Aaron Klein | The Secret to Combat Income Inequality without Raising Taxes: Real Time Payments


LEE REINERS: All right. Good afternoon, everyone. Thank you for being here today. So my name is Lee Reiners, for
those of you who don’t know me. I’m the executive director of
the Global Financial Markets Center here at Duke Law. And before I introduce
today’s guest I want to briefly
preview a conference that we’ll be cosponsoring next
month on March 20 at the Fuqua School of Business. It’ll be a day-long reflection
on the lasting impact of the financial crisis. So we have a tremendous
group of speakers lined up. We have the former
CEOs of Bear Stearns, Bank of New York
Mellon, Morgan Stanley, as well as the former Deputy
Treasury Secretary Sarah Bloom Raskin. We have– David
Rubinstein will be there as well as some of our more
prominent faculty members, including professor Cox
and Professor Baxter. So go to our website to
find out more information about that and to RSVP. It’s free to attend,
so I definitely encourage you to check that out. So with that, it’s my
privilege to introduce today’s guest, Aaron Klein. Aaron is a fellow
in economic studies and policy director
of the Center on Regulation and Markets at
the Brookings Institution. He focuses on financial
regulation and technology, macroeconomics, and
infrastructure, finance, and policy. Previously Aaron directed the
Bipartisan Policy Center’s financial regulatory
reform initiative where he launched the first
bipartisan comprehensive review of Dodd-Frank, as well as a
CEO council on infrastructure. Aaron served at the
Treasury Department as deputy assistant
secretary for economic policy during the first term
of the Obama presidency. While at treasury Aaron worked
on financial regulatory reform issues, including
crafting and helping secure passage of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, and he also
played leading roles on Housing finance reform, transportation
and infrastructure policy, as well as Native American policy. Prior to his
appointment at Treasury, Aaron served as chief economist
of the Senate Banking, Housing, and Urban Affairs Committee
for chairman Chris Dodd and Paul Sarbanes. While working in
the Senate Aaron played a key role in a series
of major legislation, including the Economic Emergency
Stabilization Act of 2008, better known as TARP, the
Housing Economic Recovery Act of 2008, the
Safety Act of 2005 that rewrote America’s surface
transportation policy, the Check Truncation
Act of 2003, the Terrorism Risk
Insurance Act of 2002, and the Sarbanes-Oxley
Act of 2002. Klein is a graduate of
Dartmouth College and Princeton University. Please join me in
welcoming Aaron to Duke. [APPLAUSE] AARON KLEIN: Thank
you very much, Lee. It’s a pleasure to be here. It’s also a pleasure
to see my good friend and former colleague, one of
the commissioners of the task force I ran at the Bipartisan
Policy Center, Jim Cox, who was just incredibly helpful in
crafting and helping to author a report on implementation
of Dodd-Frank, particularly something
known as the Volcker Rule. We had a joke when we
were doing Dodd-Frank that everything within
Dodd-Frank kind of made sense. And any part of
Dodd-Frank that you come across that has a different
name attached to it, kind of didn’t make sense with the
core of the rest of it, whether it was Volcker
or Wicker or Durbin, or whatever else you want
to say– all these named amendments. For those of you that
study banking law– and I’m presuming
many of you here are. That’s why you’re here– it’s a really weird
thing that banking laws tend to be named after
members of Congress. I’m not aware of any other part
of law that have so many bills named after members. It was kind of a pleasure to
work for two, Senators Sarbanes and Dodd who both got bills. Someday I’ve thought about doing
a research project of which senators get bills
and which don’t. That’s not whether your
bill is good or bad. it’s just if you
have a name on it. That being said, it’s a real
pleasure to be here at Duke. You guys have an amazing group
of people Lee’s put forward. The list you have coming
for this next thing in 10 years with my former colleague
and friend Sarah Bloom Raskin and David Rubenstein
and many others– you guys are really fortunate,
and I’m privileged to be here. I wanted to talk to you
today about something that I think people
experience every day but don’t appreciate
how its existence and how it works
contributes to what I think is the greatest
problem facing American society today, which is the giant
inequality in income. We’ve reached, as a society,
levels of income inequality that really haven’t been
reached since the 1920s which, after their Great Depression,
had a huge resorting of income. People talk today
about this crazy idea of a marginal tax rate of 70%. Back then after the Great
Depression, after World War II, the marginal tax rate was 90%. That was law. That wasn’t an idea. That was actually
the world in America. I was reading a
piece today about how in Rome a lot of people
think the decline of Rome started with a huge growth
in income inequality that then threatened
the core democracy around the second century BC. And if you think– our
democracy’s in a little more trouble now than it
has been historically, which I think is fair to say– I think that’s highly-correlated
with our growing income inequality. And America is a great
country in the sense I don’t think anybody begrudges
Jeff Bezos for having made a bunch of money
and making Amazon and the world a better place,
and Bill Gates the same. That being said,
dynastic growth of wealth at concentration levels
we’ve seen I think is more deeply problematic. I’ll give you a fact. The three richest
people in America own more than the
poorest half of America. So 160 million Americans, from
the poorest homeless person to the definition
of middle-class, the median American,
all the way down, if you add up their
entire net worth– it’s less than the
three richest people. And that’s kind of the
Bernie Sanders argument. Right? That 1% of the 1%
of the 1% of the 1%. I’m not here to talk about
that in the payment system. What I’m here to talk about
is how the payment system deeply penalizes the bottom
half and greatly rewards the top 10%. And let me be very specific. According to the
Federal Reserve, to be in the top
10% of Americans you have to have a million
dollars of total net worth. That’s the equity in your home
plus your retirement account plus a valuation of your defined
benefit contribution plan– everything you want to say. And for any of you who’ve taken
a basic finance course, based on the income I’m going to
expect that you will be hoping to make as Duke Law
graduates, I would guess that your goal is to
save over a million dollars. It would be my guess
that many of your parents have achieved that goal. And that makes you
in the top 10%. To give you an idea
of the distribution, the middle point– that
median person I told you– they have a net worth today of
$100,000, mostly in their home. The bottom 25%– one
out of four Americans– has $25,000 or less, and 10%
of Americans are negative. I’m going to guess, on the basis
of your college and law school loans, that the group that are
negative net worth here today may be a little bit
higher, but you’ve all made smart investments
in your future and I’m going to guess that
the vast majority of Duke Law graduates end up in the top 10%. And those that don’t are
probably not by choice, having pursued different
types of careers. But even a good
public interest career should end you with a
million dollars of savings. And I want to talk to you
about this payment system, and I’m going to do it
in two different parts. And so, part one, I want to ask
you what Capital One asks you. What’s in your wallet? So take out your
wallet, or your phone if some people only
use your phone, and I’m going to start
guessing what’s in your wallet. And let me see a show of hands. I worked at the
Treasury Department, so my favorite bill is the 10. How many people here have
money in their wallet? OK. That’s a much higher
showing of people than is often told the case. There’s this great story
that “nobody is using cash, cash is dying.” Two-thirds of all
transactions of $10 or less are made in cash. AUDIENCE: But it’s
not to spend money on, it’s just in case we get mugged. [LAUGHTER] AARON KLEIN: To be
