, increasing the supply of affordable small-dollar credit to meet borrower demand. Within 20 years, licensed small-dollar lending in Virginia surpassed $5 million a year.
Virginia updated and expanded its laws over the ensuing decades as new forms of credit developed, to protect borrowers against unaffordable prices while ensuring that lenders could still operate profitably. For example, in the 1950s, stores began offering “open-ended” credit plans that permitted customers to pay for goods in irregular amounts rather than according to a set payment schedule. So, in the 1970s, Virginia established maximum rates for store charge accounts and other forms of “open-ended” credit.
From time to time, Virginia also adjusted the maximum loan amount and interest rates that small-sum lenders could legally charge, as the cost of living rose and consumers demanded larger loans.
But cracks in this regime emerged in the 1980s and ’90s. In 1982, when interest rates were rising rapidly nationwide, Virginia repealed its rate caps for department stores and other lenders that made “open-ended” loans, permitting them to charge whatever the customer would agree to pay. In 1995, the state also removed rate caps on loans made by finance companies and other licensed lenders for more than $2,500 and set a flat rate cap of 36 percent per year on loans below that amount.
The bill’s sponsor
Check-cashing stores filled this void, charging much higher rates than licensed small-sum lenders. In the mid-1990s, some check-cashing stores in the Hampton Roads region began offering “check-advancement” services — better known today as payday loans. A customer would provide the store with a postdated check for a few hundred dollars and would receive, in exchange, the cash value of the check minus a service fee. One group of check-cashers charged more than 20 percent of the check value — amounting to a $60 fee for a $200 loan that had to be repaid in just a couple of weeks.
The Virginia Attorney General’s Office sued the check-cashers for violating state lending laws and scored a string of court victories that temporarily shut down the scheme. But some payday lenders found a loophole. They partnered with out-of-state, federally chartered banks, which are exempt from compliance with Virginia lending laws.
Rather than allow lenders to operate without oversight through these “rent-a-bank” arrangements, Virginia decided to legalize payday loans in 2002 by setting limits on the rates charged for them. But lenders continued to find loopholes.
As a result of this piecemeal process of amendment and repeal, payday and other high-cost lenders in Virginia today charge far more than they do in other states. For example, borrowing $500 for four months from a payday lender in Virginia costs $480, while the same credit costs $160 in Ohio after that state successfully overhauled its lending laws in 2018.
In the past, Virginia was a national leader in consumer credit regulation, thanks in part to the efforts of the alliance of reformers that championed passage of the Uniform Small Loan Law in 1918. Today, over a century later, a new coalition of leaders from business, community groups and government has urged Virginia to reform and update its lending laws once more to restore affordability for consumers. After decades of falling behind, this fight will determine whether Virginia reclaims its national standing on fair lending by enacting tried-and-true reforms that are projected to save borrowers more than $100 million annually while expanding access to lower-cost credit for those who need it, or whether special interests will win out.


Fed says it will develop faster digital banking system. But Wall Street fears tech incursion.

