Assembly Standing Committee on Banking and Finance

The Assembly Banking and Finance Committee is called to order. Sergeants, please call the absent Members if there are any. A couple of logistical items. We accept written testimony through the position letter portal on the Committee's website in order to facilitate the goal of hearing of the hearing as much as possible.

We will not permit conduct that disrupts, disturbs or otherwise impedes the orderly conduct of legislative proceedings. We will not accept disruptive behavior or behavior that incites or threatens violence. Looking around, I believe we have a quorum. Madam Secretary, please call the roll.

[Roll Call]

We have a quorum before we proceed with the bills. We will take up the consent calendar. Do we have a motion for the consent calendar? We have a first and a second.

[Roll Call]

That is 7-0. Thank you. The first item on the agenda is file item 1 AB407 by Mr. Assemblymember Jackson. The recommendation is do pass, as amended, to the Committee on Local Government, move the Bill.

Am I done? I'm not going to say anything.

That was easy enough, Dr. Jackson.

First, I like to thank the chair and Committee staff for working with me on this Bill. I will be accepting amendments today from the Committee AB407, which would expand the California Pollution Control Financing Authority to ensure more flexibility and act and resource access. With me today is a representative from the Treasurer's office, Deputy Treasurer Mr. Morton, to discuss the Bill in further detail.

Thank you very much. Khaim Morton, Deputy Treasurer, Office of Fiona Ma. Here for any questions. Thank you.

Do we have any witnesses in support of the Bill? Any witnesses in opposition of the Bill? Are there any questions or comments from Committee Members? Dr. Jackson, your closing statement, please.

I respectfully ask for an aye vote.

With that, we have a first and a second. Madam Secretary, please take the roll.

[Roll Call]

That Bill has seven votes. We will hold the roll open for absent Members. Thank you, Dr. Jackson. Moving on to agenda. Moving on with the agenda File item number 2 AB 1065 Assemblymember Ortega.

Thank you, Chair and Members for the opportunity to present AB 1065 today. California has a long history of challenging federal preemption, particularly in areas like environmental policy, immigration and health care. Over the last few years, California has fought against dozens of federal laws or regulations that undermine state authority or are inconsistent with its policies.

The issue of preemption has never stopped this Legislature from addressing the problems facing California. As of now, California continues to challenge several federal actions under the current Administration, including tariffs. The opposition's main tactic of 1065 has been to confuse the public.

The reality is that this Bill affects the bank's and the credit card's bottom line and therefore they will do anything within their power to kill any kind of swipe fee reform. This law passed in Illinois and the opposition has spent millions to challenge it in court, as they do with all laws that affect their bottom line.

I urge this Committee not to be deterred the largest source of California sales taxes are collected by restaurants, car dealers, building supply businesses and clothing stores. None of these businesses are allowed to charge a fee for collecting sales taxes on our behalf. Restaurants are the single largest source of sales taxes in California.

3% of what they collect fund local fire and police departments and schools. Credit card companies and banks should not be allowed to charge them a 3% fee on the sales taxes that we require them to collect. Money that was never meant to be a profit maker.

Unfortunately, current laws allow banks and credit card companies to charge businesses and their customers a swipe fee on the collection of those taxes. In 2023, merchants paid $1.7 billion in swipe fees on those sales tax alone. Credit card processing fees in California total around $30 billion per year.

The credit card industry in the United States is controlled primarily by Visa and MasterCard, who have a combined market share of nearly 90% of the profit and a profit margin of 50% or more. Let me make that clear one more time. Visa and MasterCard have a profit margin of 50% or more.

Meanwhile, convenience stores, restaurants and retailers, small business across the state who are struggling to make ends meet themselves only average a profit of 2% to 9%. It is absurd to require businesses to collect and track taxes, at their own expense, while allowing credit card companies to make a profit for those same taxes.

This Bill would prohibit swipe fees on this tax portion of transactions paid with the credit card. By doing so, it would provide significant relief to our small businesses and in turn help Californians manage the rising costs. Now, I could go one by one to address the opposition's numerous arguments, many of which are false.

But I have a technical witness here who can address those specific claims. My main witnesses today are Jas Handel, a small business restaurant owner in Sacramento, and Dan Swanson, a subject matter expert and former General Counsel of the United States Senate Judiciary Committee.

Thank you for having me here. My name is Jasmeet Handel. I'm a local businessman here in Sacramento. I'm being campaigned by other my business people and I will share my experience as a small business owner. I own several Mountain Mike's. Visas and other retail businesses in Sacramento and around Sacramento.

But our businesses are running at very tight profit margins these days. Everybody knows the food cost is high, labor cost has gone up. So it's pretty tight margin. On top, we are being charged swipe fees by the credit card processing companies.

That's totally devastating our business. Every month I'm paying more than like $6 thousand, $6 to $7,000 every month for all my businesses. And the swipe fees to the credit card processing companies like Heartland, Wells Fargo, Visa, MasterCard and Swipe is one of top highest operating expenses.

As a small business owner, I provide an essential service to the State of California and City of Sacramento by collecting taxes, at no cost. On the other side, I'm being charged, I'm being charged as a swipe fees by my credit card companies to collect those taxes, which doesn't belong to us.

AB 1065 will prohibit the banks and credit card companies from double dipping and charging a swipe fee on the collection of taxes. Every dollar counts. Every dollar counts. Seriously, these days it's very tough for a small business owner and we desperately need the relief that AB 1065 can provide.

I'm urging to all legislators, please support the small business and consumers by passing AB 1065. Thank you.

Thank you, Mr. Chairman. My name is Dan Swanson. I am an attorney and I worked on payments policy for about 18 years for US Senator Dick Durbin of Illinois who is the author of federal debit card reform legislation in 2010. The status quo is not sustainable when it comes to swipe fees.

Visa and MasterCard control about 85% of the credit and debit card network markets and they stifle normal marketplace competition. Interchange fees are fees that card acceptors pay to card issuing banks on each transaction. But the banks don't set the rates for the fees they get.

Visa and MasterCard fix interchange fee rates on behalf of all their banks so the banks don't have to compete with each other on fee rates. And that's a sweetheart deal for banks because competition usually holds fees down. But interchange fees keep going up. Now they're often 3% or more of the transaction amount.

These fees are crushing merchants and small businesses who have narrow profit margins and they inflate the prices of everything consumers pay for. And remember, interchange fees are largely set as a percentage of the transaction amount. So as prices go up, more gets collected in fees. Inflation is very profitable for the credit card industry, but it hurts consumers.

And now that we're entering an era of high tariffs, that's going to mean an even bigger swipe fee windfall for the big banks. Now, AB 1065 reins in one of the most unreasonable aspects of swipe fees by stopping Visa and MasterCard from fixing interchange fee rates that apply to the sales tax portion of transactions.

That is modest reform, but it will provide meaningful relief to restaurants, grocery stores and other Main Street merchants who are about to get crushed by tariffs. The technology is there for this to work and states are not preempted by federal law when it comes to regulating non bank credit card companies.

And I'm happy to answer questions about those issues. I've worked on swipe fee reform for a long time and I know the banks and the credit card companies fight any proposal that would change the status quo because it's so lucrative for them.

But you can't have a system where Visa and MasterCard get to fix fee rates on behalf of all the banks with neither competition nor regulation to hold the fees in check. They'll take too much. And other countries have figured this out and they've passed reform to rein in Visa and MasterCard.

We've also done this federally when it comes to debit and now states are taking action when it comes to credit cards. It's time to rein in these fees and I urge the Committee to pass this Bill. Thank you.

Thank you. Are there any witnesses in opposition? Other witnesses in support, beforehand?

Daniel Conway, California Groceries Association in vehement support. Thank you.

Jack Yanos on behalf of the California Fuels and Convenience Alliance and support.

Bobbie Singh-Allen, President of the American Petroleum and Convenience Store Association, representing 2,000 members statewide and strong support.

Gulinder Gill, franchise of Denny's restaurants in the area and please support 1065. We need help.

Sam Ranjeet Singh Molly. I'm a local convenience store business owner and in strong support of AB 1065. Thank you.

Hi, my name is Paramjit Khara. I'm a retailer in California also. So I support AB 1065 strongly. Thank you.

My name is Jaswinder Shergill. I'm a local business owner and I support this Bill.

My name is Kuljeet Sidhu. I'm a local business owner. I support AB 1065. Thank you.

My name is Balwinder Singh Durku and I'm local businessman and I'm here to support 1065.

Good afternoon. My name is Harmeet Singh. I'm a local businessman and I strongly support AB 1065. Thank you.

And good afternoon to everybody. I am Narendra Singh and I am a full support of AB of 1065. And we are going to support this.

Hi, I am Taramji Singhal. I am totally support for 1065. Thank you.

This is Jatin. I'm sporting with a small businessman. Thank you.

Sammy St. John, local businessman supporting AB 1065. Thank you.