able to pay the mugger? Well, I’ll tell you– it’s interesting. We don’t have good numbers as
to what percent of transactions are made in cash. When I pay my niece to babysit
for my small kids and she asks me to Venmo, and
I look at her blankly and hand her money– we don’t have good data on that. But we do have good data
on non-cash payments. So let me start with the next– how many people here
have a prepaid card? One? If you’re getting mugged, your
mugger probably uses prepaid. 10% of all
transactions in America are done on prepaid cards. I’m going to repeat
that stat, and I’ll give it to you in a ratio. 1 out of every 10 transactions
is done on a prepaid card. Now, there’s only one
person in the room here who raised their hand. I’m going to guess
that the rest of you don’t have prepaid cards. So think about the fact that
you’re doing 0 out of 10 means somebody else is doing
a lot more than 1 out of 10. These are radically common among
people who are not just the 7% of Americans who
lack bank accounts. They’re here. But there are 20%
of Americans who are what the FDIC
categorizes as under-banked. That is, they pay
money for services that the wealthy get
for free in banking– average minimum balance,
overdraft, payday loans, short-term loan. And for these people,
they’ve realized that these types of cards– even though they have little–
$2 to buy, $1 activation– are safer and more
secure assets for them, easier to transact
with than cash, because they have all the
advantages of being a card, and are cheaper for them for the
next common thing– moving up the income distribution. The poorest people and others. Next, how many of you
have a debit card? OK. I was assuming this
would be near-universal. Right? The debit card is the
next situation up here. This is the standard
banked person. This is what I would call the
neutral in this situation. I’ll explain later why these
people are losing money, and who’s gaining it. You don’t get really any rewards
or anything back from this, but it doesn’t really cost you
unless you have an overdraft. That’s $35. That’s very expensive. It’s universally accepted. I’ll get into how it works. This has exploded in growth. This was the giant
explosion of growth until the prepaid came along
and started eating at debit, in part because debit
is expensive to those who may touch the zero or lower
bound of their bank account. But for those who
don’t, it’s fine. It offers no pluses, no minuses. The next part I’m going
to say is the credit card. Who here has a credit card? OK. Got near-universal acceptance. But the credit
cards that we have are universally accepted
on the higher end, but are not really
available to the people who have debit cards– or who have prepaid cards,
and may be available. But if you have a debit
card, you probably aren’t paying this off. The average American
family has a $7,000 balance on their credit card. For those of you
who realize, if you have a balance you’re paying
interest between 15% and 39% on every transaction you
make until you pay it off. If you pay your credit card
off every month, like I do– because I’m in the top 10%– if you pay your credit
card off every month, you get 30 days of grace. That’s a nice little advantage. Right? That’s an advantage that
I have of the debit, where it has to get settled
in the next day or two. We’ll talk about the
speed of it later. But let me ask you
guys, what is this? What would you call this? It is a law school. Can I just call on people? Because you can’t do
that in policy school or in economics programs. What is this? Who is giving me money on this? AUDIENCE: Your bank. AARON KLEIN: Correct. This is not a Southwest card. This is not a Visa. This is prime advertising
space that Visa and Southwest have taken up. It’s actually a direct line of
credit with JP Morgan Chase. And this is a revolving
loan that JP Morgan Chase has made to me, and
is made on the basis that they’ve seen that I’m
rich and I’m a good bet. And what is the terms of this? Why is JP Morgan Chase giving
me access to a lot of spending? What does JP Morgan Chase
get out of this card, and what do I get out of it? So here’s what JP– all right. I was in a room where we
were having this conversation with one of your– another great Duke professor,
Puri in the business school, and she was talking about
credit cards and this or that. And one of my very
distinguished colleagues said, well, JP Morgan
Chase gets nothing from me. I pay my card every
month in full. They thought that the credit
card was after your interest fees or your late fees. That’s not the case
with this card. With a sub-prime credit card
where there’s a high default risk, that is. What JP Morgan Chase
is getting is 2% to 3% of everything I buy on this. And that’s a swipe fee. And who’s paying that
is the merchant who’s chosen to accept it. And the merchant’s actually
going to pay closer to 3% to 4% depending on– there are a couple
other transactions. You know the little
square cash they may have or the little Verifone machine? That person is going to
take a little bit of a slip. And if I choose to use this
in an Apple Pay format– how many of you
guys use Apple Pay? A couple of hands. Apple is going to get 50
basis points, half of 1%. They’re going to
tack it on to this for using the digital
representation of this. But JP Morgan Chase is
going to get 2% to 3% of that transaction. Now, I’m an economist. Right? The first thing is that,
well, the merchant’s paying that 2% to 3%. But the merchant is
required to offer the same cash, the same
price to me regardless of whether or not I go to
them with 10 dollars or I go to them with this
or an Amex or the Sapphire. I forgot– I left
home without my Amex. It’s a joint card with
my wife, or else I would’ve put– because there
are fancier cards than this. Yes? AUDIENCE: Is that always true? Because I’ve gone to places,
particularly gas stations– AARON KLEIN: Correct. AUDIENCE: –in
like the Maryland, DC, Virginia area where
they’ll charge you more if you use a card. AARON KLEIN: They’re violating
their terms of agreement with their card. And that gas station is
in breach of its contract. I’m going to guess– and living in the DMV,
that may have been Liberty or an off-brand gas station. Maybe it was Sunoco or
Shell, but those are all independently-owned operators. Here’s an interesting fact. Gas stations– I don’t
know if you guys know the economics of gas stations,
but I’ll do a little aside here. Gas is not profitable for the
vast majority of gas stations. It’s a break-even business. The purpose of the gas station
is the convenience store. The convenience store is
extremely high markups, and that’s their money. If you just buy
gas and leave, you are basically an
irrelevant customer in their business model. They need you to get the
economy of scale and volume to move the gas. But if you sum up the
entire gas station industry, their entire profit is less
than what they pay in swipe fee, for the entire industry. Because it’s a
low-margin business. It’s a competitive business. Right? You can see across. And the reason they’re
bringing you in to pay cash is because you’re actually
more profitable for them at 10 cents less
a gallon in cash than you are in credit, in part
because this fee is 2% to 3% plus about 30 cents
of fixed fee– 30 or 40 cents,
depending on the card. And I ignore this fixed fee
in some of my analysis going forward, but my friend who
runs a small coffee shop in Silver Spring, Maryland– Bump and Grind, it’s an
awesome little spot– swipe fee– he spends more
in swipe fee than he does in buying coffee because swipe
fee is one of the smallest– coffee is one of the smallest
average dollar volume. I’ll finish on
this in one point. How many of you use
a Starbucks app? It’s the number one
online payment app. The economics of
the Starbucks app– they’re irrelevant
to brand loyalty, but they’re deeply relevant to
how a card-based system works. The economics of a
Starbucks app are, what? You upload $50 and then you
buy your $5 coffee 10 times, and they give you a
free cup of coffee. You can quibble with my numbers
here depending on what level you are, but that’s
about the simple version. Why are they doing this? If you swiped a credit
card for a $5 transaction, it would be about
50 cents for that. 30 or 40 cents of swipe fee
plus the little percent. Swipe fee is very high. The average transaction
at Starbucks is, I think, $7 or $8. So they figured that
by uploading $50 once onto the app– it’s not about the interest or