The Federal Reserve announced Monday it will develop a service to eliminate the frustrating delay many Americans face between when they deposit a check and when it’s recognized in their account.
Such delays costs billions of dollars in late fees and overdraft charges for millions of people living paycheck-to-paycheck, industry experts and regulators say.
“Immediate access to funds could be especially important to households with fixed incomes or living paycheck to paycheck,” said Federal Reserve Gov. Lael Brainard during a speech before the Federal Reserve Bank of Kansas City.
The new service, FedNow, is expected to launch by 2024 and would allow banks to nearly instantaneously move money into customers’ accounts, she said. The Fed board approved the decision by a 4-to-1 vote Friday, but it wasn’t announced until Monday.
The announcement could pit the Fed against some of the country’s biggest banks, including Bank of America and JPMorgan Chase, who have already developed rival technology and fear that Silicon Valley companies could use the Fed system to push their way further into the banking world.
America’s payment system lags behind many parts of the world, and U.S. banks are concerned about being left behind, said Aaron Klein, the policy director for the Center on Regulation and Markets at the Brookings Institution. “I think some of the large banks don’t want to be the taxi medallions and be uberized,” he said, a reference to the impact of ride hailing on taxi owners. “The rest of the world went to real-time payments a long time ago.”
The Fed’s announcement comes at a time when big technology companies are finding other ways into the banking world. Wall Street has raised concerns about Facebook’s efforts to create an alternate global currency system, known as Libra. Meanwhile, Square, the mobile payment company, and Rakuten, known as the Amazon of Japan and operator of U.S. rewards program Ebates, have applied for a special banking license that would allow the companies to offer checking and savings accounts.
In 2005, Walmart waged a two-year battle for a similar bank charter but withdrew its application after small banks objected. But more than a decade later, Silicon Valley may pose a bigger threat to the stranglehold banking industry holds on key parts of the financial world.
Big tech companies could use the Federal Reserve’s new service to gain direct access to the payment system, bypassing banks that currently act as a gatekeeper, said Greg Baer, chief executive of the Bank Policy Institute, which represents the country’s biggest banks.
The tech industry would like the Federal Reserve to give non-banks more access to the payment system, said Brian Peters, executive director of Financial Innovation Now, a lobbying group that includes Apple, Amazon and Google. But that is not likely to happen without congressional approval and is not why the industry supports the Fed developing its own service, he said.
“At this point, we just want to make our payment system work faster,” Peters said.
For decades, banks flew planes across the country filled with paper checks ready to be processed. Now, depositing a check is as simple as snapping a photo with your phone.
But there is still often a delay of a couple of days before the money is deposited into an account, a frustrating feature of America’s antiquated payment system, industry experts say.
The current electronic payment system was built in the 1960s with physical checks in mind, not splitting a dinner bill with friends on a mobile phone app, they say. Retailers bundled physical checks into batches before taking them to the bank to be processed. That same type of process is now used for electronic payments.
The Fed decision to develop its own service was cheered by community banks, credit unions and big tech companies that were weary of depending on a system developed by big banks.
“Community bankers, we did it!,” Rebeca Romero Rainey, chief executive of the Independent Community Bankers of America said in a blog post Monday, adding that the decision would “avoid a megabank monopoly.”
"I’m glad to see the Fed is heeding our calls to act, and that the American people will soon have a payments system that works for them,” said Sen. Chris Van Hollen (D-Md.), who co-sponsored legislation directing the Federal Reserve to develop a real-time payments system.
The Federal Reserve is requesting comments on how its service, FedNow, should be designed. It is unclear how much it will cost to build.
The Fed will probably meet resistance from the big banks as it develops its service. The Clearing House, which is owned by 24 of the country’s largest financial institutions, already spent millions of dollars building a system that brings the typical processing time from a few days to less than five seconds, said Steve Ledford, a senior vice president at the company.
Launched in 2017, the real-time payments system is used in 16 of the 10,000 banks and credit unions across the country.
If the Fed develops a rival technology that could slow adoption across the industry, Ledford said in an interview before the announcement Monday. “The numbers are ramping up,” he said, but “one of the complicating factors has been this Fed potential to move into the market.”
The Fed’s Vice Chair of Supervision, Randal Quarles, the lone dissenting vote on the board, appeared to side with the big banks.
“I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available,” Quarles said in a statement.


The global cashless movement meets its foe: Local government

Lawmakers in New Jersey recently advanced a bill that would ban businesses from going cashless — a move that would put the state at odds with the global trend toward electronic payments but would bolster resistance from local officials who see no-cash policies as discriminatory.
Almost 1 of 3 Americans in 2018 say they don’t use cash during a typical week of purchases, according to a Pew Research Center study released this week. The findings reveal that Americans are becoming less reliant on paper currency, mirroring shifts in Sweden, India and China.
But state and local officials say that restaurants and shops that adopt cashless policies have left some members of the community behind —— individuals without the means to open a bank account or who lack access to lines of credit or the mobile apps that power digital payments.
The New Jersey measure, which would apply only to face-to-face sales and would exclude Internet and phone purchases, comes as officials push similar efforts to bar no-cash rules in New York, Philadelphia and the District.
While cashless policies offer consumers the promise of convenience and provide businesses greater protection against theft and shoddy record-keeping, they also can exclude low-income consumers or undocumented immigrants, critics say.
According to FDIC estimates, 6.5 percent of American households were unbanked in 2017, meaning they did not have an account with an insured financial institution. Another 18.7 percent of households in the United States have a checking or savings account but still relied on financial services outside of a traditional bank — such as payday loans or check-cashing businesses — the estimate showed.
“Cash-free businesses are discriminatory by design and pose challenges to low-income communities that may not have access to credit/debit,” New York City Council member Ritchie Torres said on Twitter last month when he introduced a bill that would ban the practice.
According to the Pew study, the decline in the use of physical currency is uneven among the population when race, age and income are accounted for. Pew found a significant gap in cashless adoption tied to annual household income, with adults making at least $75,000 more than twice as likely to make all their purchases without using cash in a typical week, compared with people who make less than $30,000.
The Pew findings suggest that the benefits of going cashless may come with a cost that only some groups of people will bear. Americans with lower incomes are roughly four times as likely than higher earners to make all or almost all of their purchases with cash, according to the study.
As CNBC has noted, business leaders such as Shake Shack founder Daniel Meyer have defended cashless policies by pointing to higher security and improved customer service and efficiency, even as they acknowledge their critics. “We know that some have raised concerns about the socioeconomic implications of operating a cashless business” Meyer wrote in a blog post earlier this year. “That’s certainly not our aim.”
Some advocates have focused on providing people who are underserved by the traditional banking system with more affordable options, attacking the root cause behind the criticisms of cashless payments. A partnership program between D.C. government and financial groups, for instance, has helped open 11,000 bank accounts for people since 2010.