Thank you. Mr. Chair and Members, Matt Sutton with the California Restaurant Association in support.

Good afternoon. Harman Sandu, local businessman, strongly in support. Thank you.

Yes, My name is Jasmin Therai. I'm a sport. 1056. Thank you.

Thank you for that. Now we will move on to witnesses in opposition.

Good afternoon Chair and Members. Robert Wilson on behalf of the California Credit Union League, I'd first like to thank the Chair, Members of the Committee and their staff for all the time they spent on this Bill.

I appreciate the opportunity to discuss our opposition to AB 1065 which will disproportionately impact credit unions and state-chartered banks since federally chartered banks are likely preempted from the Bill if passed. The Bill will not only impact the credit unions but more importantly will also impact the members in which they serve.

As the Committee likely knows at this point, a similar law was passed in Illinois last summer without the vetting of a policy committee. The lawsuit was filed by the banks and credit unions in the state against the law, citing various concerns with preemption with the National Bank act and the Federal Credit Union act were chief among them.

Last October, the Office of the Comptroller of Currency OCC filed amicus brief arguing the court to grant a preliminary injunction. They argued the Illinois law restricted restriction on interchange fees and data usage significantly interfered with the National Bank's federally authorized powers under NBA to process debit and credit transactions to charge fees for those.

The judge issued the partial preliminary injunction for national banks and a motion of summary judgment has been filed recently as well. Now why is the credit union representing talking so much about a national bank act?

Because the injunction in the lawsuit in Illinois would only apply to would make it so the law only applies to credit unions and state chartered community banks. These institutions make up less than 10% of the transactions.

My colleague will go into some of the workability concerns, but my hope is the Committee thinks during his testimony will the networks really go through this lengthy expensive process for 10% of the transactions in one state? I certainly hope so for my credit unions who offer these cards as a service to the members of the credit union.

In our opinion, passing a law like this is gambling with the well being of the credit unions and their membership if they serve.

Unlike mega stores who stand to benefit from this Bill, credit unions are owned by the people they serve and interchange fees help cover real necessary costs of operating everyday infrastructure that allows consumers to pay conveniently and quickly.

We have seen from previous interchange legislation on the federal level that any savings from the reduction in interchange rates stay with the merchant, not find their way to the consumer. For those reasons we are opposed to AB 1065 and ask for a no vote. Thank you

Mr. Chair, Members of the Committee, I'm Jason Lane with California Bankers Association. The Association represents most of the banks doing business in California, but the majority of our membership is community banks, state chartered banks who have decided to call California their home, who would be disproportionately impacted by the Bill.

I'd like to offer something on perspective and a little bit about the scope of the Bill. The proponents have said that the merchants paid $1.7 billion in interchange fees in 2023.

I don't know if that number is 100% accurate because during the discussion on this Bill through the last few months, there's been a lot of conflation between the interchange portion of the cost that merchants pay to accept the card and other fees and costs associated with that acceptance.

For example, the claim is that 3% is the percent on interchange fees and it's not. It's been 2% for almost a decade now. But let's say for the sake of discussion, it's $1.7 billion. That same year, according to CDTFA, merchants brought in $743 billion in sales. So that ratio between interchange fees and total sales is 0.02%.

Not 1%, not a half a percent. 0.02%. Now if you take that point to you ask how much of that is attributable to just the sales tax portion? Well, that number gets even smaller. That's what the sponsors are asking you to solve for.

And that's what the State of California will likely have to go to court and defend because of the preemption issues mentioned. If I could briefly talk about why this Bill is difficult to implement. The International Standards Organization, which is based in Geneva, Switzerland.

They make the final determination as to whether or not the network can add a field to their systems to separately account for the sales tax portion of the transaction from the item cost. That doesn't exist today. Currently the networks only see the total dollar amount of the transactions. The ISO is comprised of 170 different nations.

It's based in Geneva, Switzerland and it's there to ensure the interoperability, the global interoperability of the credit card system. It's why you can use your card in Sacramento today and Portugal tomorrow. It's a rigid system, but it has to prove approve any changes to that system. So to give you an example, and then I'll finish my testimony.

The California Legislature passed AB 1587 by Assemblymember Ting in 2023. That Bill required Visa and MasterCard to recognize the merchant category code that was newly created for gun merchants. But it was only able to do that after the ISO approved the new merchant category code, not before that.

And that took three years and required consensus of the governing body of 170 nations. It's unlikely that we're going to have that kind of business consensus for what the Bill proposed. Thank you. We urge a no vote.

Thank you. Any additional opposition in the room?

Good afternoon. Chair Members Jose Torres with TechNet in respect of opposition.

Clifton Wilson on behalf of the California Association of County Treasurers and Tax Collectors. With the position of opposed unless amended. Thank you.

Good afternoon. Lindsey Goelhorn with the California Community Banking Network. Respectfully opposed.

Hi, Kathy Van Austen. I'm here on behalf of Alberto Tirico. He represents Airlines for America. In opposition. Thank you.

Good afternoon. Kelly Hitt here on behalf of Capital One in opposition. Thank you.

Good afternoon. Brian Yates with the Electronic Transactions Association. Respectfully opposed.

Thank you. Bringing it back to the Committee. Any questions or comments from Committee Members? Vice Chair Chen.

Thank you, Mr. Chair. I appreciate it. Assemblymember Ortega, appreciate you bringing this Bill to the Banking Finance. I do have a question regarding federal preemption. As I understand it, the history has dictated that in the State of Illinois we passed a public policy, but with that said that there is an injunction due to federal preemption.

Do you also foresee that happening in the State of California in the event that your legislation passes?

Anything is possible. We've seen a lot of bills that we pass and get signed that end up in litigation. So yeah, anything is possible.

I appreciate the answer. I guess then I would ask the opposition if that does happen. I mean, what type of forward momentum that you see? I guess question to Jason Lane or to Mr. Wilson, that you think that could be a possibility for a compromise in the event that there's going to be an injunction, since there's a precedent for that.

It's a good question, Mr. Vice Chair. And I would say, you know, from, from our perspective, I'm. It's pretty cut and dry. You know, we see this as it's very likely federally preempted. And my federally chartered credit unions do not enjoy the same strength of their federal credit union actually compared to the National Bank Act.

So, you know, they look, from our perspective is going to fall directly on the shoulders of your credit unions in your districts and then your community banks as well.

I guess my other question would be, is there currently a structure for credit unions to be able to exempt taxes, sales tax, as well as tips, and what would it take in order for it to do that?

We would rely on the networks for that.

Yeah. If I could just answer your. Also add to the answer that Rob gave for the first question.

I guess the question that we have is if the technology doesn't exist to separate the sales tax portion from the transaction amount, and the Bill would only apply to 10% of the financial marketplace in California, will the payment networks have an incentive and if they to engineer a system for just 10% of the marketplace, and if the answer to that is no, will community banks and credit unions be able to offer MasterCard and Visa branded credit cards?

I don't know if they will be able to and that has an impact on consumers.

Thank you, Assemblymember Crow.

Thank you. Thanks to the Member for bringing this Bill. I think this is a really important conversation for this Committee to have and I understand the concerns by the opposition. Also the preemption issue, also the fact that California local banks and credit unions wouldn't those that wouldn't be preempted would be in the difficult position of shouldering the burdens of the Bill.

So my question, I guess, is really for the opposition. To us as policymakers, if we wanted to craft a policy that would limit the swipe fees and the burdens that we've heard about on the small businesses, many of whom are actually my constituents here In Assembly District 6, what would you recommend to us?

So I think that the answer, as it was previously when debit card interchange fees were reduced, I think the answer is at the federal level, not at the state level. There needs to be a uniform action by Congress if there is to be a cap or a decision on whether or not there should be a cap.

It really needs to come from the Federal Government.

Please.

To answer your question, Assemblymember Krell, there are no amendments. There are no, nothing really here, because what we're doing is addressing high cost. And when you're talking about banks who make billions of dollars, they are not going to give us anything to address the issues that your constituents are facing.

However, when they needed a bailout in 2008, we were there to make sure that they were taken care of. In fact, not that long ago here in Silicon Valley, we were able to save a bank in 72 hours or less. But your constituents who are here today are asking for similar relief.

Their swipe fees are costing them thousands of dollars a month. A month. It's their third-largest expense. I don't know how we're going to continue this conversation without listening to your constituents who are drowning in fees.

Thank you. Assembler Krell, Is that your only question?

Yes.

Thank you, Assemblymember Schiavo.

Thank you Mr. Chair. You know, I appreciate the complexity of this issue and you know, but I am grateful for the author for bringing this forward and really forcing the conversation around affordability and especially impacts on small businesses who are suffering. While, you know, as you mentioned, banks are making billions of dollars off of this.

And, you know, I wonder, I thought that you mentioned that you were not as concerned about the federal preemption. I wonder if you could expand upon that a little bit.