float they make on your $50. It’s not about the fact that
you leave a little money there that you may never
actually spend to zero. What it’s really about
is, they’ve saved $4.50. They paid the swipe fee
once instead of 10 times. And for $4.50 they can give
you a free cup of coffee. You know, coffee doesn’t really
cost Starbucks almost anything. And that is why they want to
move you to their payment app. And that economics gets
to this following point, which is that when I
pay cash in Starbucks they’re getting 10% less
than when I pay a card. So as an economist, as a
merchant– and the merchant’s constructed by this, by the way. There’s a big case
that just came out. How many of you
know Amex v. Ohio? It was decided in
the Supreme Court. Right? I’ve got three. This is at a law school. It was not the sexiest case
in the Supreme Court’s docket. But it was a pivotal case
that was decided 5 to 4 that I think was a
giant mistake, that reaffirmed this business model. And it turned on an antitrust
question that I’m not– I’m not an antitrust economist. I’m not an antitrust lawyer. I’m not a lawyer by any
stretch, although I’ve written a lot of law. But what I am is an
economist who understands, regardless of the
legal question, the economic impact
of the court’s finding is people who pay
in cash subsidize me and people who
pay in fancy cards because the merchant has
to offer us the same price. And by offering us
the same price blind, they have to average
their total net. Their net is minus this cost. So this guy is giving me more
money because I’m costing less. That’s inequality number one. You guys with me? Inequality number two. So, JP Morgan Chase
has gotten 2% to 3% of everything I
bought this year. And, you know, when
you guys have kids you’re going to appreciate
life gets real expensive. We just started charging
summer camps on our credit card because it’s online. Right? So let’s say that
my family charges $80,000 a year of expense– right– on our cards. So that’s $1,600 at 2%. Say Chase is a
little bit better. That’s $2,000 Chase
has just earned off of me using their card. But why do I have
this Southwest– I have a million cards I
could have chosen from, right? Chase has formed a
partnership with Southwest to give me some of that
back in the form of points. Which I can actually calculate,
because for Southwest 70 points equals $1. It’s much easier
to calculate this. I could have shown you
my Marriott card, which is much more challenging. 70 points is $1. So I can calculate $1 here– $1 spent is one point, but
it’s $2 on this kind of thing. It’s, I think, five
for Southwest flights. I flew Southwest today booked
on this, thank you very much. And that’s money
I’m getting back. So let’s just say I
get a 1% cash back. That’s kind of like a
very standard transaction. Right? Or 1.5%. I’m a little higher-end,
I have better offers. Right? People compete. So 1.5% cash back on $80,000
is $1,200 a year, tax-free. Right? These are called rebates. The way our tax code
works, this is not income. This is a rebate. Right? If it were a check of earned
income, like a dividend from JP Morgan Chase, I’d
have a series of taxes. But there was a decision
made as these things expanded to call them rebates
under the tax code, which are non-taxed items. So $1,200 tax-free is really
about $1,800 of pre-tax income. Maryland’s a high-tax
state, where I live. Right? Because these are tax-free
at the federal level and at the state level. $1,800 tax-free of
income a year is what I earn on the payment system. All right? The average American earns
about $50,000 to $60,000 a year. That’s about two weeks of pay
to the average median worker. So for two weeks
of their life is what I’m getting just
from how I buy things. This is a huge exacerbator
of income inequality, because the median worker
doesn’t have access to this. Their credit score
isn’t good enough. They’re not charging
enough money. They may have a subprime
card where they’re getting interest in fees. They’re probably using
maybe a debit card, or growing increasingly
because the economics of debit are not in their favor. And I’ll get to that in
the second part of my talk. They’re using a prepaid
card where they get bupkis. They actually pay a small amount
to have the safety and security of a prepaid card versus cash. This is the first way
in which how all of us are contributing and
benefiting from a system that’s promoting
income inequality. Just simply how
we pay for things. And because the best way to
change that, in my opinion, would have been to decide
Amex v. Ohio the other way, to give merchants the ability
to price discriminate– which is more
common in Europe, I might add, where
people at the register say 3% surcharge to use credit. That would be a
ball game-changer. This is also a
fundamental area where I don’t believe financial
technology is going to innovate our way out of it. Because you’re going to have
to offer me a lot of money to not use my Southwest card
or my Platinum Sapphire Amex, as you guys get
higher up the chain. And it’s going to be very hard
to innovate a new market that’s going to try to grab
these top 10% of people who are benefiting handsomely
from the current system. Let me pause here for questions,
because the second part is a little weedier and also
is how the bottom half is getting actively screwed. This is kind of
passively, right? None of the people who’ve
used cash or prepaid cards appreciate the
magnitude of this. And all of us who get
the magnitude of it don’t really connect
the dots to understand who’s paying, which
is fundamentally the bottom half of
people in the fact that they’re paying
essentially higher prices for the same goods I am. You would never
imagine a store that said all prices are 2% less
if you earned over $150,000 last year. But that’s essentially
what cash registers are. So let me pause for questions. AUDIENCE: So the
Starbucks app that you described– is that the
same thing as a department store credit card? AARON KLEIN: Hm-mm. It’s a different [INAUDIBLE]? A department store credit
card, like the Macy’s card, is a bank-issued line
of credit in which– Macy’s probably pays
a lower swipe fee. They probably have
negotiated that down. But Macy’s economics there is
actually tracking what you buy. So this is a different
side of payments altogether that’s not really
an equality side, but is an information side. So JP Morgan Chase
knows how much money I’ve spent at Macy’s, Banana
Republic, Under Armor– right? And if you’re really
sophisticated, you can find all my cards
and buy that all online. But you don’t know what piece
of clothing I bought where. You don’t know whether about
my shoes at Nordstrom, my suit at Nordstrom, my ties. Right? You can’t track
what are called two sides of the receipt,
the itemized portion and the total portion. The itemized portion isn’t
transmitted in the exchange. Macy’s really wants to
know what I buy there. And so when– on
the Macy’s card they can track my itemized
transactions, because it’s like a loyalty. I don’t know if you guys at your
supermarket– how many of you, at the supermarket, or CVS– you give them a phone number,
and you get a CVS receipt that’s, like, 10 feet tall? Right? For whatever reason–
it’s not privacy– I just never did that. I use my mom’s phone
number at the Giant, and I use my sister at CVS. And let me tell you something. I get a lot of
products that are not for me when you use
your sister’s phone number at the pharmacy. But what that really is, is
about tracking your purchase to target advertisements
to do this. One of the payment
revolutions that’s going to come in the
future is when people can get both sides of the receipt. And when you pair that with
indoor GPS, which is coming, I go into the mall and
somebody can figure out, hey, wait a second. You’re walking towards
the Under Armor store, and you don’t actually
buy your sneakers there. You’ve actually been
buying golf shirts. And so, did you know Macy’s
has a sale on golf shirts? And then a thing pops
up on your phone. Right? You guys all thought it was
going to be Foot Locker, right? And I was going to
make a a shoe comment. I’m from Maryland, so
I’m an Under Armor guy. But I know Duke is a Nike– [LAUGHTER] AUDIENCE: It was. AARON KLEIN: It was? So that’s actually what
the store cards are. Other– yes? AUDIENCE: Is the
proposal in part one that cash back should go away? Or is it that merchants get to
