Banking on the Unbanked



Photo: Plug 1

Ever driven through a neighborhood and noticed there is a bank in almost every block corner? It’s easy to spot a well developed and financially stable neighborhood by the number of banks it has. But if you take a turn into a neighborhood that’s struggling, it’s almost impossible to find a bank branch and the only ATM available is in the local bodega that charges a high fee for its use. These are the so-called unbanked or underbanked communities and it’s where a new breed of banking is surfacing. These hybrids of banks and check cashiers are popping up in under-developed areas where affordable and convenient banking services are needed to serve low-income earners.

Unbanked communities made up of people who are not part of the mainstream of banking customers are not a small group. According to a June 08 survey by The Center for Financial Services Innovation, it is estimated that 40 million US households (106 million individuals) are either underbanked or unbanked. That means that the individuals who make up this number either have only a basic checking or savings account or no bank accounts at all. 685 banks responded to the survey sent out to 1,300 banks. 53% of those who responded said that they teach financial literacy and education sessions targeted towards these communities and 25% designed marketing strategies aimed at them.

Individuals in unbanked communities are mainly immigrants, low-wage earners and minority group members who go to check-cashing facilities to cash their work checks often at high fees. Reasons for going to these high fee facilities include distrust of the banking system and the need for transparency. According to surveys, low-income wage earners looking to cash their checks feel that the best place for this transaction is a supermarket or a check cashier facility where they know the exact fees. This is in contrast to banks where there is a lack of transparency and fees are not always clearly laid out. Distrust of the banking industry has reached new highs in the wake of the financial crisis, even among those who bank with more traditional financial institutions. It seems everyone wants visibility into what’s going on with their finances these days. However, the drawback to not having a bank account is that unbanked communities are unable to build a credit history or take advantage of interest accruing accounts.

Banks that cater to these unbanked communities have been increasing over the past several years. Many banks and other organizations have realized the potential for growth and economic development by banking these underrepresented areas. For example, in 2003, Key Bank started a check cashing service in Cleveland and by the end of 2008, Wal-Mart opened 1,000 Money Centers across the U.S. Wal-Mart’s Money Centers offer a variety of services including low cost check cashing with wire transfers and utility payment services. Conventional banks such as Citibank has also taken an interest in unbanked areas and sees the potential. It partnered with the United Way of Greater Los Angeles (UWGLA) to create the UWGLA Saving for the American Dream asset- building program which helps promote economic development to low-income families by mitigating language and cultural barriers and meeting the banking needs of the these areas.

Low-income neighborhoods benefit from these new banking facilities from the services they offer such as payroll cards. These are stored- value cards issued by employers instead of paper paychecks. Like direct deposits at commercial banks, the money is deposited directly into a bank account from which the employee can use the card to withdraw money from an ATM machine. Opening a checking and savings accounts is also easier since these banks offer very low minimum balances and fees.

In addition to Key Bank, Citibank and retailers like Wal-Mart who have expanded their services to include unbanked individuals, other facilities like CheckSpring have been created solely to service these neighborhoods. CheckSpring is a development bank founded in 2007 and headquartered in Bronx, New York. The bank offers personal loans, credit building services, residential mortgages and home equity loans and lines of credit. In addition to check cashing, bill pay, money transfers and online banking, the bank serves businesses in the area with commercial lending, currency services and checking and savings accounts. Prior to the recession, many cities had major branch openings from banks like Washington Mutual, HSBC and others. However, this Bronx community had not seen a bank branch opening in the past 25 years.

The transition to becoming banked has worked well, most of the customers who come into CheckSpring for check cashing services end up opening bank accounts by enrolling in a savings clubs. The savings club later converts into a regular savings account when a certain balance requirement is reached. This is the ultimate goal of these developmental banks, to convert unbanked individuals to bank account holders.

It’s evident that more banks see the economic potential of these communities and are trying to gain market share by targeting the areas that where ignored in years past. While many banks have either expanded into these communities and new developmental banks have sprouted giving these areas an economic lift, there are still many underrepresented places without adequate banking services.

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