Sure, I'd be happy to, Assemblymember.

So the Illinois law that was passed said no tax or, excuse me, no swipe fees imposed on taxes or tips, and it applied that prohibition to all of the members of the payments ecosystem, to the card issuing bank, to the merchants bank, to the processor and to the card network.

And the financial trade associations brought a lawsuit saying that we think that that Illinois state law is preempted as applied to some of those participants because of federal banking or credit union law.

And at the preliminary injunction stage of the litigation, the court has said, yes, we think it's likely to be the case that you would be preempted from applying this Illinois state law as to nationally chartered banks or state chartered banks outside of Illinois, and not likely preempted as applied to credit unions or state chartered banks within Illinois.

But the most important piece of that preliminary order that's come down, again, all of this is preliminary. Nothing's been decided on the merits here. But the judge considered and rejected whether the state could take action against Visa and MasterCard. And they are the keys to the whole system. Visa and MasterCard set fee rates.

These are their rate schedules that every bank and credit union that issues Visa and MasterCard follows to a T. Every single one of them follows what Visa and MasterCard put on these schedules.

And so if the state directs Visa and MasterCard to change the formula that they use for setting their fee rates to subtract the tax amount from the amount for which the fee rate is applied, then everybody will follow it.

If they don't want to follow it because they think that that state regulation is too onerous, then any bank or credit union is free not to follow the fee schedules that Visa and MasterCard set up.

But they all do right now because it is so lucrative for them and they don't have to compete with each other on their fee rates, whereas banks and credit unions compete on every other type of fee, interest, you know, or late fee or things like that that they charge.

So the Illinois law is scheduled to go into effect on July 1 as applied to Visa and MasterCard. If they are preempted in Illinois, if the government is preempted from bringing civil penalties against the Banks or the credit unions or out of state banks, it almost doesn't matter as long as Visa and MasterCard are on the hook.

They would have to change the way they set the fee rates. And right now everything else in the system flows from that.

So I think we're seeing states all across the country now recognizing that the federal playing field has not been filled when it comes to taking action to rein in Visa and MasterCard. They are not banks, they are not regulated like banks are. Though they do set fees on behalf of all the banks.

And so that's why 1065 would help get at the problem. If there is preemption deemed with respect to enforcement brought against the other participants in the system, you might see those parts dealt with through the severability clause on this. But if you get Visa and MasterCard, you change the whole system.

And that's because, remind me what Visa and MasterCard, their kind of share of this market is?

85% about the debit and credit network market.

They're dominant.

Right.

Thank you. And is there anywhere internationally that has addressed this in some way or other places that have kind of figured this out?

Yes, Assemblymember. So around the world folks have figured out you can't just let these dominant network companies which form, the role that they play is this fee fixing role. You can't just let them do that in a market where they are unconstrained by competition or regulation.

So around the world we have seen governments step in to provide regulation one way or another. And we've seen a variety of different ways for that. In the European Union they have imposed caps on the interchange fees that can be set by these networks. It's about an eighth of what we have on average here today.

In Canada, the government negotiates with Visa and MasterCard on behalf of businesses. Again recognizing that there is no negotiation in the system today with Visa and MasterCard of 85% of the market and negotiate on behalf of thousands of banks, no merchant can go into that negotiation and have a level playing field.

We have tried other reforms at the federal level and across other states. I frankly am not aware of any legislative proposal that has ever been put forward in this country at the federal or state level that the financial industry has ever endorsed.

I think they have fought against any effort to change the status quo and I get it because it's incredibly lucrative for them. But around the world you will see, I think a majority of places in which card transactions occur have taken some action to rein in Visa and MasterCard. You can't just let them run the whole system.

Thank you. I mean, I think your point earlier too, about the impact of tariffs and inflation, how this is going to increase the costs both for consumers and businesses is definitely a big concern.

And I think as on many issues, we can learn a lot from our international partners on how to negotiate to make sure that things are more fair and balanced. We like fair and balanced. So I appreciate the author's leadership on this. I think this is an important conversation for us to have and I hope that it continues.

Thank you.

Assemblymember Dixon.

Thank you. Just a couple questions and I appreciate your concern about the charges and the cost of doing business. I mean any and I am a strong advocate of all business, small and large. If a business owner does not want to offer credit card services, they do not have to.

There's not a gun to their head. They could require, many companies say cash only. That is an alternative. The convenience factor of offering credit cards is, that's what it is, a convenience factor. I asked this at I think this was before Judiciary, so I'll ask it again just for this audience.

We've all experienced, I have multiple times experienced fraud and had to get a new credit card many times. And I learned in the Judiciary Committee discussion that the retailer does not, if there's fraud committed on a customer's credit card, the retailer does not do the reimbursement. It's the credit card company.

That's just one example of the costs that are born in the servicing and the providing of this global exchange and transfer and moving of credit card services.

Also, it occurred to me as I'm listening, we all know we use the ATM and there's a fee to an ATM and that fee has been fixed for many, many years.

And is that, does that reflect I mean I think it's like $3 is that's been the same or $2.50 or $3 at least the banks I use and that hasn't changed in 20 years. So somebody's bearing that cost. So it's easy to say the banks make billions of dollars.

I have not seen a financial statement that attests to that. But the fraud, I would like to see a number if someone had it, is the amount of fraud that is committed on the use of illegal use of credit cards. I don't know the number. Maybe you know the number. What is the fraud in the United States?

Or maybe the gentleman from the California Bankers Association, what is that number for fraud that you cover, banks cover for fraudulent use of credit cards?

It is estimated that in California, credit card fraud cost $8 billion a year.

So we're throwing away around a lot of $1.0 billion here. So there are costs to providing the convenience of using a credit card. As I say, the business owner does not have to offer credit cards. Their business may because of that, or they may find that it's easier not to have that extra fee tacked on.

I don't like more mandates, more regulations. The convenience factor is how lives are improved by having the convenience of using a credit card. And I think just applying this to California banks is problematic because banks across the country, if the Federal Government wants to get involved in this, I'd say let them.

You served on Senator Durbin's Committee for many years, and many years there'd been a majority party by Senator Durbin's party. So I don't know why that hasn't gone through Congress. In any event, I'm trying to protect our business owners, trying to protect our consumers, and trying to protect those who want to provide these services.

So thank you very much. Unless you had an answer to my question.

Oh, sure. With respect to fraud. So I think a couple of points. Right now the US has about 25% of the payment card volume worldwide, but we have about 40% of the fraud. So the way the system is working today right now does not do a very effective job in preventing fraud.

And I would argue that part of the problem is you have Visa and MasterCard determining what the fee rates are going to be for every bank or credit union, and they all receive the same fee rates, whether they are good at preventing fraud on their cards or bad, whether they invest a lot into fraud prevention or not.

They're guaranteed the same fee rate fixed by Visa and MasterCard in every transaction. So it does not align the incentives towards fraud prevention like you would ideally have in a competitive market. And then with respect to the costs that are borne by fraud, we would stipulate that there are costs.

And in debit, when we federally reformed this, we said, look, If Visa and MasterCard are going to fix a rate that applies to everybody, we'll let them do it. But it has to be a reasonable and proportional rate, proportional to the cost of processing the transaction.

And we have data collection on debit now, so we know how much fraud there is in the system and who bears it. And we found out that merchants end up paying for fraud twice in most cases. They prepay for anticipated fraud losses through interchange, which banks and credit unions will say they use to prevent fraud.

But then when fraud actually occurs on debit, two thirds of the time, right now, the bank charges back the fraud to the debit to the cardholder or to the merchant, and merchants end up bearing about 40%, 47% of the debit fraud that's in the system right now.

Okay, thank you very much. Thank you.

Please. Would you like to add something?

So we're talking about the chargebacks and the frauds. I can show you all my, my credit card statements and the bank statements. We are the people who has to pay for the chargebacks. Even we have the proof of that. That this person was here. Still we have to pay for the chargebacks.

The other big fraud, I'm not sure, but the chargebacks, we have to pay for all of them.

Would you like to respond?

So it's more complex than that because it is a lot of this is based on whether or not the transaction is a chip is being used with a transaction or a PIN is being used with the transaction, which some of, the type of transaction dictates the risk and that dictates whether or not the fraud is charged back to the consumer.

Thank you, Assemblymember Rodriguez.

I just have a comment. I want to thank the author for bringing this Bill forward. But isn't when you go to like. I want to echo what my colleague said. You don't have to take credit cards at a small business. Because I'm all for small business. Don't.

I know a lot of times when I use my credit card at a small business, my debit card, they charge. Me like, oh, if you use your card, it's going to be a dollar. Okay, fine, you pay that. Right. So I'm just, you know, that was my concern. Because you do pay a fee when you use your debit card at a small business.