price in and reclaim cash back from the consumers? AARON KLEIN: Right. So the proposal is a bit of
a Rorschach test as to how you think about public policy. Right? Like, if I were thinking
what AOC or what, like, a strong liberal would be– I would ban cash back or
I would tax cash back. Right? Why is this un-taxed
rebate income? It should be taxable income. It’s literally cash back. It’s one thing if it’s
frequent flyer miles. How do you value that? Now it’s actually a
check from a bank. Right? How is that different
from your interest? My belief as an economist– and
maybe I’m moving a little more in the center– is, the merchant should
have the authority to price differentiate
based on their total cost. I think had Amex v. Ohio
been decided differently and it had gone five to
four in a different way– which I think it might
have, had Merrick Garland been on the court– then I think that would
have solved the issue, and let merchants
figure it all out. A true free-market
person would say, listen. The merchant has the authority. They don’t have to take it. There’s a reason people a lot
of merchants don’t take Amex. Amex is an extra
point, basically, relative to Chase
and the other folks. At the extreme
luxury end, it’s not. Chase Sapphire is comparable
with an Amex Platinum in terms of the fee for the merchant. But they would say, listen. The market’s the market and
merchants can be cash only. Now, cash only is
a dicey business, but that’s kind of the– far free market people
say, you know what? It’s not a problem. People compete for
rich people’s business. Leveraged people get
more money off of this. If income inequality is your
problem, do a different tax. Or maybe the market’s
fine with that. But I think if I’m
giving you, like, an honest “these are
the different choices,” that’s where I would choose. I think reasonable
people can argue each of the different spectrums. Other questions? All right. So now I want to get to the
other part of the debate, which is the other system
of the payment system. How many people here are going
to get paid on Friday, March 1? All right. Two people. AUDIENCE: The 25th. AARON KLEIN: You get paid on
the 25th, which is Monday. So Friday– happens to
be every other Friday. March 1 happens to be
a Friday this year. If you take your paycheck
into the bank and deposit it, or you take your phone
and– how many of you deposit when you get
a check from a relative or something on your phone? Right? That’s a check truncation
law that Lee mentioned, that I helped write. That made that legal. Before that you actually had to
physically present the check. Why is that money not
immediately available? Maybe you have a credit
union that offers it to you. But under the law the Expedited
Funds Availability Act, which is a 1970-era
consumer protection law– how many of you
guys have noticed that all these
consumer laws tend to be somewhere in the ’70s? It says the following. The bank has to make the
first $100 available to you immediately. Up until that it can choose to
hold your funds for up to three days for something
called a local check and five days for something
called a non-local check. There used to be a
distinction between that based on which of the 32 Federal
Reserve processing districts you were in. Today there is one processing
district for all of it. But they can hold your
check from Friday– these are business days– to credit you at the end of
the day Wednesday if they want. And that’s based on the fact
that Monday isn’t a holiday. If you’d gone two weeks earlier
when there was President’s Day they could hold it
for nearly a week. Now, there’s a reason why. In the ’70s it took a
week to physically fly this check around. There were concerns
about fraud, bad checks, the money’s not
there in the account. Today there’s no reason why. Or you should let me
put it a different way. There are two reasons why. One has to do with the
actual technology about how the payments are
processed and credited. The second has to
do with the law and who wins and
loses from this. Let me start with the second
and then I’ll get to the first. OK. I don’t care. I don’t care when my
check is available, because I have a bunch of
money in my bank account. My wife didn’t get paid
for an entire month. She’s a career
government employee. The government was shut down. She actually had to
go to work because she was on the national
security exemption, but she didn’t get
paid for a month. Missed two and a half paychecks. We were OK. We put off paying for
summer camp a little bit, but our mortgage,
everything else like that– half of Americans and
everybody in that top 10% basically has that cushion. According the Federal
Reserve, 40% of Americans couldn’t come up with $400
to pay for an emergency without selling an item
or borrowing money. The bottom half that
I told you about– the 160 million people that
have less than the top three people– regularly touch the
zero or lower end of their bank account. For them, time is money. For them, March 1, the
first of the month, means rent, mortgage,
childcare, car payment, maybe your credit
cards, gym membership. There are a bunch of
recurring things– utility bills, et cetera. Those are debited the 1st. It matters if my
money’s not going to be available until Tuesday,
Wednesday, or Thursday. How do they handle this? This slow system costs them
billions of dollars a year in the aggregate. Americans spend– what was it? It was– I came up with, I
remember– $7 billion a year in check cashing services, $35
billion a year in overdraft, and another I think $18 billion
a year in payday lending. Certainly some elements
of each of those three are irrespective of this
time and certainly could be eliminated by this time. I’m going to tell you a story. And it started me on
this whole research. I take my girls ice skating
on Saturday mornings. And after the end of ice
skating we go to the bank, I do my banking. They have little kid accounts. They put in the money
from their piggy bank, they get a lollipop, I
teach them banks are good. So we’re sitting in the bank
and there’s two women in front. One woman in front of me
and one at the teller. It’s Saturday morning. It’s a slow day. The woman at the
tellers says, when’s my check going to be there? The woman says, not until
Wednesday or Thursday. Monday was a holiday. It was Saturday morning. She said, but I need my money. I have debits coming. She said, I’m sorry. She said, what’s going
to happen if I hit a 0? She says, you’re going to get
an overdraft. $35 dollars! Oh my god! Blah, blah blah. She’s yelling. The woman says, well, you know,
what if I have more than one? The teller goes, it’s
$35 each time, ma’am. Boom. She explodes. I feel sorry. I know the teller. I come into the bank
every couple Saturdays. You know? This isn’t the teller’s
fault. The woman’s getting angrier and
angrier and yelling, and my kids are
starting to get anxious. I’m like, look– you know,
I’m thinking about this and thinking about
faster payments and all these other things I work on. I’m like, wow, how weird
is it that I saw this? Here’s the mind-blowing
part of this story. The other woman in line
who’s in front of me, who’s also waiting as
this woman’s screaming louder and louder at the
teller, all of a sudden walks over to her and
goes, hon, I gotcha. Go around the corner
to the check casher and bring back the cash. You’ll be fine. And the woman says,
well, when’s the cash go? And then woman goes,
oh, well, your cash is credited immediately. Oh my god. Thank you so much,
thank you so much. And she walks out the door. Now, here’s my takeaway
from this anecdote. Number one, this economics
of what this woman did were brilliantly rational. The check casher’s $20. By saving one overdraft
she just saved $15, and I know for a fact
she had more than one. $70 versus $20. She just saved $50. That’s a lot of money. And who knows? That’s two overdrafts. Right? I can keep counting. Two. Check cashing demand is
not on unbanked people. The woman clearly
has a bank account. It’s not a question of,
is there a branch nearby, are their hours open,
is it convenient. The woman was at the bank. At the teller. It wasn’t even like
the line was long. She was sitting at the teller. Right? That’s not the problem. Right? The problem is the speed
of the money getting in there made going
to a check casher the economically
optimal decision. That’s just a fact. Two, there were three