As restaurants go cashless, a backlash is building. Will D.C. intervene?

Aaron Bateman pulled out a few bills to pay for a taco lunch in the nation’s capital. To his surprise, his money was no good in the city where money is printed.
Surfside, a 24-hour Mexican eatery in Dupont Circle, doesn’t take cash. No cash means no register for robbers to empty out, no bills for workers to slip into their pockets and no change-counting holding up lines.
The global cashless movement has reached Washington, where a growing number of fast-casual establishments and other spots are saying no to greenbacks in favor of plastic and mobile payments. Sweetgreen, the national salad chain founded by Georgetown University graduates, went cashless in most of its locations last year. Other cashless spots include a Menchie’s frozen-yogurt shop downtown, the posh Barcelona Wine Bar on 14th Street NW and the Bruery beer store at Union Market.
Soon, they may be breaking the law.
Critics of no-cash policies say they shut out the 1 in 10 District residents who don’t have bank accounts and undocumented immigrants who can’t easily sign up for cards. Some people also pay in cash so they can better track their spending or to avoid having their card information stolen.
Heeding these concerns, several lawmakers in the District have introduced a bill to require retailers to accept cash.
“By denying the ability to use cash as a payment, businesses are effectively telling lower-income and younger patrons that they are not welcome,” said D.C. Council member David Grosso (I-At Large).
His bill is among the pockets of resistance forming against the cashless trend, which has taken hold in countries such as Sweden and India where mobile payments are gaining popularity.
Similar legislation was unsuccessfully introduced in Chicago last year. Massachusetts has an obscure 1978 pro-cash law on the books, but the state retailers association says it doesn’t seem to be enforced and state officials haven’t offered guidance.
Companies going card-only say it makes good business sense.
Washington restaurateur Bo Blair, whose company Georgetown Events operates eight fast-casual and three sit-down restaurants in the District, decided to experiment going cashless when opening Surfside in Dupont Circle in 2015.
Usually, cost-conscious small businesses operate cash-only to avoid card processing fees.
But cash also has hidden costs, Blair said: Armored vehicles taking money to banks. An extra hour for workers to close out the register. Employees swiping money from the till. And some of his places had been robbed.
“Not having to worry about employees stealing or getting robbed is a huge lift off our minds,” Blair said.
Few Surfside customers complained and long lunch lines moved quickly, so Georgetown Events stopped taking cash at its seven other fast-casual spots, including the Jetties sandwich shop, where about 80 percent of customers were already paying with their cards. The company did not make the shift at full-service restaurants where bartenders and servers like taking their cash tips home at the end of a shift.
Bateman, who tried to pay in cash at Surfside, said he was lucky his girlfriend brought her debit card with her so they could pay. The 22-year-old Norfolk cook, who was on vacation, said he likes paying in cash so he doesn’t have to constantly check his bank account to avoid overdrafts.
“You have your money in your hand and know what you can do with it,” Bateman said. “It’s a little bit better money management, unless you are on top of your account like every five minutes.”
After placing his order at Surfside, Richard Selgado said he prefers paying with his debit card.
“Some places, you don’t know your surroundings. I’ve been in situations where I dropped money and people pick it up and don’t tell you,” said Selgado, a 26-year-old Prince George’s County resident. “I wish a lot of places are like this.”
Sweetgreen, with a dozen locations in the District and scores more in Maryland, Virginia, New York, California, Pennsylvania, Illinois and Massachusetts, is perhaps the most high-profile business to go cashless. The company has declined requests for comment on the District bill that would force it to accept cash, but officials previously said going cashless helped process as many as 15 percent more sales an hour and led to more people paying with the company’s app.
“We believe digital payments are the future, and we want to help lead that charge, not lag behind,” Sweetgreen founders wrote in a 2016 Medium post announcing the cashless switch.
Other restaurateurs say refusing to take cash is disrespectful to their customers.
“Not everybody is able to buy a smartphone,” Amsterdam Falafelshop owner Arianne Bennett said in an email. “Not everybody is in a position where they can get a credit card. Not everybody is even in a position where they have a stable bank account to be able to use the debit card. But they are hungry too, and have $10 in their pockets and they would like to spend their legal American form of tender, known as cash, with you.”
“As society and technology evolves,” she said, “we must ask ourselves always, not just ‘can we’? But ‘should we’?”
An Amsterdam Falafelshop franchise in the Boston area went cashless in 2016, but the company intervened a month in. Instead, the franchise put up signs on its counter advising, “While we prefer digital methods of payment, we will of course accept your cash.”
Cava, a fast-growing Mediterranean chain with roots in the Washington region, has debuted a number of cashless options including preordering online and paying in the store with an app. But the company’s leadership says the costs of continuing to take cash are worth it to avoid frustrated customers.
“Whether it’s for underbanked reasons, for privacy reasons or for budgetary tracking reasons, we want to accommodate them,” said Cava chief executive Brett Schulman.
The decision to go cashless also has broader implications in the global battle between the credit-card and ATM industries.
Perhaps unsurprisingly, Visa has been a major booster of the cashless movement. The credit card company in March awarded 50 businesses $10,000 each for rejecting cash payments and has released reports touting the benefits of a cashless society.
The International Currency Association launched a “Cash Matters” initiative last year to push back against cashless policies, mostly in Europe. The initiative is also supported by the ATM Industry Association, which declared the bill before the D.C. Council “a historic development in the nation’s capital in the long war against cash waged by the card brands.”
“When card brands diminish human choice in the payments sector, they corrode a part of freedom itself in the wider economy,” said Mike Lee, the ATM group’s chief executive.
Advocates for poor people and immigrants say keeping cash as an option is essential for people without bank accounts.
Nationwide, 7 percent of households had no checking or savings accounts in 2015, according to the most recent federal survey. It was more than twice as high for black people and Latinos.
The most common reason for not having a bank account is the fees imposed on customers who can’t meet a minimum balance or other requirements. Some don’t trust financial institutions, and others don’t have a choice.
Leonard Edwards, a 58-year-old resident of Petworth in Northwest Washington, said he lost access to his bank account when arthritis prevented him from working and he fell behind on child-support payments. Instead, he pays high fees to cash checks and use temporary debit cards.
He does not go out to eat much, but when he does he pays cash and was surprised some restaurants wouldn’t take his money.
“It’s just a way to keep low-income and poor people out,” Edwards said. “We don’t have credit cards or money in the bank just sitting around. It’s just another hurdle for poor people to maneuver around in the system we live in.”
About 11 percent of District residents did not have bank accounts in 2015 and an additional quarter were considered underbanked — meaning they use services such as payday loans, check cashing or pawnshops for money.
Some advocates for the “unbanked” say the focus should be on giving them more payment options. A partnership between D.C. government and financial groups called Bank on DC has helped open 11,000 accounts since 2010, said Tanya Bryant, a spokeswoman for the city’s financial-regulation agency.
The Cities for Financial Empowerment Fund works with Bank on DC and other groups to provide low-cost checkings accounts. “If someone is buying a salad or something, and it’s $6, and they need to swipe instead of using cash, the real underlying issue is they don’t have a bank account with debit-card functionality,” said David Rothstein a principal with the fund. “That’s where the real problem is. It’s less about the use of cash, and it’s more about financial inclusion.”
fenit.nirappil@washpost.com