Thank you. Appreciate the questions and comments from Committee. I also have a couple of questions. I want to circle back on the point of taxes. It was stated that California does have the highest percent of credit fraud in the nation. Who pays for the taxes incurred from the fraudulent transactions?

I'm sorry, I'm not sure I understand the question. You're saying if a transaction is fraudulent, but there was a tax to the transaction and then if it was charged back, what would happen?

Correct. So every transaction has a tax. Correct?

So that would be the bank. Because the bank ultimately, for lack of a better term, eats the fraud cost of the entire transaction, not just the sales tax portion of the transaction.

So just to confirm, the bank has to refund the tax for a fraudulent transaction if there is a fraudulent transaction?

Yes, because it's the entire amount. We don't see the sales tax portion separately.

Thank you. Would you like to.

Well, Mr. Chair. So as I understand it, so if the transaction goes through, then the merchants bank will receive about 97 cents to the dollar of the sale amount that was made. The rest is deducted in fees as the money passes from the cardholders bank to the merchant's bank.

So then if there's a chargeback, so that money goes to, most of it goes to the card issuing bank as an interchange fee, then Visa and MasterCard take a cut for themselves as a network fee and then the merchant's processor takes a bit for a fee as well.

Then if the transaction is deemed fraudulent and if the bank decides to charge back the merchant for it, they just take the money out of the merchant's account.

But it would be 97 cents to the dollar of what the merchant had is taken out the money that went to the bank, the card issuing bank, as an interchange fee to Visa and MasterCard as a network fee or to the processor's processor fee. I don't think that comes back.

But the merchant loses all 97 cents of the transaction that they got as a result of the chargeback.

Thank you. If we were able to bifurcate the tax component, what would stop, let's say, the bank or the credit union from charging their own fee for processing these taxes?

So that's an excellent question because I know that the gentleman to the left of me mentioned what, what has happened in the international level. Right. So UK, UK, Australia, they have capped interchange fees. One thing I would note about that there is no cash back, no bonus points, no credit card rewards programs in the, in the UK.

But to answer your question, we actually know what would happen. In Australia, the Federal Government conducted a study once they capped interchange fees and not only did they conclude that not a dollar went back to consumers. Consumers' credit card rates went up 20, fees associated with credit cards went up 22%.

So it was a cost shift from merchants to consumers that. So to answer your question, there isn't. The money probably gets recouped somehow.

Thank you. And a question for the author. Just logistically speaking, AB 1065 ensures that taxes are properly collected. How would it ensure that taxes are properly collected? And who bears a liability if taxes are not properly connected to the state?

Well, they're itemized and it would be up to the banks and the networks to provide that. They've argued that it is impossible to do this for them to itemize the fees, to break it down. They are already doing this. I sit on privacy and in every Committee hearing, I've heard about AI curing cancer, but they can't figure out a way to itemize and separate the taxes? I just don't understand.

Thank you for that. And I would agree with that perspective. But then it just goes back to my previous question, right? Who would then stop a fee being implemented by the banks or the credit unions in order to process that? It is a service. It is a process that needs to take place somehow, some way.

So my question is, how does that not get passed on to the merchant, then trickle down to the consumer is my question.

If I may, Mr. Chair. So I think your question is, so where would the cost of the system be born to segment out the tax data from the transaction? And if the banks have that cost, would it be imposed back on the merchant if that cost were segmented out? I actually don't think that's a concern.

I think the vast majority of merchants point of sale software systems right now will show on the receipt, here's what the sales tax was for the transaction. And that is typically part of the data flow in the transactions that goes to the card network to all the participants.

It's called Level 2 data and is available for any merchant to use. You'll find merchant processors saying any merchant can do it.

Now, I think the structure of the Bill comes into play here because the Bill says it is a merchant's choice whether to submit this tax information either at the time of the transaction or within 180 days afterwards to the network in order to have that part excluded from the way the interchange fee rate is applied.

If the merchant doesn't send that information because they choose not to get the software upgrade they might need to do it, then the bank doesn't need to worry about excluding the interchange on the tax portion of it. But it gives merchants an option if they want to do the software upgrade, If they're not currently transmitting that level 2 data, it gives them the option to do it so that they can then get that relief.

And then with respect to where the cost would be born in the system, this information is collected. Today, processors have this Visa and MasterCard see it.

They have said before other state legislatures that it'd be pretty easy for them to do the subtraction that they would need to do to affect their fee rates on this. By and large, they will try and sell that data back to merchants to try and help them get more visibility onto their spend.

So we know that they can do this, but they will generally claim that any change that you make to the status quo is too complicated and will destroy the whole system.

May I address that one issue? So what he's referring to is something called software as a service, which is an add-on feature that Visa and MasterCard give to governments and to very large businesses to help them manage their expenses and see where their expenses are going.

It is not a part of the payment processing system at all. That data does not go through the payment networks. It is a software that is available for government after government provides the information about the transaction. So they don't have access to that data.

Appreciate that. Just one more question around consumer benefit. Studies have shown that consumers did not benefit from the passage of the Durbin amendment, which capped debit card interchange fees. The change benefited merchants who did not pass savings onto the consumers. How will this time be different?

So I'm happy to speak to that. And first, you know, I worked on this debit reform and know the history of it. When we passed this reform, we said that if Visa and MasterCard are going to set debit interchange fee rates on behalf of banks and credit unions, that fee rate that Visa and MasterCard set has to be what is reasonable and proportional to the cost of processing the transaction.

As soon as that law passed, the banks and credit unions went to the Federal Reserve which was tasked with implementing it and begged them to make a much higher fee rate and allow a much higher fee rate to be charged than the actual cost of processing the transactions. And they won with the Fed, they got a much higher fee rate.

Right now it's about 24 cents on costs of about 3 cents. So they are able to charge much more than it actually costs them. And when they did that with the final rule, it ended up reducing dramatically the amount of savings that could be achieved by consumers in the system.

So they begged for there to be less savings for consumers to achieve, and then criticized the reform for not saving consumers that much. But we do know that prices continue to go up because of inflation after reform.

And we've seen the Producer Price Index, what merchants basically paid for the goods that they get, go up by 9%, whereas the consumer price index went up by about 4%, half as much. And merchant profit margins did not go up. So we don't think merchants were able to hoard savings from this.

They did pass along savings from reform. It wasn't more than we saw inflation during that time, but it was real.

Consumers ended up paying less for the cost of goods than they would have in the absence of reform, would I have loved to have seen a lower regulated rate for debit that would have made savings more visible for consumers? You bet.

But the banks fought us on that and they were able to get a much higher regulated rate. And respectfully, our friends in the credit industry, we exempted them. The vast majority of credit unions were exempted from federal fee regulation when it came to debit.

They are able to charge dramatically more through Visa and MasterCard than big banks are. We never got thanked for them for doing that.

We continue to have them opposed reform, but we ended up making it easier for them to compete against big banks in the debit market because they are able to get much higher fee rates through Visa and MasterCard.

Again, it just to the point, the savings never got down to the consumer.

No, they did so again. Inflation would have caused the producer price index to go up 9%. But the consumer price index, what consumers actually paid, even though the cost of the goods merchants sold went up 9%, what consumers paid went up 4%. So that means consumers saved about half of that increase that otherwise would have been there.

So I would love it if you could have pointed to the price of everything went down after reform. But there's inflation in the economy, so the savings that were achieved did not supersede the inflation that was there. You know, merchants and retail are very competitive. You see that you know, single digit profit margins for the retail industry.

They have not been able to increase their profit margin since reform. They weren't able to hoard the savings. And that's because it's so competitive. You know, every gas station puts their prices up on the sign outside.

You know, grocery stores are competing vigorously with each other and you know, it is very hard for merchants to be able to hoard that savings.

Thank you. Are there any additional questions from Committee Members or comments? If not, Ms. Ortega, please, your closing statement.

I'll close with. Well, first of all, thank you for the opportunity to present this Bill. Again, you know, fee after fee after fee, that's what we're being charged. When is, when is enough enough?

And I'll also close with asking the banks one more time and Visa and MasterCard who unfortunately couldn't be here or are not usually sitting here opposing, which I find very interesting. Do we know of any other entity who charges for collecting taxes for fire, police and schools? The answer is no.

Yes.

No.

Thank you for that closing statement. And this is coming up from an individual who comes from a small business family. I grew up working at my father's grocery store. So believe me when I say I know firsthand this topic and the conversations and the frustrations that revolve around this particular fee.

And while I appreciate the intent of AB 1065 and the effort to address the financial burdens faced by businesses and also consumers, I do have concerns about the workability and potential unintended consequences of this particular Bill in the way that it's written.

And given the complexities with the federal preemption, the impact on small businesses as well, that I don't believe will actually benefit from this particular policy and the broader implications for the payment system, I cannot support this measure. And for these reasons, I will be voting no today. With that, we do have a motion and a second.

Madam Secretary, please call the roll.