customers at this bank, me and two people. One of them had the problem,
the other one knew the answer. For that other woman
to know that answer, she must know that problem. I never thought of that, and
I’m an expert in payments. I wrote the law governing
how the check is deposited. I studied this at
a fancy think tank. It never dawned on
me to tell her to go to where the check casher was. And while I’ve lived
in Silver Spring, Maryland my entire life– it’s
where I went to high school– I live a mile from my sister,
and I’ve seen the check casher vaguely on the road. I’ve driven past the
sign a million times. I couldn’t have given her
turn by turn directions like this woman did
going out of the bank. So some percent
of that $7 billion a year in check
cashing fees is solved by having your payments
expand immediately. I have another piece
of data on this. Now I’m going to turn
to my other point. The Consumer Financial
Protection Bureau set up in Dodd-Frank had
this complaint portal where anybody could
go online if you could figure out this
weird government agency and argue a complaint. And they would publish
reports on what people were complaining about. People complain a lot
about credit bureaus. But when they did a
deep dive on banks the number two
complaint in America about all banks and
all bank products were about the following. When you guys deposit
a check on your phone– I saw a bunch of
you raise your hand. Do you get an email saying
your deposit’s been approved? I get that. Right? The number two
complaint in America were people complaining
about that email and then getting an overdraft,
because they read that email to mean the money’s there. That’s actually not
what that email reads. That email reads, you submitted
the little thing correctly. Don’t worry. You can tear up your check. It’s going to go
through processing, and it will be there in
three to five business days– or no less than
three business days. But people didn’t realize that,
and they went and spent money and then they got hit with
this $35 overdraft fee. And they were so
pissed off about it, about the fee, that
they went and found this random
government agency that hasn’t been around that long
and logged on the consumer complaint portal and complained. That’s how prevalent this is. So I would estimate that this
is about, in the aggregate, costing the bottom half of
people $10 billion a year if– based on a conservative
estimate of 10% to 20% of these fees going away. And I’m not counting late
fees from just saying, you know what? If I pay my power bill
five days late it’s $4. Whatever. You know? I’m not talking
about interest fees, about carrying longer interest
until I pay off my credit card. I’m going to get a very small
number here, in my opinion. $10 billion a year. Right? You guys heard of welfare TANF? That’s a
$17-billion-a-year program. That’s how much the government
gives to those poorest people. This is how much our slow
payment system is taking away. Now, why is the system so slow? Well, the system’s so
slow because nobody cares to improve it. Or, put a very specific
way, the Federal Reserve is not invested in
its improvement. The Federal Reserve– America’s third central bank– operates a clearing system,
the Automated Clearing House– or ACH– which is the network
of things that process all the payments
that’s governed by this law. They operate under a technology
that’s called batch technology. And I went to one of these
check carrying plants in the inner harbor of
Baltimore one night, and it looked like
something from my childhood of a film strip, which
was this old, like, machine with 63 slots– because it was
64-bit processing, and there was one bit
for the random thing. And you just put a bunch
of paper in and it went, ch-ch-ch-ch, each of the
little routing ticker codes, and it came out. And then you just run
them batch after batch. And when you run
a batch network, the full batch
takes as long as it takes to run the very
last transaction. I can’t promise you the
first transaction posts before the last, and when
you’re doing payments you’re netting things out. Right? Every time we send each other
money it’s not like the bank’s actually– you know, it’s not
like JP Morgan Chase and Bank of America
are constantly moving 30 dollars between each other. Right? They’re settling on a basis. You can’t move a batch
payment into what’s called a real-time system, in
which the ledgers are moved individually in real time. You have to build a new
system from scratch. Mexico did this in 2004. So did South Africa. Poland did it. The Bank of England
did it in 2007 when the first iPhone came out. This is an XR. Since then we’ve improved
our batch system slightly. Your batch will clear, say,
at the end of the business day if you post by 1:00 PM
eastern time, 10:00 AM Pacific. There’s no time break if you’re
one of the 50 million Americans in the west coast. In addition, just because this
thing is clear doesn’t mean the bank legally has to make
the funds available to you. There were banks– and this is
well-documented in the press– that they would do
this system where they would run all
the debits before they ran all the credits in order
to maximize overdraft fee. That’s pretty shady,
don’t you think? Hold on. I’ll go one step further. They would go to a person and
look at your account and say, at 10:00 AM you spent
$100, then you spent $50, then you spent $3, then you
spent $10, then you spent $12, then you spent $2.50. And they would reorder
your transactions for processing to process
the largest ones first to get you to $0
and then give you the maximum number
of overdrafts. So you were not actually
being debited in your ledger contemporaneously with the
timing of your accounts, but rather in a algorithmic
way to maximize overdraft fee. I never paid that. In fact, if I even get an
overdraft I call my bank angry and they refunded it like,
oh my god, I’m sorry. We didn’t mean to
do this to you. Right? You raised? AUDIENCE: The bank that I
was [INAUDIBLE] very much was [INAUDIBLE]. AARON KLEIN: That’s right. AUDIENCE: And very deliberate
strategic decision. AARON KLEIN: A hundred percent. There are stories about the
guy who figured it out at– I forget which bank– who got,
like, a $10 million bonus. And, by the way,
that was, you know, well-earned from the
bank’s profit perspective. In a real-time system
that’s impossible. In a real-time system
you can’t do that. In fact, the
consumer is empowered by having the information. The technology to do this
real-time system exists. You just have to
build it from scratch. And the Federal Reserve
has chosen not to do that. In addition, as the
regulator of this system, there are other private
clearing systems. The clearing house operates
one very old in New York. It started before
the Civil War, which was a period when America
had no central bank. As I said, the Fed is the third. The second central bank
ended under Andrew Jackson. So there’s a long
period without one. Payments still
cleared and settled. We still had banks. And so other clearing
houses do this, but they operate under
the regulatory authority of the Fed. As regulator, the
Fed is inherently conflicted by its
operational arm. That is, if the Fed wanted to
do the right thing and mandate real-time, in six
months everybody has to pay in real time. OK. Your operation system
will shut down. It is impossible– almost
impossible to ask a federal agency to do something
regulatorily that it cannot comply with operationally. It just doesn’t happen. In addition, there’s
been historically very little political
pressure to do this. Americans don’t fully
understand that your check ought to be there immediately. I mean, if they can send
you an email that it’s approved for deposit, they
can put the money there. Some credit unions
voluntarily do this as a good. But this is an area where
financial technology can disrupt. This is an area where the bottom
half could operate and move their money to a
platform that does this. And, to the bank’s credit,
some of the big banks kind of realized that if
they don’t move this way there’s going to be enough
consumer demand where they could be Uberized, or maybe
a different way to put it– if they create
this product, they can make a decent
amount of money on it because this
overdraft issue is starting to get attacked
very much politically. All the banks that got caught
ordering these transactions– essentially, the big banks
