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Authors Marc R. Saidenberg, Jose A. Lopez, and Joseph J. Doyle explain that many consumers who lack checking accounts are paying relatively high costs to access the nation's payments system--the system that makes the transfer of funds between individuals and firms possible. Moreover, many of these 'unbanked' consumers have low-incomes: 40 percent of families with incomes below $10,000 do not have a checking account.
Legislative reforms aimed at giving the unbanked inexpensive access to the payments system, explain the authors, involve requiring commercial banks to offer low-cost "lifeline" accounts. Such reforms have been implemented in a few states and are under consideration at the federal level. Access to the payments system will take on even greater meaning after 1999, when all federal government transfer payments, such as social security and welfare payments, are scheduled to be made electronically.
Saidenberg, Lopez, and Doyle examine the effectiveness of lifeline legislation in reducing costs and drawing the unbanked into the payments system. They conclude that:
Although helpful, lifeline legislation may not significantly lower consumer costs since many banks already voluntarily offer accounts priced below lifeline accounts.
Many of the unbanked do not appear to be motivated by the cost savings offered by lifeline accounts; instead, they opt for the perceived advantages of costlier alternatives such as check-cashing outlets.
Legislation designed to bring unbanked consumers into the payments system should not be limited to price reform. Measures that increase the convenience of banking services and inform consumers of the advantages of using these services also should be considered.
Marc R. Saidenberg and Jose A. Lopez are economists and Joseph J. Doyle is a former assistant economist at the New York Fed.