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When Government Goes Digital, What Happens to the Unbanked?

Experts, vendors and local government officials on designing online services in an accessible way while at the same time working toward community-wide banking equity.

Checkout stands at a Walmart store
During an ordinary year in Pulaski County, Ark., five public offices are open for people to pay taxes owed on assets, from land to cars to mobile homes. And folks in Pulaski — which is home to the state’s biggest city, Little Rock — tend to be pretty good about paying what they owe, doing so in the 95th percentile, which yields roughly $530 million for the county government.

But 2020, of course, was no ordinary year.

In 2020, tax books opened on March 1 as always, but then, in what felt like a blink of an eye, the COVID-19 pandemic erupted, halting the flow of daily life the world over. All 53 employees of the Pulaski treasurer’s office were soon working from home, and all five of the public offices where payment could typically be rendered in person were ordered shuttered to slow the virus.

As with many local governments, Pulaski County has increasingly enabled residents to do business with its offices online, and that includes paying taxes. This modernization enabled a number of residents to pay as usual amid the pandemic. But questions arose for other groups: What about those who prefer to pay in cash? What about others who lack computer skills to pay online? And what about members of the community who do not have viable bank accounts, a status known as being under- or unbanked?

Pulaski County — like so many local governments across the country — had to address those concerns, with the stakes being tax funding for vital services such as education, hospitals, fire response and police.

“When you have $530 million of taxes to collect,” said Pulaski County Treasurer Debra Buckner, “you’re not going to let a pandemic slow you down.”

And they didn’t. With the help of a longtime gov tech partner, Pulaski was able to stand up a solution that solved the problem. While their story is instructive, the problem of government serving the unbanked as it continues to digitize remains complex. 

New Payment Options for the Unbanked

With a sizable chunk of public funding at stake, Pulaski County needed to find ways for folks to pay in person, Buckner recalled, and they needed to do it now. After the pandemic showed no sign of dissipating by June 2020, Buckner said it became clear the county needed to act.

The treasurer’s office turned to a longtime partner in the private sector, NIC Inc. Buckner, who has been in office 20 years, has worked with NIC her entire time in public service. She describes them as a “go-to vendor,” one with a history of creating solutions customized specifically for her office, including payment methods such as paying online and by phone.

Together, the treasurer’s office and NIC developed a way for people to pay county taxes at the same places they were already buying necessities like food, water and fuel. They gave people the option to pay taxes at grocery stores, which in Little Rock often means Walmart. It was a system that had been in place for utility payments for years, and now it was being modified to include county taxes that other residents have started to pay online.

“It was just a couple of weeks, literally, and it went from an idea to implemented,” Buckner said. “We had a looming deadline and we were desperate for a new solution.”

That new solution involved enabling CheckFreePay — an existing payment system available in more than 30,000 places across the country, most of them retail stores — to work for government. Pulaski was a beta site for this, and the way it works is that residents can go to these stores and render payments for a flat $3 fee. The beta was live in mid-September, with radio spots letting listeners know it existed, paired with email blasts and newspaper ads.

By the end of 2020, Pulaski County had taken in $419,000 of taxes through CheckFreePay, totaling 1,400 individual payments. Buckner says it is now here to stay, noting that for many residents it is easier to pay taxes at a 24-hour grocery store than to go in person to government offices during normal business hours. There are 53 CheckFreePay locales in the Little Rock area, with others in cities nationwide, enabling displaced Pulaski residents to pay from a distance.

NIC has also added CheckFreePay to its portfolio of government offerings across the country, said Sloane Wright, vice president of payments at NIC. With so many other solutions in government, Wright said that enabling residents to pay this way, often with cash, was something NIC had been looking into even prior to the pandemic.

“One thing we really wanted to solve for is we didn’t want a resident or citizen who was unbanked or underbanked to have to go to a drugstore or other retailer to purchase a prepaid card just to go online and transact with their government,” Wright said.

So, they enabled them to do it directly at retailers for the $3 fee, which stays flat regardless of how much tax one pays.

Yet some say cash payment options such as this CheckFreePay are just one tool, rather than a full solution to how government should serve the under- or unbanked. Equitable banking advocates point out that progress can be made in other ways too, ultimately lessening the number of citizens who don’t use banks, or, depending on the approach, removing banks from the payment process altogether.


Understanding the Under- and Unbanked

While there are some residents in every community who simply prefer to use cash, there are others who don’t really have another option because they don’t use banks, or they use banks in ways that do not enable easy bill payment.