got under huge public pressure to change it. And and most did. Not all, but most. So they invested in
a new technology. It’s called the RTP– real-time payments, and
have started offering this. PNC recently– it’s basically
the 48 largest banks. They’ve started offering it. PNC actually as a
product now where they’ll give you
availability of your money for 2% of your deposit. Does this sound like a
good or bad deal to people? AUDIENCE: Bad. AARON KLEIN: Bad. Who here thinks bad? Who here thinks good? Most of you think,
I don’t know yet. Well, if I had $1,000
and I was going to– it’s 2%. $20. Saves me one overdraft. Life’s about alternatives. If I have $500 it’s only $10. That’s half of what the
check casher charges me. It’s nuts to me to lose 2%
of your pay to have access to it 72 hours faster. But life in economics
are about alternatives. Right? If it’s a $39 late fee,
it’s an awful good deal. Right? As these products get rolled
out, banks can charge for them. There’s another economic value
incentive that you have that differentiates a bank
participating in real-time payments from one of the
5,700 banks that are not– the 48 largest. By the way, the platform’s open. Any bank can join it. Most payment networks
have to be that way. So, you know, this
is kind of where I think the second
phase of this is, which is how the
payment system charges those who have less
more money to access their own money for things
that the wealthy never have to think twice about. I don’t know if my paycheck
is going to be available on the 1st or Monday or
Tuesday or Wednesday, because I don’t care. I’ll close with this, and
then you guys can answer. Direct deposit is not instant. Direct deposit– if my person– direct deposit is when
your payor hits the button to submit your bank to notice
that and go through the system. If you get your money
in the bank on Thursday, it’s probably because the
person did direct deposit on Monday or Tuesday. It’s not– and I found this out,
that people didn’t understand this when I posted
one of my pieces on Brookings Facebook
page and a bunch of people wrote, like, oh yeah,
I had that problem when I used to get
paychecks, but now I signed up for direct
deposit and I’m all good. Not true. You’re not realizing it because
of the way your payrolls process. And this gets to
another question which is a broader
issue, which is, why do I have to work for two
weeks and get paid week three? Why don’t I get paid the
same day that I do that work? If you’re an Uber
driver– anybody here drive Uber in their spare time? You can actually request that,
to get paid the same day. Uber will charge you $5. And they’re charging
you $5 in part because they’re
fronting you the money, because the real-time payment
platform hasn’t been developed. If you develop
this network, there are a series of auxiliary
programs and payment technologies and
customer transactions that may occur from that. Remember, Uber
can’t work on cash. You cannot get the benefit of
Uber without at least a debit or a prepaid card, depending on
whether Uber accepts prepaid. So let me stop for questions. AUDIENCE: So my question is
about the real [INAUDIBLE].. So, I mean, although we
said the other thing was good comparatively
to overdraft fees, but for those people
that are really on the margins of society,
those fees in and of itself are very high. So you don’t have $20 to spare. Although it might be better,
you don’t see the logic of that. So who is developing policies or
thinking about those people who live by these things? So you mentioned TANF. So they went to a
debit card format, so all of these
different formats. What do those things mean
for the people that are at the very margins of society? AARON KLEIN: So the
bottom group of people– cash. Cash is kind of efficient. Cash clears in real time. Right? You have safety issues. You have concerns. You don’t build credit history. It makes expanding– going up– 7% of Americans
lack a bank account. So I’m going to take
it from your question that you’re focused
on the bottom 7%. Right? For the bottom 7%
a lot of them– I think about a third to half,
depending on the surveys– it’s a small sample,
and a little bit harder to sample than
the rest of America– used to have bank accounts. And they’ve chosen not
to because of the fees. There’s a high
monthly minimum fee. There’s an overdraft risk. This is not a product that’s
economically valuable for them. In addition– you say,
well, make the banks offer them free
fee– free accounts, even if it doesn’t
matter to them. It’s a lot more expensive to
offer an account to somebody, because there’s a high due
diligence cost having to do with anti-money-laundering
concerns that have been ramped up substantially– in my opinion, often
for no good reason. Put a different way, I don’t
think the bottom 7% of people are terrorists, and I
think that we’ve ramped up our anti-money-laundering
thing because we want to catch al-Qaida,
not because we’re terribly interested in
where that 7% got their $50. Maybe. I’m not saying that. By the way, does anybody know
the highest-profile person who just got put in jail
for money laundering? Who here’s watched
the Jersey Shore? Come on. Be honest. Maybe my references are
already five years into– The Situation. Mike, The Situation, was
convicted of tax evasion and money laundering. Because if you put in
more than $10,000 in cash the bank has to file a
report, and so The Situation, being the smartest guy
in the Jersey Shore, thought if he just deposited
$9,900 a bunch of times nobody would file. That’s called structuring. And he went to– There are a bunch of things. Denny Hastert. Do you guys know who
Denny Hastert is? Former speaker. Right? He’s in jail not for what
it seems like he committed, which was child molestation,
but he’s actually in jail for pleading for
money laundering, illegally taking cash
out of his bank account to avoid the $10,000
limit to pay the victim. That’s what he’s– he’s not
in jail for, what I would consider, the true crime. Or– I’m not
minimizing structuring. The reason we have
these money laundering is to catch folks
in that situation, but it requires a
high due diligence. The bank’s filed three million
suspicious activity reports last year. That number is up 1.7
million more than in 2010. So I’m not going to
pre-al-Qaeda stuff, 2001. You can understand
why you might want more of these reports
in 2005 than 2001. From 2010 to 2016. So the bottom group
of your folks– I would say the following. One is, they’re mostly dealing
in a cash-based system. For them the biggest
problem is making payments that are
increasingly moving digitally. So I want to pay my bills. Right? I have to go somewhere in cash
that accepts a cash system. There’s an argument
that, as some enterprises are going cashless, that’s
discriminatory for them because they don’t
have the access to buy even a prepaid
card because you have to put that money up front. That is, I think, kind
of the frontier of where the future is looking for them. When you ask the question about
this time delay in banking, I would say for
them the biggest– one of the reasons the bank
account doesn’t provide much value for them
is, when they get paid they need access to
those funds immediately. So if I’m that bottom person and
I worked my tail off this week and I don’t have
a direct deposit and I get a check on
Friday, one of the reasons I’m going to the check
casher and not even doing direct deposit is
because that money is not going to be available
to me on Monday and I have to pay my rent. I have to my utilities. I may have to pay my child care. I may have to pay my
child support, my alimony. Whatever that is is on
the first of the month. And so I would argue to you,
moving to real-time payments creates more value in the
banking system for them than the current system. One of the reasons why
the current system is not as valuable to them on a
minute, day-to-day basis are things like this delay. AUDIENCE: You make
a good case for it. But there are some
some complications that I’m sure you’ve got into. One is the [INAUDIBLE]
that even if you’re getting a real-time
payment, you have to get cash to pay all the
people you have to pay. A lot of people– until everybody is off of
cash [INAUDIBLE] they’d say, you’ve still got
the same problem. AARON KLEIN: So, I’m
totally for cash. Let me be very clear. I’m against cashless. I think cash plays a valuable
role, because I’m not sure the economics work for a