AB 1065 Ortega. The motion is do pass. [Roll Call]

That vote has six no votes. Thank you Ms. Ortega.

Can I ask for a reconsideration?

Measure fails and you are asking for reconsideration. Is there an objection to that reconsideration? There's an objection to grant unanimous consent to reconsideration by Ms. Dixon. Can we please call the roll on reconsideration?

On reconsideration. [Roll Call] That has seven votes.

Seven votes in favor of reconsideration. Thank you. The next item on the agenda is file item 3. AB 1365. Assemblymember Garcia. The recommendation is do pass to the Committee on Labor and Employment.

Mr. Garcia, when you're ready, please.

Thank you, Mr. Chair and Members of the Committee for the opportunity to present on AB 1365. I would like to start off by thanking the Committee Staff for working with us on this Bill. I will be accepting the Committee amendments.

So, AB 1365 establishes the CalAccount Program, a 0 fee, 0 penalty banking account, administered by the state treasurer. With the cost-of-living skyrocketing in California, struggling to afford basic groceries, every dollar a family can save counts.

One in six California households do not have access to a bank account due to pricey overdraft fees and minimum balance requirements. 75% of these households make less than $30,000 a year.

Lacking access to traditional banking not only means that you pay more for basic financial services, but that you are less able to save, build credit, receive fee-free government assistance, and exit poverty. Women and people of color are especially disadvantaged by traditional banking practices.

Last year's CalAccount Market Feasibility Study found that the benefits of this program outweighed the costs, and that in its first year alone, CalAccount could stimulate the state's economy by $45 million.

AB 1365 removes banking barriers by offering a zero fee, zero penalty, and no minimum debit account, ensuring that everyone can maximize their income and savings and better partake the world's fifth largest economy. With me to testify in support are Ms. Cynthia Amezcuas, representing Free From, and Sandra Jauregui, a fast food worker, here to share her story.

Thank you.

We have a translator as well.

[Speaking Spanish]

"Hello, my name is Sandra Jauregui, and I live in Sacramento. I work at Jack in the Box. I've had a Wells Fargo account for over 10 years."

[Speaking Spanish]

"I have had to pay hundreds of dollars in overdraft and monthly fees for over 10 years."

[Speaking Spanish]

"When I didn't have money in the bank, they automatically charged me a $35 penalty fee without notifying me. I only found out about my negative balance when I tried to buy groceries for myself and my family."

[Speaking Spanish]

"It was at FoodCo that I found out my account was negative because my card was declined, and I had to leave the groceries behind. I was then charged another $35 fee for attempting to use my card for groceries."

[Speaking Spanish]

At the end of the day, I was over $70 in debt with Wells Fargo and still didn't have food for myself or my grandchildren.

[Speaking Spanish]

"Today, I still bank with Wells Fargo, not because I want to, but because I need it to pay my rent and bills."

[Speaking Spanish]

"Working families, like mine, deserve a banking option that doesn't charge us just so we can access our own hard-earned money. CalAccount would do that."

[Speaking Spanish]

"Please support CalAccount so that workers like me don't end up in debt for trying to feed our families. Thank you to Chair Valencia and the Committee on Banking."

Good afternoon, Mr. Chair and Committee Members. My name is Cynthia Amezcuas Amudio and I am the State Policy and Advocacy Manager at Free From, an organization working to end gender-based violence with survivors, by building safety and economic freedom. Today, I am testifying in strong support of AB 1365.

CalAccount is necessary because some 2.5 million California households are Unbanked or Underbanked. People of color, survivors of gender-based violence, Californians with disabilities, low-income Californians, and other vulnerable communities, like single parents, young people, and people impacted by the criminal legal system, are disproportionately Un and Underbanked.

Moreover, no fee, no minimum balance accounts are rare in California, as over 95% of banks charge overdraft fees. CalAccount will also help survivors increase their financial security. At Free From, we learned that many survivors don't have bank accounts and even more lack a safe bank account.

We also learned that survivors turn to financial institutions for support, but the support they receive is often unhelpful. I'll share the words of a California survivor to highlight the importance of addressing their specific banking needs.

"I was not allowed to spend money. My money was deposited into a bank account that was in my name, but only my partner had access to my banking card. I wasn't allowed to go inside the bank unless he was there with me, so he could see what I was doing."

CalAccount addresses such issues through targeted program goals and opt-in services focused on addressing the needs of vulnerable communities, such as unhoused people, survivors, and immigrants. California can, and should, step up to trailblaze the solution, as it has done before, and as federal regulations are weakened or rolled back.

CalAccount will be that solution by building on the successful model of programs like CalSavers and CalABLE. We thank Assemblymember Garcia for your leadership on CalAccount and we respectfully ask the Committee for their "Aye" vote. Thank you.

Thank you. [Speaking Spanish] Are there any other witnesses in support? Please state your name, organization, and position.

Good afternoon. Danielle Kando-Kaiser, on behalf of the proud co-sponsors of the Build the National Consumer Law Center, as well as supporters, California Low-Income Consumer Coalition and Consumer Reports.

Mr. Chair and Members. Tiffany Whiten, proud co-sponsor, with SEIU California, also here in support, of ASIAN Inc., as well as End Child Poverty. Thank you.

Good afternoon. Rene Bayardo for Rise Economy, also a co-sponsor on the Bill. Thank you.

Good afternoon, Mr. Chair and Members. Robert Herrell, Executive Director of the Consumer Federation of California, here to support consumer choice in this Bill. Thank you.

Good afternoon. Carol Gonzalez, on behalf of Inclusive Action for the City, in support. Thank you.

Olson Manning, on behalf of California State Treasurer Fiona Ma, in support of this Bill.

Thank you. Are there any witnesses in opposition?

Feel free to begin when ready.

What was that?

Feel free to begin when ready.

Good afternoon. Lindsay Gullahorn, here today on behalf of the California Community Banking Network.

We are in respectful opposition to AB 1365 and while we do support and appreciate the goal of the Bill to increase access to affordable banking accounts for Californians, we believe these services are already available at banks and credit unions and that the research does not support the need for a CalAccount Program in California.

The CalAccount Feasibility Study found that only 5.1% of households in California do not have a bank account and half of those household not interested in having a bank account. Further, the FDIC found, in an updated study, that the number of unbanked California households is continuing to decline.

And since the CalAccount Feasibility Study, 20% of California's unbanked now have bank accounts. Again, we support the goal of ensuring unbanked Californians have access to these accounts and this is why community banks and credit unions are joining the BankOn Program, which works to ensure access to secure low-cost accounts that have no overdraft fees.

Rather than enacting CalAccount, the state should explore ways to further promote BankOn, which is more secure and less expensive than CalAccount. And to further expand on the cost point, the Committee Analysis for this Bill notes that estimated cost to implement CalAccount in years 1 and 2 are at $291.5 million.

In addition, the Feasibility Study for CalAccount relies on hundreds of thousands of Californians, who already have accounts at existing credit unions and banks, moving into CalAccount to ensure sufficient enrollment. Community banks and credit unions can choose to be chartered in California or federally chartered.

The number of community banks and credit unions chartered here continues to decline and taking half million customers out of California's existing bank and credit union network will further erode the attractiveness of the state charter in California. So, in closing, definitely appreciate the intent of this Bill.

We think the Legislature should explore other ways to ensure Californians have access to affordable bank accounts. Unfortunately, we don't think CalAccount is the appropriate solution, so we must regretfully oppose AB 1365. I also have my colleague Chris Schultz from the California Bankers Association here to answer any technical questions. Thank you.

Thank you. Good afternoon, Chair and Members. Emily Udell with the California Credit Union League, here in respectful opposition to AB 1365. I want to thank the author, staff, sponsors, and Committee for the good conversations that we've had so far on this Bill. Credit unions is not for profit member-owned financial cooperatives.

We're created to serve people of modest means. It's in our structure and nature to best serve the financial needs of our community, and we appreciate and absolutely share the goal in expanding safe and affordable banking services to the unbanked and underbanked.

Unfortunately, we have concerns with the creator of CalAccount and believe that the state would be better off advancing existing programs and services that are already available in the market.

Like mentioned by my colleague with Community Banks, many credit unions are joining the bank on program, which has national account standards ensuring access to credit to checking accounts with low fees, including no overdraft fees and low minimum account balances. As referenced in the Committee Analysis, the 2021 DFPI Annual Report had shown that the BankOn Program had gone largely dormant.

However, since then, California credit union participation has grown substantially. The 2021 Report listed only three credit unions in the BankOn Program, but today, there are nearly 30 credit unions in California and BankOn and, independent from this Program, there are numerous credit unions in California already offering similar low to no fee checking accounts.

Credit unions are committed to serving the underserved and continue to find new ways to do so. For example, a credit union in the Fresno area opened a mobile branch that provides typical teller services like deposits, withdrawals, check cashing, loan payments, and opening new accounts.