To put the prevalence in context, Aaron Klein, a senior fellow in economic studies with the Brookings Institution, pointed to research that shows that about 5 percent of American households lack even a single bank account. That number is much lower among white Americans and much higher for other groups, standing at about 12 percent for Latinos and roughly 14 percent for Black households, making it an issue that disproportionately affects populations long underserved in other ways.

Add to that the 15 percent of American households that are underbanked — meaning an individual has a bank account but has also in the last year used a payday lender, a check casher or a wire transfer service — and the population that lacks equitable banking gets larger. Research also shows, Klein noted, that about 8 percent of American households have paid more than $300 in overdraft fees in the past 12 months.

There are inherent challenges to not having a usable bank account or other access to digital money, including having to spend more for services or cards with attached fees, and these challenges can make life more expensive for people who don’t have a lot of money.

This is a challenge that has been exacerbated during the pandemic.

“You can’t use cash with Amazon, and the pandemic has increased the value of buying things online,” Klein said. “If you don’t want to go to the store to avoid COVID, and you want to buy online, you have to be able to access digital money.”

There are ways for the federal government to alleviate some of the problem, he added. If the United States were to move to a real-time payment system — one that eliminated the time recipients must wait for cashed checks to clear — that would help, as would forbidding overdraft fees. Another move would be to require banks to provide a free, no-overdraft basic account, which is a thing that exists but is not available at every bank.

These are moves at the federal level that could proactively make banking more accessible, as opposed to putting the burden of picking safe accounts on individuals. Klein compared it to actions taken in the past to increase safety in other industries.

“We created a system in America where we eliminated the sale of unsafe meat,” he said. “We didn’t create a system in America where we tried to teach everyone which meat was rotten.”

Another solution is to eliminate the role of banks in digital payments altogether, said Vance Smiley, founder of BankWorx, a company working to help form new ways of digital finance. Although it is still likely a ways off, Smiley believes the future of equitable banking in the country is establishing a trusted way to move money across systems independent of paper notes altogether.

Basically, the vast majority of digital payments today are tied to a contract that money will be moved from one bank account to a company or vice versa. The system Smiley and others envision is a digital cash system, one that involves public blockchains and trusted cryptocurrency. But without agreement on how to establish that, progress will remain slow.

“Until we all start rowing in the same direction,” Smiley said, “until there’s a consensus on how to solve it, all we have is little isolated pods of success, and those don’t get you to the right place.”


How Can Government Support Banking Equity?

The question next becomes this: What can state and local government do to ensure that those who struggle to obtain equitable banking are not left behind by public-sector efforts to digitize payments?

There is certainly a major role for services like CheckFreePay, especially in the coming months as the pandemic continues to make in-person business difficult. Another option is widespread advocacy and awareness work around safe banking, which is something already being done in cities across the country by a network called Bank On.

Bank On today has 90 local member coalitions, the stated goal of which is “to ensure that everyone has access to a safe and affordable bank or credit union account.”

As a principal at the Cities for Financial Empowerment Fund, David Rothstein leads the Bank On initiative, and he said that a key thing the group has done is establish a set of features that accounts must have to be Bank On certified, meaning in basic terms that they don’t make life more expensive for low-income individuals.

And while federal action could solve problems, Rothstein said Bank On supports localized actions.

“We are very intentional about believing that cities, counties and even state government can play a positive and important role in banking in general,” he said.

To that point, roughly 40 percent of the Bank On coalitions are led by local government in their respective areas. Bank On itself was actually born in local government in San Francisco. Amanda Fried is chief of policy and communications for San Francisco’s Office of the Treasurer and Tax Collector, which has been led by Treasurer José Cisneros since 2004. Fried said helping the unbanked and underbanked gain equitable financial access has been a major area of focus over those years.

The office has worked to convene local bank leadership, create the initiative that grew into Bank On, and launch public awareness campaigns that involve multilingual efforts as well as financial coaches that work directly with individuals. 

The crisis also provided an area of opportunity to make progress with this issue. The federal stimulus payments specifically motivated some residents to move toward digital banking so that they could obtain that money through direct deposit, rather than waiting on a check in the mail, said Darrin Williams, CEO of Southern Bancorp, a designated Community Development Financial Institution that works on these issues with underserved communities.

“We approach this issue by trying to meet people where they are,” Williams said.

And in these odd pandemic times, that has meant finding them at the grocery store or when they take their first steps toward banking online to get their stimulus checks.

Associate editor for Government Technology magazine.