The government move that threatens to keep Americans trapped in debt

In November 2017, the Consumer Financial Protection Bureau (CFPB) issued a rule requiring payday lenders to assess a borrower’s ability to repay before making a loan. Then, in February, the agency reversed course and announced a plan to rescind the core features of the rule.
The hundreds of pages of evidence supporting the 2017 rule, amassed over five years, did not change in the interim. The CFPB’s leadership did, and its new proposal threatens to continue a regime of ineffectual regulation, led by states, that has left many Americans trapped in a cycle of debt.
For more than a century, the states have regulated small-dollar, high-cost loans primarily through controls on the price of credit and limits on other loan terms. In the early 20th century, state usury laws capped how much lenders could charge for credit, and most set fees too low for small-sum lenders to operate profitably. Raising rate ceilings was the first step to creating a functioning and legal market for small-sum credit.
Many states adopted a model lending law, known as the Uniform Small Loan Law, that allowed licensed lenders to make loans up to $300, repayable in regular installments, with fees capped at 3.5 percent per month. Where enacted, the Uniform Law succeeded in spurring the entry of legitimate companies offering reasonably priced loans into the lending industry during the 1920s and 1930s.
But over time, as market conditions changed, the Uniform Law fell out of step with the needs of many lenders and borrowers. Its loan limits and maximum rates of charge did not reflect the commercial realities of post-World War II America. Many states failed to update their laws to keep pace. This made it harder for lenders to make these small sum loans profitably. With the deregulation of various financial service markets in the 1970s and 1980s, some licensed small-sum lenders moved into other, more profitable lines of business.
As a result, while traditional installment lenders licensed under state small-loan laws still operate today, they generally do not serve consumers who need loans of only a few hundred dollars. The legal limitations make it too unprofitable.
Enter payday lenders. Beginning in the early 1990s, some check-cashing stores began offering “deferred presentment” transactions, which are better known as payday loans. The check casher would give the customer immediate cash and, in exchange, would accept a postdated check to be cashed after the customer’s next payday.
Although the stores initially argued these transactions were not loans, their claims ran into legal challenges. So the industry launched a state-by-state campaign for new laws to legalize payday lending. This approach has led to a patchwork of regulations, under which some states allow payday lending with few restrictions, some regulate it closely and others ban it entirely.
This is a throwback to the situation in the early 20th century. Then, as now, state-by-state variations created opportunities for lenders to evade restrictive state laws by lending across state lines.
In the past, lenders congregated in states that either failed to regulate lending or that adopted rules which were easily evaded. In the early 20th century, for example, “salary” lenders based their operations in Maine and Rhode Island, two states without strong usury laws. The salary lenders then extended credit through the mail to borrowers in states with more protective laws, such as New York and Pennsylvania, in an attempt to evade state-level restrictions.
More recently, payday lenders have partnered with Native American tribes to evade state lending laws, claiming sovereign immunity from enforcement of state consumer protection rules. Several states have challenged the validity of these arrangements in ongoing litigation.
That’s why the CFPB regulations are so important. The CFPB was created in 2010 to enforce federal consumer financial laws and to protect consumers against unfair, deceptive or abusive acts and practices.
Federal law already requires credit card issuers and mortgage lenders to assess a borrower’s ability to repay. The proposed CFPB rule extends this requirement to lenders offering high-cost loans that must be repaid in a short time period (45 days or less) or that require a final “balloon” payment, meaning a lump-sum payment that is more than twice the size of the other required installment payments.
The proposed CFPB rule innovates in several ways: First, compared with state-level lending laws, the CFPB’s proposed rule adopts an entirely new regulatory approach for small-dollar loans. Rather than control the price of credit, the CFPB rule would require lenders to assess the borrower’s ability to repay the debt. Regardless of the cost of credit, the rule would require payments to be affordable so that the borrower would not end up in a long-term cycle of taking on new debt to pay off the old one.
In explaining the agency’s rationale for attempting to rescind the 2017 rule, the CFPB emphasized the importance of access to credit. But access to unaffordable credit does not benefit consumers. As the CFPB concedes, many borrowers are already “in financial distress” when they take out a payday loan.
An affordable small loan can offer these borrowers a lifeline. But a loan that the borrower cannot repay makes the struggle to stay above water longer and harder. The CFPB’s 2017 rule would eliminate loans that drag struggling families deeper into distress, while keeping affordable small-dollar loans available.
Second, the CFPB’s 2017 rule would create national minimum standards for payday loans, thereby shifting some of the burden of regulating them from the states to the federal government. It would provide a floor applicable everywhere — and therefore harder to evade — without setting a ceiling on state-level consumer protections.
In the past, federal law has imposed ceilings on state efforts to protect consumers, with poor results. Before the mortgage crisis of 2008, federal regulators preempted the application of state anti-predatory lending laws to federally charted banks, allowing those lenders to make risky loans that were more likely to default. Likewise, since 1978, federal law has preempted state interest rate laws from being applied to out-of-state national banks, opening the door to high-rate lending even in states with strong rules on the books.
In the early 2000s, payday lenders seized on the opportunity to evade state laws by partnering with national banks — until federal regulators clamped down on the practice, demonstrating the need for federal action.
In contrast, the CFPB proposed rule does something different. The CFPB rule would leave states free to adopt additional consumer protections, such as caps on interest rates or limits on other loan terms. Ohio, for example, amended its lending laws in 2018 to close existing loopholes and to allow lenders to offer affordable products with total fees and interest not exceeding 60 percent of the amount borrowed. The CFPB rule complements Ohio’s regulations instead of preempting them.
If the CFPB rolls back its payday lending rule, however, it will shift the full burden of regulation back to the states. The federal floor will fall away, leaving state law as the only safeguard against unfair and deceptive business practices. States such as Ohio will need to rely solely on their own laws and already stretched state enforcement budgets to protect small-dollar borrowers.
For more than a century
The demand for small loans is real and driven by forces outside the CFPB’s control. The agency cannot reduce the need for small-dollar credit or the number of financially fragile Americans. It can, however, try to prevent struggling families from being dragged down by unaffordable debts that exacerbate their economic suffering.


