BANKING ON DEMOCRACY.

• Author: Baradaran, Mehrsa

TABLE OF CONTENTS INTRODUCTION PART I A. Three Types of Access to Credit 1. The Innovative Credit Product: Fintech 2. Gap-Filling Legislation and Regulations 3. Self-Help and Subsidiaries B. Common Traits PART II A. Payments B. Credit PART III A. Progressives, Populists, and Access to Credit B. The Creation of The Federal Reserve C. Financial Redesign CONCLUSION INTRODUCTION

When Facebook launched its Libra currency, the head of the initiative testified to the Senate Banking Committee that "[o]ur first goal is to create utility and adoption, enabling people around the world--especially the unbanked and underbanked (1)--to take part in the financial ecosystem." (2) Mark Zuckerberg emphasized the point when he was called to testily to the House of Representatives a few months later: "The Libra project is about promoting financial inclusion through a safe, low-cost, and efficient way of sending and receiving payments around the world." (3) Since its inception in 2009, many in the cryptocurrency industry have promised that one of the main benefits of the distributive ledger technology is to facilitate financial inclusion of the unbanked. (4) The language of fintech as financial inclusion is so widespread that one could be forgiven for assuming that increasing access to credit were the sole aim of these companies. (5) Regulators have responded with their own encouraging reports pronouncing that fintech, mobile banking, or other innovative new products will eventually lead to financial inclusion. (6) A commonly held belief in the world of finance is that what stands between the current landscape of financial exclusion to full financial inclusion is the right technology or innovation. (7) This is misguided.

This Article seeks to reframe the problem of financial inclusion because the current framework misunderstands the problem to be fixed. In order to find adequate solutions to the current inequalities of finance, academics and policymakers must challenge the prevailing narratives about financial inclusion. This analysis proposes a theory of the political economy of finance and adds to an emerging body of work by other scholars engaged in counteracting the prevailing market neoliberal ideology that governs narratives about markets, power, labor, and climate. (8)

The term "financial inclusion" is nebulous and overly broad, yet also relatively non-controversial. Financial inclusion is an umbrella concept that encompasses access to bank accounts, credit products, or financial services of any kind. (9) Murky, too, is the identification of the problem; among a myriad of financial services, which should be available to all? What services are essential for participation in commerce? Generally, financial services can be divided into two categories: the payments system and the credit system. Both of these systems are exclusionary for low- and moderate-income (LMI) individuals and communities; aspects of each can be deemed as essential; and both of these systems have

public or quasi-public features.

When referring to financial inclusion of the "unbanked," the problem is lack of access to the payments system. (10) Each purchase, sale, payment, and interaction with commerce is mediated by financial institutions and/or their proxies. Yet the unbanked and underbanked pay a fee or a premium each time they interact with the payments system. (11) They pay to cash checks, purchase prepaid debit cards, or send or receive money. (12) This class of fees and interest rates usually falls on LMI individuals who spend an average of 9.5% of their annual income on fees. (13) Many communities have been completely abandoned by the community banks and credit unions that used to serve them and have been left with alternative service providers such as check cashers, payday lenders, or even gas station ATMs that charge between $5.25 to $7.50 for every transaction. (14) These transaction costs are only paid for by those without banking accounts, usually LMI families. (15) They prove the adage that it is expensive to be poor. It is also time-consuming and stressful to mediate the various external services in the economy like check-cashers, Western Union remittance services, bill pay offices, and pre-paid debit cards. (16) Policymakers, academics, and industry experts recognize that "financial inclusion" is a worthy policy and business goal and have offered various products, services, and even subsidies aimed at financial inclusion. (17) Now, more than ever, the economy is digital, global, and mediated by technology. Those who do not have bank accounts pay a fee every time they participate in modern commerce. Just as the railroad, telephone, and electricity were once recognized as essential public utilities, (18) access to payments should also be recognized as an essential public good.

Financial inclusion also includes access to credit, another policy goal actively pursued by legislators and regulators on the left and the right. (19) There is little consensus on how best to achieve access to credit, but advocates on both the right and left have described a panoply of proposals as increasing access to credit, rendering the term almost meaningless on its own, or rather amorphous and decontextualized and up for grabs to promote any political agenda. While a policy on the left may propose that breaking up the banks will increase access to credit, one on the right might advocate complete deregulation of banking markets to increase access to credit. (20) In the business context, many innovative technologies premise their enterprise as increasing financial inclusion through a variety of apps, platforms or networks. (21) A wide range of credit products like payday loans, peer-to-peer (P2P) loans, microcredit, mobile banking, alternative mortgage loans, bitcoin, and other non-bank credit products describe their services as financial inclusion, access to credit, or alternatively democratizing credit. (22)

This Article describes three general categories for financial inclusion and access to credit in frequent use in the modern finance and policy corridors. First, the product-innovation model focuses on technology or new market innovations including fintech, mobile banking, blockchain technology and other tech products. The second face of inclusion is the "gap filling" model, which is usually focused on removing discriminatory elements of the "normal" credit system. For example, legislation like the Community Reinvestment Act (CRA) attempts to increase access to credit by persuading the mainstream banking system to lend into formerly redlined areas due to previous discrimination. (23) The Equal Credit Opportunity Act (ECOA) aims to censure banks that deny access to credit to individuals due to discrimination based on a protected class status. (24) The third category of financial inclusion efforts is the subsidy model which includes philanthropy and government subsidies that bolster microcredit or nonprofit community banking, technology, and other grassroots efforts.

The wide array of solutions and problems related to financial inclusion and access to credit are usually discussed separately because each has distinct characteristics and approaches. For example, fintech solutions and anti-discrimination laws seem to be completely unrelated in the problem they are attempting to remedy and the solution they offer. There is very little overlap in the interest groups or political parties pushing these various models for financial inclusion and access to credit. Yet this Article will make the case that all of these paradigms share a common flawed theoretical paradigm of credit markets. The misconception they share is in fact pervasive in "neoliberal" legal and financial discourse. (25) The foundational theory is that credit markets and the financial circuitry of the economy are a neutral byproduct of market forces. (26) This view conceives of financial inclusion or the lack thereof as a "bug" or a gap in the general circuitry. The solutions to the problem of financial exclusion range from creating new products outside the "normal" credit system to filling gaps that have been created by bad actors. Those who find themselves outside of the normal channels of credit and money therefore must be "included" in the credit market using a different device or method than what is offered to those who already have access to credit and financial services. Those who cannot access a normal loan can receive a microcredit, peer-to-peer, or payday loan. Those who do not have a bank account can be given an alternative route to transactions such as a check cashing service, a newly designed fintech product, or an alternative blockchain currency. (27)

Not only does the confused rhetoric of access to credit and financial inclusion lead to failed policy to address financial exclusion, but it also elides an accurate understanding of the mainstream credit markets. Or rather, it does not discuss them at all, taking "the norm" for granted and focusing instead on the periphery. According to the standard neoliberal perspective, the scope, quantity and circumference of the credit markets are a neutral and natural byproduct of market forces. (28) Credit markets are seen through a prism of natural law (29)--credit is given to the creditworthy and withheld from those who are not. There are gaps created by "market failures" that subsidies or financial education can overcome, but the credit market itself operates in neutral conditions. No one is deciding to exclude. In this model of financial inclusion, the design of the credit system is an innate characteristic of the market and not a result of decision making. A designing entity or policy-creator is absent or irrelevant--presumably credit decisions are guided by the invisible forces of the market. People who are excluded find themselves outside of the financial markets because they are not "creditworthy" either due to too little money or...