They have bilingual staff assisting members in both English and Spanish, and they frequently travel to parking lots of a community college and elementary school in a true banking desert area. This is just one example of how credit unions are already working to bridge the financial services gap.

The Feasibility Study unfortunately left many questions unanswered, like who would bear the burden of potential fraud costs? How will CalAccount overcome lack of trust in government and banks? And why were half of those surveyed, among them, not even interested in opening a bank account?

Finally, we share the concern that the CalAccount Program's success and enrollment relies on moving hundreds of thousands of consumers out of their existing banks and credit unions and into CalAccount. We appreciate the good intentions of AB 1365, but we believe there are better ways for the state to address the unbanked and underbanked population.

So, we must respectfully oppose the Bill today. Thank you.

Thank you. Any other witnesses in the room in opposition, please state your name, organization, decision.

Chris Schultz with the California Bankers Association. Align my—align our comments—with those of the banks, community banks, and credit unions.

Thank you. Any Committee Members with questions or comments? Assemblymember Rodriguez.

I want to thank the Author for bringing this Bill forward. And you know, being a young mother, I appreciate the witness coming and testifying. I actually knew was what—knew what it was like to pay my rent or feed my family. So, I appreciate that. But I understand, you know, credit unions and banks already offer a BankOn account with similar features.

Why not just promote that more, instead of establishing a whole new state agency?

Thank you, Assemblymember, for the question. As mentioned, BankOn does, you know, have similar goals in mind, but it is not the same as CalAccount. As already mentioned, BankOn has low minimum balance, not no minimum balance. There are also other fees associated with BankOn. So, BankOn is not fee free and CalAccount will be fee free.

So, in that way, they are crucially different. In addition, as you know has been mentioned, CalAccount will be a statewide offering, right, that will be able to be something that Californians can turn to that has stability. So, it is crucially different in that aspect.

If I can just add—also, even with BankOn and private options, over 2.5 million California households remain unbanked or underbanked, showing clear unmet demand. And also, it's not meant to be competition. It's supposed to be complementary, and so we're eager to support new bankers to build their knowledge of BankOn through CalAccount.

The Office of the Treasurer estimates implementation cost much less and we're happy to work with appropriation staff to address these cost pressures.

I just have a couple questions. Totally understand the intent of the Bill, but why isn't that we are exploring options for the state to partner maybe with the credit unions, to be able to offer these already existing services, when there is already an existing network? I ask this because I have worked on these issues.

Being formerly a City Council Member, I actually also worked very closely because I was on the Board of Access Plus Capital. We brought, to our community, Self-Help Credit Union to Southeast Fresno, which was a highly unbanked community. You know, communities of color, I know that that's where we have these, kind of, deserts, when it comes to access to banking.

And so, I'm just wondering why isn't that we're exploring better partnerships, instead of creating these whole bureaucracies? And that's what I'm concerned—that if we create another bureaucracy, why aren't we working in figuring out a way to partner to be able to create these additional options for our community?

I'm totally for ensuring that the folks that are unbanked, the 2.5 million folks, would have, you know, better options. But so, why aren't we talking about, you know, these partnerships? I think it would probably also be less expensive for our state. And, and so, you know, that's kind of my question.

Have we—have we explored that as an option?

Well, like I mentioned earlier, even with the programs that have already been in existence, we still have great unmet need, and this is something that would be simplified by making it a statewide account.

You know, and I just want to say, you know, I, I have Wells Fargo—I have six accounts with Wells Fargo, but they all have minimum balance. And so I, I don't pay any fees because I maintain those minimum balance. And I'm able to maintain those minimum balance.

I just got a text today that I got approved from car loan from my credit union. And so, this is not meant to be competition. This is supposed to serve an underserved population that, right now, is not being served.

And with everything happening at the federal level, I, I, I think this would be a great opportunity for the state to fill this need.

Yeah. And I would only add that this is following the model of other successful, you know, public private partnership of CalSavers, CalABLE. So, it is building on those models that we have seen succeed. And to Assemblymember Garcia's point, CalAccount can really be an on ramp to other levels of financial services.

CalAccount is meant to be an area where folks who are currently left out of financial economy can have a stable place where they can save their money, they can build their financial stability, and from there, build credit to other, more, you know, other financial services.

And I also just want to highlight that CalAccount really has these tailored components to help reach communities that are the most vulnerable. For example, there is no—nothing comparable—in terms of serving survivors and their specific banking needs than what is in CalAccount.

At Free From, we've seen that there is a huge gap in our understanding of survivors' banking needs. And from the work we've done, we know that survivors—from the surveyed survivors in California that we worked with—they are unbanked.

Like they do not have a bank account at higher rates than U.S. adults from, again, just the numbers that we've looked into. And so, CalAccount has those additional programs to meet those additional needs that, right now, the market isn't meeting.

I have another question, to follow up, because I'm just thinking about the practicality and the implementation of this. So, say we pass the program, and we create, you know, this other option. I know a lot from the folks that I represent and those that are unbanked, they, they are.

What they want is like brick and mortar and people that speak their language, and you know, that's what I've experienced in my district. So, we create this. How are folks going to—what is the practicality of them accessing these accounts? Are they going to have to—who's, who's, where are they going to show up to?

How, how are we going to create this? Is this going to be online? Are they going to have a place where they—a brick and mortar?ATMs that are free of charge—I'm just thinking about the practicality of the implementation. Obviously, the concept seems great, but I think that there's already an existing infrastructure. And so, that's why I'm purporting that.

Why aren't we looking at creating a specific, you know, program with the existing infrastructure of brick-and-mortar folks? So, anyways, I'm just thinking out loud, in terms of the practicality and the—you know, how we actually put this into place. And so, am I going to get a, like, CalAccount branch in Fresno County? Merced County?

I'm just trying to think out loud, in terms of how are we really going to implement this, in terms of having these places where the folks can access these accounts?

Well, I'm glad you asked that question because it is meant to be a public private partnership, and so, CalAccount's Network Administrator is responsible for developing a network of financial services partners with retail locations, such as community banks or credit unions, where account holders can deposit and withdraw cash without fees. And so, that is part of the plan.

So, how, I guess, how would that work? So, they would be the host of the, of the money or?

So, there is a Commission that would be responsible for implementing the program. And so, it is with partnering with these, with these community banks, as well as credit unions, to offer these retail locations.

Would they—would the banks and the credit unions like have to agree or how would that?

Yes, well, I'll let the.

Yeah. So, you know, in implementation, there would be an RFP process where, you know, we would be looking for those partnerships to come and join. And there are incentives, like we already mentioned, the financial on ramp, right, so having a place for people to start, to build that credit.

And when you consider that this is going to be just like a debit-only account, no kind of loan, borrowing, or any sort of feature like that, it will be able to include folks who, right now, often get denied for opening other types of bank accounts, because there's process—or barriers—like the check system, that are used that often become a barrier to entry.

So, CalAccount can help those folks come in, and so, that's one incentive that we see. From what I understand as well, there's also an incentive of getting like CRA credit, buys partnering through CalAccounts. So, there are some incentives there that we see. And I, also, you know, we mentioned the 2.5 million households.

I want to highlight that that is households. So, they're, you know, unbanked households. I think, you know, we fully understand that's a household where nobody has a bank account, but for the households that are underbanked, as long as one person in that household has a bank account, they're considered underbanked. But there are multiple folks in that household.

And with the definition of how we define underbanked, there are other individuals in that household who are using alternative financial services. And so, it signals that there are, in those households that are underbanked, also individuals who do not have bank accounts.

So, we do think there is a significant population to, again, on ramp and give them an ability to participate in the financial economy.

And to, to elaborate—yeah, sorry, because I misspoke, I said Commission, but it would be the board, the CalAccount Board and, and there would be no mandate, but it would be—banks would be bidding for the contract.

Thank you. Assembly Member Rubio, you have a question?

Yes, thank you. No, I appreciate the, the conversation, but I am concerned about the, the brick-and-mortar aspect of it. And again, if we're—I work really closely with my credit union. They're my partners in a lot of the issues in helping provide services for my community.

So, if you're already going into the credit union, if you—I guess the problem is you're assuming that they're going to agree to this. Are they going to be compensated for providing these services, in addition to the services that they already—like what would be the incentive for the credit unions or the banks to actually provide the service, when they provide the service already?

I have Wells Fargo, as well. I understand that—my account is about 30 years old and because I have direct deposit, there are no fees.

Now, I understand that, that not everybody has direct deposit, but my credit union, I use it for different purposes, and the credit union doesn't charge me any fees for anything. If anything, I feel more comfortable going into the credit union because they sit with me and talk about different options, to talk about the kids.

So, how, what would guarantee that the, that the credit unions or the banks are even going to accept a contract like this, and are they going to receive fees because they're partnering?