As stimulus payments begin, a rural pawnshop keeps an already-struggling town afloat

Jeremy Rowland woke up alone, away from his wife and teenage son, in the back office of the pawnshop he now calls home.
He pulled himself out of his brown recliner, counted the cash in his register and posted the day’s deals on Instagram. Lysol and hand sanitizer within reach, he perched beside the shop’s new drive-through  window. In the thick of a global pandemic, Triple R Pawn was still open.
Rowland had closed the store for 10 days in March, fearful he would bring the coronavirus home. Then came the questions from concerned customers who had already secured loans against their property, and who would need him in the months to come. Rowland needed them, too.
“I can’t go home,” he said, fielding calls from three cellphones. “We have bills to pay, we have a livelihood. We discussed it as a family, and we made the decision that I’m the sacrificial lamb.”
In Ash Flat, Ark. — a city of 1,082 where more than a quarter live in poverty — the coronavirus first felt like a distant threat. The abrupt recession that has since catapulted more than 17 million Americans out of work didn’t immediately register in this rural outpost near the Missouri border.
But Rowland’s pawnshop has long been indispensable for customers just getting by. And it was only a matter of time before the economic pain rippling across the nation exacerbated the hardship many in town knew all too well.
When the recession did touch down, the residents of Ash Flat and surrounding Sharp County wouldn’t only wonder whether they should stock up on essentials. They’d worry how to pay for them.
“A lot of people think it’s a choice to just go to the grocery store,” said Jeremy’s wife, Pamela, who’s managing the business from home. “It’s not here.”
The coronavirus has unleashed an unprecedented economic crisis, one so pervasive that Washington is rolling out trillions of dollars to support individuals and businesses. But pawnshops operate in a slice of the economy that was bypassed by the nation’s prosperity of recent years. Many of their of customers don’t have bank accounts and would be hard-pressed to borrow from more mainstream lenders. They could also face longer waits for their stimulus checks — $1,200 for millions of adults — because the program prioritizes direct deposit.
Pawnshops allow people with few alternatives to borrow against their possessions. In Ash Flat, where the median household income of $19,837 is less than one third of the national average, it can be the only option. Pawning a generator for $300 could cover a car payment. A 12-gauge shotgun might command $100, and provide a cushion until Social Security comes through.
“You have a lot of individuals that do live paycheck to paycheck,” said Ethan Barnes, president of the Spring River Area Chamber of Commerce, who like Rowland, is a lifelong resident of Sharp County. “Jeremy’s business may be that lifeline that helps somebody put an extra pound of ground beef on the table for their family.”
Earlier in the outbreak, Pamela joked that her husband of 23 years could move into the pawnshop. But they quickly recognized just how stark their choices were: close the store and cut off those who depend on it, or accept the health risks of staying open.
To close would mean turning away the man who pawns firearms to care for his cancer-stricken wife, Pamela said. Or the woman who regularly comes in at the end of the month, after her money has dried up but the bills have not.
So the Rowlands began mapping out how to safely reopen. They installed a shower and washer and dryer in the back office and set up a recliner for Jeremy to sleep. They built a drive-through window so he could limit his exposure to customers. And they now ask clients with large items to pull up to the main entrance and stay in their cars while Jeremy unloads their haul.
It’s all so that when the phones do ring, Rowland is there to answer.
“Triple R Pawn, this is Jeremy. How can I help you?”
For the Rowlands, the decision to stay open was less about serving the newly afflicted than wanting to stand behind those who had depended on the pawnshop for years.
Sharp County is so rural, Barnes said, that it initially was insulated from the sweeping layoffs and economic tidal wave roiling the nation. One of the county’s top employers is a Walmart Supercenter that opened 25 years ago. Triple R sits nearby, at the only stoplight in Ash Flat.
Some local businesses never reopened after deadly tornadoes ripped through Arkansas in 2008. Much of the state budget relies on tourism sales tax dollars, which will dry up as the industry sputters.
Barnes has worked for years to attract investors and new businesses, pitching the area’s affordable real estate and deep sense of community. “It’s just a matter of people coming here and realizing the potential,” he said.
But in the past week, the coronavirus and its repercussions have started slipping through. When Sharp County reported its first confirmed case earlier this month, retailers, restaurants and other businesses couldn’t ignore it, even though Arkansas is among the few states without a stay-at-home order.
“If you drive down the main strip in Sharp County, you’ll see a lot of signs saying ‘closed,’ ” Barnes said.
