Prof: electronic banking can save tax dollars, create wealth for poor

April 17, 2000

Legislation pending in Congress and proposed by President Clinton to help poor working families save money and build assets draws on research and policy recommendations by Dr. Michael Stegman of the University of North Carolina at Chapel Hill's Frank H. Kenan Institute for Private Enterprise.

In his new book, "Savings for the Poor: The Hidden Benefits of Electronic Banking," Stegman argues that a little-noticed amendment authorizing electronic funds transfers (EFT), or direct deposit, of federal benefit checks can have maximum impact if coupled with a national savings program to help working poor people save money for a first home, acquire education or training or start a small business.

The proposed Savings for Working Families Act of 2000 introduced in February by Sen. Joseph Lieberman, D-Conn., would provide incentives to financial institutions to match funds saved by low-income working people who opened special accounts (called Individual Development Accounts, or IDAs) to save for such purposes. Clinton, in his January State of the Union address, proposed a similar incentive program for stimulating retirement savings. Both proposals draw from Stegman's work and recommendations about savings strategies for low-income people.

"We're talking about using the tax system to encourage and reward thrift, financial planning and asset-building for lower-income people as we do for middle- and high-income people," said Stegman, former assistant secretary at the U.S. Department of Housing and Urban Development, now chairman of UNC-CH's public policy program and director of the Kenan Institute's Center for Community Capitalism.

"We must overcome barriers that make it difficult for the working poor to enter the financial mainstream and build a stable, secure financial future," Stegman said. "In doing so, we also open the door for creating new and ultimately profitable markets for mainstream financial institutions, creating a win-win-win for consumers, taxpayers and banks alike."

The Electronic Funds Transfer Act of 1999 created what amounts to direct deposit for federal benefits recipients. The switch from paper checks to electronic deposits authorized by EFT '99 is expected to save the federal government $165 million a year in processing costs. But the most important impact, Stegman said, could be in encouraging low-income families to enter the mainstream banking system. This opens up opportunities for working low-income families to take the next financial step -- saving for the future -- if incentives are put in place to encourage it.

"EFT will bring people into the banking system, and IDAs will give them an incentive to use the system to the fullest," said Lieberman, a longtime proponent of IDAs, in his foreword to "Savings for the Poor."
"Savings for the Poor: The Hidden Benefits of Electronic Banking" is available from Brookings Institution Press, 800-275-1447.

Note: Stegman can be reached at 919-962-6849 or 962-8839. Kenan Institute contact: Cyndy Falgout, 919-401-3548.

News Services contact: David Williamson, 919-962-8596.

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