Because if they're already doing it, what would be the incentive to do it if they're not getting any other benefit, other than somebody else walking in and now, they're providing those services that they already do? That's where, I think, we're caught up in this, is the practicality of it.

And if you have brick and mortar, you're not going to have as many community banks or credit unions.

Now, to be fair, I have only a couple credit unions and I have to go to the same one, you know, I have to drive to that credit union, as opposed to Wells Fargo, where I can go to very many branches. So, how is that going to work?

Because now, you don't have a brick and mortar and are you requiring the credit unions, or the community banks, to provide the service? So, long winded, but the question is, what is the incentive for the banks and for the credit unions to actually even do this, if they're not getting any financial benefit?

So, as mentioned previously, there are—there is—a CRA credit and like I said, there would be a contract that they would be bidding for. And secondly, like, while I know credit unions provide the service, there are eligibility requirements to be part of a credit union, whether you live in a certain county or your certain profession.

And so, it is limiting. And so, the CalAccount supersedes all that. So, if you are—if you live in California, you would be eligible. So, that, that, that is the main benefit.

Right, but what is the fee structure? Are they going to receive fees for doing this? And you know, and—I know not all credit unions are the same, but my credit union is, I go in there, as long as you, you live in the area, you can belong.

It's not an eligibility, like it used to be, I believe, in, you know, back in the day, there was a kind of an application, if you will, belong to that credit union, but now, you just walk in and if you're a member of the community, you just can apply for a credit union.

But again, what would be the benefit for the credit union to even do this? The, the—what would the contract say, I guess, if that's what we're heading, what would the contract say?

That they're going to receive just another person or they're actually going to receive fees, which again defeats the purpose of the no fee, because somebody has to pick up the fee, if that's what we're requiring from the credit union.

So, so, that falls under the implementation, like I said, the contract that would be granted with the credit unions and the participating community banks. So, the specifics of that, I wouldn't know the specifics and I don't think anybody knows specifics quite yet.

Okay, thank you.

I also do want to just flag, I know you're kind of, your question is focusing on the revenue, you know, the fees for credit unions, but I also do want to flag that credit unions, it sounds like there's some credit unions that don't have fees.

But what we have seen, there are still lots of fees at many credit unions. So, there is also still that. I know Assemblymember Garcia mentioned, you know, sometimes the different qualifications you need to have in order to be a member of the credit union. So, that's one barrier.

But there are also several fees that come with most credit unions. So, it's really not a service that is fee free across the board, statewide.

Right, but that's the point, right? So, the practicality of it, if there's only one credit union, for example, that is going to accept the contract, then the accessibility is still the same. You know, the access for that particular person to be—go into these credit unions is still limited.

If not, if not all credit unions or community banks are going to accept the contract. So, that's—and I understand, and I don't want to grill the, you know, kind of—I'm not trying to grill, I'm just trying to see the practicality of this.

If, like I said, with my credit union, I have to go to the specific credit union, but it would be the same for, for the—in terms of access.

Like in the Central Valley, for example. We're lucky—I'm in the LA County, I have more access, but the Central Valley would still have to go to the same place that, that we are saying is not accessible, at the moment.

And I know Ms. Soria brought up about the brick and mortar and it's important to certain areas, but the intent here is for a big segment of the population right now that's unbanked to participate in our cashless society. And this was even more evident during COVID, where everything went cashless.

And so, being able to provide a debit card without the minimum balance, without the fees, is going to greatly serve our community. And so, that is the intent here.

Thank you for that. Moving on to Assemblymember Dixon.

Thank you. Just quick, I think, I, since I'm behind you, I couldn't quite make out—did you identify the cost?

So, according to the Committee Analysis, it's 291.5 million.

200—I mean just 291.5 million to whom?

In Years 1 and 2.

Is that to the?

It's to the state.

The state is paying all the fees and startup and organizing 200? Okay. And then, on an ongoing basis, what funds the service fees?

I don't have the numbers off the top of my head. Actually, I think I do. In the first 10 years of implementation, the Feasibility Study stated that CalAccount will cost the General Fund 121 million to 201 million, over 10 years.

Thank you. So, is this—is the intent of this Bill notwithstanding your desire to facilitate a better improved banking process for unbanked—never heard that expression before—but unbanked people? Is it that the State of California is now going to provide a financial service banking system for unbanked—is that what this is all about?

Will cause the taxpayers—the startup 291 million—on an ongoing basis, over $100 million a year. Is that the intent, that the State of California is going to get into the banking business?

That's incorrect. So, it's meant to be a platform and like I said, it's done through a private, public partnership. So, with the retail locations, in terms of having community banks and credit unions participate.

So, not getting into the weeds too much, but boy, that would be a great program for all 55 million members of the California—residents of California—have a free banking program. I mean, just why doesn't everybody have a free account with the State of California? That might be kind of interesting. I'm sure there's some criteria.

I haven't seen that.

So, so, it's not full banking services, and, like was mentioned before, this is an on ramp. And so, for savings account or for other products earning Interest, they would still be able to participate. And it's getting them through the door, participating, right now, we're talking about people that are using cash and are not using banks.

Being able to get them into that system, which would be beneficial for credit unions and banks—is what we're trying to accomplish.

All right, but your witness, and I feel badly that she gets to the cashier and cannot pay, but there are a number of different ways to, number one, understand the balance in your bank account before you go write a check, or if she had an ATM, or even just understanding financial literacy.

I know there are programs the State of California provides. No one should be put in that situation. And I agree that those fees can be excessive, but there are ways, again, to avoid them.

I just hope we can help educate people to avoid running their balance low and just being mindful of their responsibility to just check their account. But issue for me is that the State of California is going to be getting into a competitive banking entity, with other financial institutions in the State of California.

And I just—I think that is a difficult prospect for me to consider. But thank you and I appreciate your sympathy and understanding and I have empathy for people.

I think we can help people in other ways, through existing programs with credit unions and other banks that do serve lower economic areas of our state, and financial literacy, and help people understand how to manage their checking account. I hope we could find ways to do that. Thank you very much.

Thank you, Ms. Dixon. If I'm able to respond—so, I know our witness testified about situation of having an overdraft fee, $35, as you were saying, that, you know, she could have known what was in her account, but then, wanting to use her account, then she was charged another $35, so that's $70.

And so, that's something that would not be possible with CalAccount, because those transactions would not be going through. So, there are no withdrawal fees because those charges.

Okay, but the State of California would be paying whatever service fees—the cost of operating this. I mean, it's just taking over the banking system for a certain segment of our population.

These are people that are not being served by our current bank system. So, it wouldn't be replacing it.

It's still a cost to the taxpayers, overall.

Right. There is startup cost and nowhere near—you know, $5 million is what is—was estimated for the first year.

5 million?

291 million?

$5 million dollars is what I have.

So, I'm not sure what...

Well, there's some disparity there, but—to be resolved at some point. Well, thank you very much. Appreciate it.

Thank you, Assemblymember Dixon. Assemblymember Krell?

Thank you, Mr. Chair. I'll keep my comments brief. I guess I respectfully disagree with my colleague, Assemblymember Dixon, and see this from a little bit of a different view here.

Having worked with survivors of human trafficking and domestic violence, for most of my career before coming here, I know the unique barriers that they face to financial independence and that without financial dependence, they cannot truly escape.

I see this program from a very narrow lens and that is that these people, who have been victims, are less likely to go to the traditional banks, but they need to be able to bank, in order to make a break, get away, achieve financial Independence.

And seeing Free From as a sponsor on this Bill, as one of the most well-respected organizations working on this issue, convinces me even more that this is an important Bill. So, I want to thank Assemblymember Garcia for bringing this Bill.

I think this will help some of the most vulnerable people in California achieve a better degree of financial stability, and I would like to move the Bill.

Thank you, Ms. Krell. A couple of points that I'd like to make as well. Want to thank the author for bringing this Bill forward and the concept to ensure that folks have access to banking. California is extremely diverse, and we all come from different backgrounds, ideologies, perspectives. Some folks find comfort in traditional banking systems.

Some folks may not feel as comfortable, for whatever their personal reasons are, and that's exactly why I do believe options are important for Californians. I will also acknowledge the fiscal concern.

With that being said, want to ensure that we're evaluating this policy based off of the merit of the policy in this Committee and not the fiscal impact, which will be another component of the legislative process. I'd also like to thank the author for agreeing to the amendments that will ensure that there is a feasibility plan, moving forward.

And also, regarding the public participation component. In order for this Bill to be funded, if it were to get to that point, it would only be made—the funding would only be made available do so, if the Commission has demonstrated this feasibility and an implementation plan.

And what I mean by implementation plan is proving that there is a constituency out there that actually needs this specific program, which I do believe that there is, because there are folks out there that are unbanked. So, with that, I will be supporting this Bill, due to the amendments that were accepted by the Member.