person who makes $15,000 a year to be banked. They may require a subsidy. The liberal in me would
like to impose on the bank a requirement and duty
to serve to provide that person an account even if
that person is a money-loser. But that’s– I don’t believe the
American public writ large has the political will to do that. In terms of the question about
the payment system needing to go to the other
side, which is– one of the problems with
payments is, it’s a network. It only works if
everybody else is on it. It’s a giant barrier
to entry, to moving to an alternative
payment system. Right? Because I need to know that my– one of the reasons I carry
that card everywhere is, I’m just confident I can
live with it if I don’t have a single dollar in my wallet. And so you can create– we’re at a tipping
point with technology where you can create
that very differently. I’ll tell you a story. I was in China. I have a paper coming
out on Chinese payments. And China operates–
the only other place I’ve seen that operates
similar to China is the parking lot here. [CHUCKLES] So I got a parking
pass here for the day. How many of you guys have– right? And there’s a little
QR code that you scan. Right? That’s how China works. Everything you pay
in China is a QR card on your phone
based on two apps– Alipay and WeChat. And how many people
here have WeChat? Any? Yeah. One, two, three. Right? WeChat is larger than Facebook. China. It’s the largest messaging
system in the world– larger than Facebook. Alipay is like– is the
payment arm of Amazon. Money exists there
and is transmitted through the payment
system completely detached from the banking network. I can WeChat pay you money in
what’s called a red envelope, and if I were paying
for parking here I would have held up my
phone and the QR code would have scanned it and would
have docked my WeChat money some amount. It would have gone there. And they may have paid
their employees on that. Or if it had been on Alipay they
may have paid your suppliers. They may have bought
the pizza on that. Nowhere in all of
those transactions is a banking system. We have payments inter-tangled
in the bank in banking. Everybody here
appreciates the separation of banking and
commerce in America. Right? This is one of the few crowds
where we all appreciate. Right? Other countries don’t. What I’ve come to realize is,
we separate banking and commerce in law, and we think about
things that are banking and we put payments
in the banking realm. But it really isn’t
legally there. Is it? The definition of bank,
as I understand it– and there’s a
roomful of lawyers– is accepting deposits,
having deposit insurance. Right? The definition of bank is all
about charter type, deposit type. It’s nowhere about payments. Payments are money
transmitting businesses, which are state-regulated,
non-payment entities. Right? PayPal is not a bank. You can create– thanks to
the ubiquity of technology– it used to be these
magnetic cards were linked with
banks because it was the ubiquity
of the technology, of knowing the money was
there behind the system. But thanks to
phones, which are not correlated to income, banking– how you pay is deeply
correlated to income. Whether or not you
own this is not. Right? Whether or not you use
this for mobile banking– among people who have bank
accounts, whether or not you use your phone for banking
is not correlated to income. In fact, minorities use their
phone for mobile banking more than whites, not
controlling for income. It’s the only statistic I’ve
ever seen in all my years of banking where you have what I
would consider a good product– right? Mobile banking should
be a good thing– with a higher adoption rate. By the way, as an
economitritian– that’s an example of
what economitritians call a hidden variable bias. Race has nothing to do
with mobile banking. Do you know what does? What’s the variable? AUDIENCE: Access to other
types of technology. AARON KLEIN: Nope. Age. Young people use this. Old people are much
less likely to. Minority population
skews younger. You control for age, the
relationship goes away. It’s not a racial thing,
it’s an age thing. But here’s something
that’s fascinating. If I know what you
do on your phone I know how much money you have. If you’re rich you use
your phone to move money. If you’re poor you use your
phone to check your balance. Why? Because you’re afraid
of hitting zero. Why? Because you don’t want to get
a fee– all these problems and fees that come
when you go zero. What you use your phone for is
deeply correlated to income. Again, because I don’t
care what my balance is, because it’s always high. Or, put a different way, it’s
always high enough from zero that I don’t have to worry. But that’s the
luxury of the top, which is not the reality for
the majority of Americans. Other questions? So how come you mentioned the
Dodd-Frank legislation dealt with a lot of abuses by banks,
also dealt with other things– that at no point
along that statute did they ever consider
the idea that if you have an electronic contribution
that Duke makes to my bank that I have to wait 72 hours
to get that money unless Duke makes some arrangement
with Bank of America. So I’ll tell you,
three great things. One is, there’s only so much
capacity to argue an issue. In the payments
capacity– and Dodd-Frank was completely eaten up by
something known as the Durbin Amendment which,
as I said earlier, is one of these things that
was not core to Dodd-Frank. It was the only vote in the
Senate that was filibustered. Every other part of
Dodd-Frank amendment was a 50-voter, as they call it. The opposition to Durbin by the
banks was so hard it was made a 60-voter, and it passed over
the objection of Senator Kris Dodd, who voted against it– a part of his own bill. But what the Durbin
Amendment did was it said the Federal Reserve had
to promulgate new regulations on the swipe fee of debit
that essentially reduced debit from 35 cents to 20 cents. In other words, it took 15
cents of each debit swipe and reallocated it from
banks to merchants. Maybe in some macroeconomic
way the merchants argued to lower my
price by one cent. Right? Which is– you know, debit
is about 30% of transactions and blah, blah, blah. Right? People have done some
pretty good papers on this that have shown no
price impact from debit. And it was a great political
food fight between the big box real things– Best Buy, Walmart– right? You can imagine how
much Walmart cared about this versus JP
Morgan, City, and all that. And the big banks hid
behind the small banks, who were deeply pushing it. And the big box stores hid
behind the small retailers. I always think of my dry
cleaner, who doesn’t take Amex so I have to use debit. Right? And that was a huge
political fight. And that sucked up a lot
of the political oxygen. That’s reason one. Reason two– and this
is a failure of the bill that I helped work on in 2003. In 2003 most people didn’t
really have real-time payments, and when we argued to
expedite the payment process the banks countered with
a concern about fraud. They countered with adoption
rates of the technology. And the Fed countered with,
we’re not that sure about this. We don’t want to change
how things are going. We want to make sure we’re
doing this big thing. Trust us. We have the regulatory authority
to lower it if we want. And I originally
fought to require it. I ended up getting
whittled down to a study. That’s a very
common thing in law, which is, you come
with a requirement, you get a study with authority. The study was done five
years after enactment. Originally the Fed proposed 10. I was a young staffer and I
said, that’s way too long. 10 years? And I just jammed them at five. That was a mistake on my part. Within five years they had– the study was due five years. They chose to honor that
time frame, strategically. Often people–
studies come in late. I’m sure nobody here has
ever done a paper late. And they started this
study three years after the law had passed. And three years after
the law had passed, not that much
adoption had occurred. So the study concluded
it was too soon to tell. One. Two was– in 2010
the banks were still making a decent amount of flow. There was still some
interest rate on this. And in requiring the
bank to move that faster, you’d be reducing
banks’ profitability on overdraft and on float. And in the financial
crisis the goal of policy was to make the banks