Soon Rowland’s services could take on new urgency. In places as secluded as Ash Flat and as bustling as New York City, the majority of pawnshop customers are among the nation’s 63 million unbanked or underbanked adults, according to 2017 figures from the Federal Deposit Insurance Corp. That means scores of U.S. households don’t have a checking or savings account, or that they had an account but also sought financial services outside the banking system.
As the federal government scrambles to issue loans and stimulus checks under what’s known as the Cares Act, those on the economy’s margins may not get relief.
Tracy Harrison, a freelance makeup artist in Homestead, Fla., near Miami, said she hasn’t been able to meet with clients since the outbreak. For years she has relied on the employees at Naranja Trading Post & Pawn to get through hard times when “ends don’t quite meet. They may be looking at each other, but they can’t quite shake hands.”
Pawn brokers provide short-term loans to people who offer their belongings as collateral. The average loan is small — around $150 — and has no effect on a customer’s credit history.
Harrison knew that stocking up on toilet paper, cleaning supplies and extra groceries during the pandemic would bust her budget. So she pawned her flat-screen TV and a necklace with a pendant for $350.
“If it had not been for them being open, I wouldn’t have been able to get what I needed,” Harrison said. “I can’t go to the bank and say ‘I need to borrow $300.’ They’re like, ‘Yeah, right, get out of here.’ ”
Economic downturns always give rise to businesses offering loans to those in urgent need — and at a high premium, said Ellen Harnick, an executive vice president at the Center for Responsible Lending. But unlike car-title or payday loans, pawn customers don’t risk falling further into debt if they can’t make a payment.
“When the bill comes due and the person can’t afford it, if you have a pawn loan, the consequence is that you lose the thing you pawned,” Harnick said. “With these other lenders, you don’t have that out, so your debt mounts. And once it starts compounding, it can be pretty catastrophic.”
At Daddy’s Cash in Miami, Andres Arcila served a customer who worked at AmericanAirlines Arena — home of the Miami Heat — who wasn’t sure he’d get a full paycheck after the NBA suspended its season. Another told Arcila, the store’s manager, that he depended on contracts with Chinese customers who were behind on their payments.
“For a lot of people, in this moment, who’s going to lend you money for jewelry? For a computer? TV?” Arcila said. “Banks are not going to help you with that. We are their only hope.”
Eric Modell, a fourth-generation pawn broker in New York City, has had to accept the limits of what he can offer, even for customers with whom he has long-standing relationships. His business, Modell Collateral Loans, offers loans on jewelry and serves as a secondhand dealer.
Modell’s first sense that the economy was cracking came well before New York Gov. Andrew M. Cuomo (D) started broadcasting live updates about the outbreak; it was when the travel industry began to bleed. A worker at a nearby Times Square hotel came into Modell’s 47th Street location saying his hours and pay had been cut. The man pawned a watch and gold items for several thousand dollars.
One day last month, a high-end jewelry manufacturer whom Modell has known for years brought in his entire product line. The jeweler told Modell he didn’t know how he would make rent or pay his employees.
“It was a hard thing to see,” Modell said. “He was trying to be proactive, but he knew he needed a significant amount of money. I think I gave him half of what he needed, but that’s all I could do.”
The full weight of the coronavirus recession may have yet to hit Sharp County, but any support would be welcome. Under the federal relief package, small businesses of fewer than 500 employees can apply for loans.
In rural Arkansas, “small businesses can be one, two or three employees — mom and dad and son and daughter running the business,” Barnes said. He added that the individual stimulus checks of $1,200 would be a “blessing from the sky” for many families.
“We’ll have to see how long we have until we, unfortunately, exhaust our other resources to get by, to even buy groceries,” Barnes said, “maybe buy a few extra cleaning supplies.”
Triple R Pawn will be there. On weekdays, Rowland closes the shop around 4:30 p.m., though the phones ring for hours beyond that. He might fill evenings or weekends scrolling through Twitter and TikTok, or taking his boat out to “social distance in the middle of the lake.” Pamela has been trying to prepare and pack healthy dinners for Jeremy, though she’s still satisfying his sweet tooth with his favorite German chocolate cake.
For the Rowlands, the test of these times — the pandemic, living apart, hauling generators out of peoples’ trunks — briefly fades away sometime after 9 p.m. Jeremy settles into the brown recliner in his makeshift home. And once more, his cellphone lights up, this time with a FaceTime call from Pamela and Ty, their 18-year-old son.
Photography by Terra Fondriest for The Washington Post. Photo editing by Annaliese Nurnberg. Design by Audrey Valbuena. Copy editing by Karen Funfgeld.


