Tuesday, February 12, 2013

How Well are Banks at Reaching Financially Underserved?

United Stated dollar sign puzzle
Anyone who still wonders why there are so many unbanked and underbanked in America here's the Number 1 reason: only 4 in 10 U.S. banks design products that address the basic financial needs of low-income consumers.

The data is contained in a report released last month by the FDIC.

FDIC Chair Martin J. Gruenberg said banks have made some real advances in serving the needs of this segment of consumers. And that has been the case; in 2009 the FDIC reported that only 25 percent of banks targeted marketing to reach the unbanked and underbanked. However, the country's unbanked population grew during those same 2 years, by almost 1 million. (Check out this previous post for more details from a report on unbanked and underbanked consumers the FDIC issued in September 2012.)

The 2011 FDIC Report of Banks' Efforts to Serve the Unbanked and Underbanked draws from results of a voluntary online questionnaire completed by over 500 U.S. banks representing various asset sizes. It addresses marketing and retail strategies, basic account features, auxiliary products (think money orders, check cashing and prepaid debit cards) and financial education and outreach. And it includes detailed data sets.

Among the less than stellar findings reported:
  • Almost all surveyed banks require an initial deposit of at least $100 to open a basic checking account
  • 20% impose monthly service fees of $3.00 or more; although nearly two-thirds charge no monthly fees when account-holders use Direct Deposit.
  • Only 21% offer "checkless," card-based checking accounts
  • 20% offer "second chance" accounts to individuals who don't qualify for basic checking accounts
  • 71% cash payroll checks; 47% offer this service to both account-holders and non-account-holders
  • 68% offered domestic remittances to basic account-holders
  • 11% provide domestic remittances to non-customers; 9% offer international remittances to non-customers

In addition, 80% of surveyed banks offer small-dollar unsecured personal loans; the minimum loan amount at most (53%) is between $1,000 and $2,500.

There are no minimums on small-dollar loans at 43% of banks. Generally, these loans are made with repayment terms of 90 days or more and annualized interest rates under 36%. Typically, the banks offering small-dollar loans approve such loans in less than 24 hours.
How Can Banks Reach the Underserved?

The FDIC report also highlights opportunities to increase access to basic financial services. These are pretty basic suggestions, such as "Expand Offerings of Basic, Low-Cost Checking and Savings Deposit Accounts." Banks can do this by offering low-cost card-based (checkless) checking accounts, the report noted.

The report also suggests banks broaden offerings to underserved households to include, for example, check cashing, money orders and remittances.

It also recommends that banks enhance marketing of small-dollar loan products, noting that at least one-third of consumers who borrow from payday lenders and pawn shops complain that banks don't offer small-dollar loan products.

Perhaps most importantly the report urges banks to partner with community organizations to promote bank account ownership. Like the BankOn programs that have been springing up all over the country. (Check this post for more about BankOn programs.)

The 2011 FDIC Report of Banks' Efforts to Serve the Unbanked and Underbanked is available for downloading from the FDIC's website.

Senators Blast Bank Payday Loans

January 10, 2013 by Patti Murphy.

A group of ranking Democratic Senators - led by Connecticut's Richard Blumenthal - this week urged federal bank regulators to crack down on banks that offer loan products that resemble payday loans in most respects except by name..

The letter, sent earlier this week, echoes concerns expressed recently by the Center for Responsible Lending in a letter to the Office of the Comptroller of the Currency (OCC) complaining about payday lending practices of OCC-supervised banks.Regulators discourage banks from offering payday loans. However, several banks have devloped short-term loan products that get repaid after an expected Direct Deposit is received.

"These bank payday loans are widely recognized as predatory products designed to trap low-income consumers in a cycle of debt," Blumenthal wrote in a letter addressed to the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency (OCC). Blumenthal was joined by Senators Richard J. Durbin (D-IL),Charles Schumer (D-NY), Sherrod Brown (D-OH) and Tom Udall (D-NM). A copy of the letter was distributed by his office yesterday.

Connecticut is one of 14 states that ban banks from making payday loans. However, Blumenthal argues that the products many banks offer look and act a lot like the payday loan products nonbanks offer. That is, banks deposit the loans directly into customer checking accounts and debits the loan amount and interest from subsequent Direct Deposits. Typically, if there are insufficient funds to repay the loan after 35 days, banks repay themselves nonetheless, leading to potential overdrafts and a cycle of debt.

In the letter to regulators, the Senators said the typical bank payday borrower takes out 16 such loans a year, and some take out as many as 20 or 30 loans in a single year. And they urged "meaningful regulatory action" that assures this end result.

"Bank payday loans increase the ranks of the unbanked by making checking accounts unsafe for vulnerable consumers, a result clearly inconsistent with a safe and sound banking system. And payday lending poses serious reputational risks to any financial institution," the letter states. "As the agencies responsible for the safety and soundness of the financial institutions you supervise, you are compelled to stop them from making payday loans and from preventing additional banks from beginning to do so."

Getting a Handle on America's Underbanked

According to the 2011 National Survey of Unbanked and Underbanked Households on in 12 American households, representing at least 51 million adults, is underbanked. (Click here for previous coverage of the survey.) But some experts warn the FDIC's data may overstate the problem.

The Center for American Progress (CAP), a progressive think tank, for example, has asked the agency to reconsider using prepaid cards as a sole indicator of a household being underbanked.

Joe Valenti, Director of Asset Building at CAP, argues in a letter to the FDIC that the agency's survey doesn't discern which households are using prepaid debit as substitutes for bank accounts, as opposed to other reasons (such convenience, safety and budgeting). He also argues that payroll cards are bank account equivalents, so folks who are given prepaid cards for accepting Direct Deposits of payroll are effectively banked.

Valenti and CAP are not alone. I have heard this complaint from several quarters, especially given the rapid pace of growth in prepaid debit (especially network branded cards - think Visa and MasterCard).

The Boston-based consultancy Aite Group, which follows the prepaid space, predicts the U.S. market for prepaid debit cards (including payroll cards) will grow at a compounded annual rate of 19.9% through 2016 when the market is expected to top $168 billion. In 2011, prepaid debit was a $70 billion market. And those predictions preceded announcements last year that Visa would soon support mobile check deposits to prepaid cards, and that American Express was teaming up with Walmart to offer Bluebird, a branded prepaid card that's being marketed as an alternative to bank accounts.

Heck, even I have used a network-branded prepaid card, and I'm by no means underbanked. So, maybe it is time to refine that definition.