a little healthier. Right? Now, this debit fee thing–
again, Dodd lost the vote. The banking interest
lost the vote. It was real money, but it was
money going to an identified political constituency– retailers. That’s a very powerful
political constituency. Who is the political
constituency I have? Who’s the political
constituency for my argument? The bottom half? That’s a very weak
political constituency, particularly on a topic that– I mean, they would get very
agitated about Glass-Steagall, which I don’t think would
help the bottom half of people at all, versus something
specific like this– is the second reason why I
don’t think it was there. And people didn’t have the
experience and ubiquity. Right? Even though England had
adopted it three years earlier, folks didn’t realize it. The last point– I’m going to blame my friends
in the consumer movement, whom I tend to like. They tend to be overly
concerned about fraud. And they have huge, huge
amounts of legislative remedy for very, very small cases
and incidents of fraud. And you can look back
on this Check 21 Act. They had consumer groups– I’ve met some of them
who have opposed it. I said, well, if
you’re not going to have your paper check,
how can you prove it without the physical substance? And there’s all this
legislative about rules about fraud and subsidy
checks and all this stuff. I think the Federal Reserve
found seven counts of trillions of payments. They found seven incidents. Right? People just– fraud is detected
in a lot of different ways. But that argument still
exists to this day. The second argument that
consumer groups get wrong is that– back in the 1970s when
people were playing the float– So in the 1970s, when
everything was done by check and the poor didn’t
have debit cards, the problem was less
severe, because yes, I got paid on Friday
and I deposited it, but I gave my rent check to my
landlord at 4:50 PM on Friday knowing that they couldn’t go
to the bank and deposit it. They couldn’t deposit
it on the phone. There’s no such thing as an ATM. The bank didn’t
open until Monday. And by the time the guy
deposit it on Monday and it cleared three
days later, my Friday pay would have cleared
one day sooner. And oh, by the way, if I was a
richer, sophisticated consumer, I was getting 10%. Banks used to pay 10%
interest on your account. I’m too young to have seen those
days as well, but believe me. I’ve heard from people I respect
that they really existed– in the Electronic Funds
Transfer Act, I think, of 1974. And so they were
saying, you know what? Like, people benefit
from this timing game. And what they fail
to appreciate is, with the advent of new
technology and modernization, the most empowering
thing you can do to people is tell them
how much money they have in the bank account
right now and let them make their own sets of choices. And they’re not putting these,
like, three day arbitrage times. And the banks aren’t either,
because they figured out how to reorder the
payment systems, particularly with
the digital debits. AUDIENCE: There’s
another area where I think liberals
have gone off track, and ironically I think
they borrowed the idea from neoclassical economists. The nonsense that late charges,
interest rates, penalties and that are all fungible. [INAUDIBLE] said this is
just the cost of money. I think it’s messed up the whole
payday lending [INAUDIBLE].. People who use payday
lending, for them it’s a fee to avoid having their
car repossessed [INAUDIBLE].. It’s a very different
mindset from– and they don’t care
about whoever’s running around saying
they’re paying 300% interest. They laugh at that. They say that’s just irrelevant. I would rather pay $45 so
that I have my car tomorrow. And I see that as
a convenience fee, which changes how you
should address the politics side of it. So if that’s
necessary, then let’s see how we can structure
it to protect people so they understand that. AARON KLEIN: So
one of the things I like about my real-time
payment argument and my policy of
mandating clearing immediately is, I think
it will give a huge value and reduce the demand
for payday substantially. And it’s not a tax. Rich people aren’t paying,
unlike my credit card reward thing, which you could argue. And it’s not an
interest rate cap. It’s not a debate that you–
no, you can’t get this. Right? And so I think it’s a
very appealing solution. I’m very pleased in your
example you said car repossessed and not car repaired. There is a huge error
in the way people talk about low-income people’s
immediate demand for money. And it has to do with unplanned
expense versus shock to income. In other words, the center
for responsible lending– a wonderful national nonprofit
located here in Durham– did a really
interesting analysis where they found that the
driver for payday lending was one out of every six people
was an unplanned expense. My car broke down. I needed $600 to repair my car. Five out of six
times it was a shock to income, which is your story. I can’t make my car payment
because I am a painter– one of my side hustles
is painting houses, and it rained for three weeks in
a row and I got short of that. My alimony comes on the first,
but my ex was late five days. I’m going to get
it in five days. He’s just late. All these other
stories I can give you of unplanned expense,
that’s the majority. The story in Washington
which, told by both industry and repeated by folks
on the left as well, is unplanned expense. And the solution to unplanned
expense is very different. It’s budgeting, it’s savings,
it’s all these other things. Right? Because I can build
a little cushion. Shocks to income
are very different. And shocks to incomes
show that when you need income,
when it’s not there, the timing of when you
receive it matters. For any of you who’ve not
read the financial diaries, it’s a wonderful book by
Jonathan Murdoch and Rachel Schneider. They do this in-depth study
about real people’s income, and they show that most people
that are somewhere in the– you know, I’ll call the 25th to
60th percentile of income– they’re cobbling income together
from three or more sources. That is, between the
husband and wife or whoever else constitutes the family. It’s not just one job. Right? This idea that two people
have two salaried jobs and have steady paychecks
is much more common. There’s a lot of seasonality. JP Morgan Chase showed that a
quarter of their customers– these are JP Morgan Chase
customers who are already not dealing with the bottom 7%. A quarter of their people have
an income shock of 40% or more one month of the year. And, as people have these giant
income shocks they need funds. So it’s the cost of money– And people– policymakers
just assume you can just put it on your card. Oh, you’re short this month. You’ll put on your card. They assume a set of short-term
financial instruments. Real-time payment can’t
solve that in the sense it can’t create more money. But the story I’ll tell–
and I realize I’m over time, so I’ll close with this– is this couple who were
both hourly workers. And every Sunday they got
their shifts for the week, and so they could
calculate how much money they would each earn. And their hours
went up and down. Right? I mean, that’s
what life is like. And then they could figure
out how much they were short. Or, put a different way, what
bills they could afford to pay and what they couldn’t. Let’s assume they had
bills that they had to pay, or they wanted to avoid
the expense of being short. And they said, you know what? I’m a gig economy. I’m going to go drive an
Uber for these extra hours. I’m going to pick up these
hours somewhere else. Well, if your bill
is due on Friday and you find out the hours
you’re short on Thursday, how can you do the
work, get paid, and have your payment clear by Friday? You can’t do that if your
payment requires three days to clear. Even if you have this wonderful
gig economy of on-demand work where I costlessly go to
TaskRabbit and go and pick up somebody’s dry
cleaning for a day. Right? In order to unlock this,
to empower people more, you have to get to this
very, very arcane plumbing of how fast money
moves, and move into it to an instantaneous amount. In that way I think
we could do more to address our growing
problem of income inequality than is greatly appreciated
in the current public debate. Thank you all very
much for your time. [APPLAUSE]

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