We have a motion to move the Bill. Is there a second? Awesome, Assemblymember—Assembly Member Soria would like to second it? Great. Thank you. Madam Secretary—Mr. Garcia, please, your closing Statement.

Well, thank you, everyone. I, I really appreciate this dialogue and making sure we have something that, that works for everybody. And so, yeah, like I said, this is not meant to be competition. Like I said, it's about choices, you know, and that's what we really need right now.

With so much people can't control in our economy, another option to build economic security for a big segment of a population is what Californians are asking for. And so, I respectfully ask for your "Aye" vote.

Thank you. With that, Madam Secretary, let's call the roll.

[Roll Call]

Thank you. That Bill has six votes. We will leave the roll open for absent Members. Thank you.

And now, it's my turn. I will be handing the gavel over to our incredibly talented Vice Chair, Mr. Chen, out of Orange County, as well.

Let's move that Bill right away, gentlemen.

I was going to say, please be gracious with my, with my bills.

Motion.

Did you say motion?

It has been moved.

It's moved? The next item on the agenda. Let's follow item 4. AB 1052 by chair in Valencia. The recommendation is due. Pass the Committee on elections with that, Mr. Chair. At your pleasure, sir. It's been moved. And Second.

AB 1052 establishes a legal framework to legitimize digital assets. As digital assets become more widely used, the risks grow. Unclaimed property issues, legal uncertainty about their status, and greater opportunities for public corruption are some of those concerns. California is failing behind the new wave of financial innovation. Digital assets are no longer abstract or futuristic financial instruments.

They are here. And they are increasingly used by businesses and consumers. As the world's fifth largest economy, California must protect consumers, embrace the legal recognition of digital assets and foster responsible growth. Without a clear framework, crypto assets remain vulnerable to exploitation, including by public officials who could use their influence to issue digital assets and personally profit.

As the state adapts to evolving technologies, it is critical that we uphold public trust and maintain the highest ethical standards in government. With me to provide testimony on this bill is Dennis Porter, CEO and co founder of the Satoshi Action Fund.

Chair Valencia and Members, thank you for the opportunity to testify. My name is Dennis Porter and I'm the CEO and co founder of Satoshi Action Fund, which is a US Based nonprofit focused on advocating for Bitcoin and digital assets. We are also the sponsor of AB 1052.

I'm here to voice strong support of AB 1052 with special emphasis on Section 5 and the accompanying provisions on unclaimed property and public official accountability. First, Section 5 is the Consumer protection heart of the Bill and works in tandem with the previously passed Digital financial asset law.

DFAL, which passed in law in 2023 via AB39, licenses custodial businesses where controlled by a third party exist. But it stops short where an individual or a small business retains full control of their assets via peer to peer transactions and a process called self custody that no control zone covers.

Millions of Californians using digital assets for spending and saving. Without Section 5, a city or county could still ban or surcharge those perfectly legal payments, leaving honest users in regulatory limbo. Section five ends that uncertainty. It affirms that self custody digital assets are lawful considerations for goods and services and it bars any local discrimination against them.

It is the seat belt that complements the airbag DFEL already provides. Also, despite concerns, this language has already passed into law in six states. One of those states has an existing regulatory regime much like California and has yet to experience any conflicts with their existing regulatory regime.

Second, the Bill adds clarity for unclaimed digital property today, if law enforcement or the courts seize crypto or other digital assets, or if an owner dies, intestate agencies face wildly inconsistent policies about how, when and where to escheat those assets.

AB 1052 sets a clear path so assets don't vanish in legal gray zones and rightful owners or the state can trace and reclaim value transparently. Finally, AB 1052 strengthens the government accountability by prohibiting public officials from issuing, sponsoring or promoting any digital asset while in office.

This provision closes a loophole that could let elected officials mint tokens, pump their value and cash out of the public's expense. It protects the integrity of this Committee's work and ensures public trust and our rapidly evolving financial landscape.

Taken together, Section 5 empowers consumers, creates a streamlined process for unclaimed property, and the Accountability clause keeps public service as a public trust. AB 1052 is a balanced, non partisan and urgently needed piece of policy. I respectfully ask Respectfully ask for your aye vote to keep California at the forefront of smart, ethical digital asset policy.

Thank you to the Chair for your leadership on this Bill and I'm available for questions.

Are there any witnesses in support? Seeing none. Are there any key winners in opposition.

Good afternoon, Mr. Vice Chair. Members. Robert Herrell with the Consumer Federation of California. We have an opposed unless amended position on the Bill. So I'm going to just focus my comments on the objectionable portion of the Bill, which, as it turns out, is Section five of the Bill.

We are concerned that the way that that section of the Bill is written, it could have quite dramatic unintended consequences, especially as the state's crypto licensing, the DFAL program, is being ramped up by DFPI that needs to be operational by July 12026.

This Legislature, this Committee, gave them an extra year to make sure they do it right. And we were intimately involved, as some of you may or may not remember, in putting that together in AB 39 of a couple years ago. So we're concerned.

We dropped in a letter not in time to make the analysis, but the concerns actually, ironically, are similar to the concerns raised in the analysis and or issues for consideration in Comment number 6. We are not here to comment on the sheet to the state and how that should or shouldn't work.

I think some of that stuff could probably use some tinkering, but it's really Section five that we think needs a cleanup. And so we're happy to work with the author and sponsor as the Bill moves forward to try to clean that up.

I think for now, it's probably best to take Section 5 out of the Bill and then maybe put something back in if and when it's ready. But that's our position. So thank you for the indulgence.

Thank you for your testimony. Any other witnesses in opposition? Seeing none. We'll take it back to Committee. Any questions? No questions. It's been moved and seconded.

Mr. Chair, at your pleasure, respectfully ask for a yes vote.

Thank you, Madam Secretary. Please call the roll.

[Roll Call]

The Bill has seven votes. Thank you very much. Thank you, Mr. Chair. The next item is file item five. AB 1180. The recommendations do pass as amended to Committee on to Appropriations. Mr. Chair, at your pleasure. It's been moved. It's been moved in second.

Thank you, Mr. Chair and Committee Members. Muy buenas tardes. Evening is getting past us. AB 1180 would establish a pilot program authorizing the Department of Financial Protections and Innovation to allow the Payment of fees using digital financial assets. This ensures that California's economy remains on the forefront of financial innovation and continues to adapt to evolving consumer preferences.

Today, consumers can already pay for their phone bills, sporting tickets, insurance claim settlements and much more using digital assets. The potential for widespread use of crypto is significant. Yet California has fallen behind in adapting this new financial reality.

Other states like Colorado, Utah and Louisiana have readily responded to the needs by accepting crypto payments for taxes and fees. However, in a state as large and economically influential as California, it is critical to address the unfamiliar familiarity and misconceptions surrounding these digital assets. Used say that 10 times fast.

AB 1180 addresses this by requiring a report to the Legislature that details the challenges and provides recommendations for expanding the acceptance of cryptocurrency payments across state agencies.

Thank you, Mr. Chair. Any other witnesses in support?

Good afternoon. Thank you. Good afternoon. Jaime Minor. On behalf of the California Blockchain Advocacy Coalition, pleased to support. We think it's the measured approach to this, especially as cryptocurrency adoption grows among Californians. They're eager to see these options available to them. We're the number one leading state when it comes to innovation in this space.

We want to keep it that way. We want to send this message that we're a leader. So look forward to continuing to work with the author and we support the Bill. Thank you.

Thank you. Any witnesses and opposition Seeing none. We'll take this back to Committee. Any questions?

I just have a quick question. I think it's an important Bill. I support it. What I wonder about the industry and this is the banking and finance. I think if they called it something other than crypto or bitcoin, people would understand just say digital dollars and it's just a digital version of currency. I think crypto is what stymies a lot of people. It's my own personal opinion.

I appreciate that. And that's just the first term used. Then there's terms like blockchain and the list goes on and on. So I agree that the branding does need to improve to make it more understandable to us.

To the advertisers, it just sounds like it's ether or something, you know. And people I've talked to people about, well, what is it really? You know, I think they could do a better job. You may convey that to your sponsor just to help this be become adopted in a more broad scale way.

That's my thought for banking and finance at 5:30.

Appreciate that it's been moved and seconded. Mr. Chair, would you like to close Respectfully.

Ask for a yes vote.

Thank you, Madam Secretary. Please call the roll.

[Roll Call]

The Bill of seven votes. Thank you, Mr. Chair.

[Roll Call]

We will now be voting on consent items. Opening the roll for consent item. Voting for Members that were absent at. The beginning of the hearing on the consent.

[Roll Call]

Consent calendar is adopted. File item one. AB 407.

AB 407. The motion is due. Pass as amending. Refer to Committee on Local Government. Fong I. Then she left. So that has. She said she didn't vote on Rosa.

File item 4. AB 1052.

[Roll Call]

Open up the rolls for add on AB 1052.

[Roll Call]

Those three bills. Get out and meeting adjourned.