Richard Cordray has a letter for CEOs of large banks.  The Bureau of Consumer Financial Protection staged another public hearing, this time in Louisville, Kentucky.  Director Cordray’s letter was featured.  The subject was checking accounts.  The folks at the Bureau love them.  They want everyone to have one, or something like one.  The scripted event offered the Bureau’s view that too many people go without one.  I am sure that bankers would agree. 

Quick to emphasize that the letter is not “any sort of regulatory requirement,” but “simply a suggestion”, Director Cordray urges the banks to offer transaction accounts to people who live outside of the financial mainstream.  However, the letter insists, bankers should make sure that these outreach programs not allow the new customers to overdraw their accounts, regardless of whether customers may want overdraft protection.  Most bank customers do.

The letter does pose the question to all subject to the Bureau’s authority, What do you make of this?  It suggests one of two things.  Either the head of the Bureau believes that he sees something about potential customers that all of these banks have missed, or the banks need advice or nudges from a powerful regulator to sail forward, even if it means damning the torpedoes of customer preferences and economic and business realities.

Among the realities is the fact that there are many reasons why someone may not have or want a bank account, from not having enough money, to personal preferences, to the customer interrogation mandated by anti-money laundering rules.  Very low on the list, but prominent in Director Cordray’s letter, is that potential customers want to get into the bank but find the door barred for having overdrawn their accounts in the past.  A 2013 FDIC study of the matter found that less than 7% of people without bank accounts were hobbled by their previous banking history.

The Bureau letter at first displays an unfamiliarity with banking.  In the leading paragraph there is the fanciful assertion that potential customers are faced “with a binary result” in account applications:  either they fit standard qualifications or are shown the door.  In practice, banks offer a variety of account options and are more likely to offer customers a chair than the door to find the account that will work.  Few businesses are happy to see customers walk away.

Later in his letter Director Cordray notes the reality that “a growing number of institutions are already finding ways to offer” their products and services.  Of course, that is what businesses—including banks—do, if regulators will let them.

That may be the operative element:  if regulators will let them.  Involving many of the same people is the market for small-dollar/short-term loans (loans in amounts of less than $5,000, and for terms shorter than a year), somewhere north of 50 million people.  The Bureau has made no secret of its intent to come as close as it may to shutting down the payday lending industry.  Where will those people go for credit?  Millions of bank customers rely upon overdrafts to meet their small dollar credit needs.  Where will these people go if bank overdraft programs are closed, as the Bureau recommends?  I suppose that the “informal sector” will be ready for them, as it always is wherever governments drive legitimate business out of the mainstream.

The Consumer Bureau is proposing a bank account that it prefers.  The Bureau has no business relationship with customers; it gets its money on demand from the Federal Reserve.  Banks have been working to develop a variety of accounts their customers may prefer.  Banks will get paid only as they succeed.