A court ruled swipe fees are still too high. But they’re probably going away anyway.

Really, these still? (Andrew Harrer/BLOOMBERG) The credit card companies lost a round in the payment wars on Wednesday: A judge ruled that the Federal Reserve's 21-cent cap on swipe fees for debit card transactions was too high, and should be reconsidered. The retail industry cheered, since it either has to eat the cost of those fees or pass them on to consumers. But here's the question: If swipe fees are such a burden on merchants, why are they still paying them? There are a bunch of different ways to evade the system, after all. With its cute iPhone-mounted card reader, Square has much lower start-up costs. Dwolla charges 25 cents for transactions over $10. Then there's Paypal's mobile system, Google's Wallet, Groupon's Breadcrumb, and a few smaller players. They all transfer money through the Automated Clearing House, which is also used for big transactions like direct deposit of paychecks, enabling relatively friction-free movement of money. Electronic payments are growing fast--several percentage points per quarter, according to the Electronic Payments Association. The highest-profile success has been Starbucks, which now takes in 10 percent of sales via a smartphone. But there are a few reasons why they haven't yet taken over the consumer market: - Too many services: - America is too used to credit cards: - Retailers would rather keep your data: - The legal landscape is still unsettled: Meanwhile, big banks are getting worried about all the new non-bank payment options proliferating in the marketplace, and are urging the authorities to address regulatory gaps. "Failure to do so runs the risk of incentivizing the creation of a 'shadow payments system outside of existing consumer protection and system integrity schemes, with enormous implications for consumers and the overall economy," wrote the American Banking Association in a recent report. Light regulation might give the marketplace some certainty and security, but not if it forces decent services out of the running. "We're in a period with mobile right now where there are lots of green shoots of competition developing," says Duncan. "The goal here is for everyone to stand back and not stomp on them before they have a chance to grow." - Big retailers are cooking up their own mobile payment system: So it may be odd that we're still talking about high swipe fees. But it's still possible that within a few years, yesterday's big settlement won't matter much anyway.

Really, these still? (Andrew Harrer/BLOOMBERG) - Too many services: - America is too used to credit cards: - Retailers would rather keep your data: - The legal landscape is still unsettled: - Big retailers are cooking up their own mobile payment system: So it may be odd that we're still talking about high swipe fees. But it's still possible that within a few years, yesterday's big settlement won't matter much anyway.


What issues face the approximately 28% of Americans with limited or no access to traditional banks?

How Wal-Mart and Google could steal young customers from traditional banks

These upstarts are gaining footing in the banking world with prepaid debit cards that customers can use to pay bills, make purchases and deposit checks via a smartphone camera -- pretty much all the things you can do with your traditional checking account. And they are piquing the interest of a highly coveted group that traditional banks have struggled to attract: young people. These companies possess a few things that could really pose a threat to banks: an existing customer base, scale and an ability to quickly adopt new technology. Wal-Mart fought to get a bank charter years ago, only to be foiled by lobbyists who were dead set against having the retailer go head to head with traditional banks. But Wal-Mart may be getting the last laugh as it reaps the benefits of being a bank without the headaches of being regulated like one. Banks still have a leg up in the digital world, with vast amounts of customer and transaction data and experience in security, regulatory compliance and payment processing -- all of which are difficult to replicate, Accenture said. But the pedestals that once held the industry high off the ground and away from outside competitors are starting to crumble.

It used to be that the JPMorgans of the world only worried about losing customers to Wells Fargo or Bank of America. But that universe of competitors has grown to include T-Mobile, Wal-Mart, Google and a host of other retail, tech and telecom companies that are now operating like banks.
These upstarts are gaining footing in the banking world with prepaid debit cards that customers can use to pay bills, make purchases and deposit checks via a smartphone camera -- pretty much all the things you can do with your traditional checking account. And they are piquing the interest of a highly coveted group that traditional banks have struggled to attract: young people.
A new survey of nearly 4,000 Americans by Accenture found that 72 percent of people ages 18 to 34 would bank with such companies as Wal-Mart, Google or T-Mobile if they offered banking services. Of the nearly two dozen companies that researchers asked about, people were most willing to sign up with Square or PayPal because of the relationships they already have with the companies. Nearly one-third of those polled said the same about T-Mobile, Costco, Apple and Google.

These companies possess a few things that could really pose a threat to banks: an existing customer base, scale and an ability to quickly adopt new technology.
Take T-mobile, which has 49.1 million wireless customers, an established base for the telecom to pitch its prepaid debit card. Many of these folks use T-Mobile's prepaid wireless phones (15.5 million) for the same reasons that make prepaid cards attractive: There's no credit check and no long-term contract. And with more people using their mobile phones to transfer money or take pictures of their checks for deposit, having the same provider manage most of the steps in that process could be appealing.
The biggest game-changer for traditional banks is Wal-Mart's incremental expansion into consumer banking. The world's largest retailer has rolled out everyday low prices on check cashing, money-transfer and checking accounts in the last few years. When Wal-Mart teamed with American Express to launch the prepaid Bluebird card as a low-cost alternative to checking accounts, the pair attracted one million customers in less than a year.
Wal-Mart fought to get a bank charter years ago, only to be foiled by lobbyists who were dead set against having the retailer go head to head with traditional banks. But Wal-Mart may be getting the last laugh as it reaps the benefits of being a bank without the headaches of being regulated like one.

These outside threats are coming at a bad time for banks. Slow growth and high regulatory costs continue to put pressure on banks' return on equity, a measure of the bank's ability to squeeze profits out of shareholders' money. And while alternative payment technology may appeal to the digital unit at a bank, the folks in the card division may worry that it could cannibalize revenue, researchers at Accenture said.
Banks still have a leg up in the digital world, with vast amounts of customer and transaction data and experience in security, regulatory compliance and payment processing -- all of which are difficult to replicate, Accenture said. But the pedestals that once held the industry high off the ground and away from outside competitors are starting to crumble.