For Spring Bank, trying to help the underbanked is not a sideline, but its whole reason to exist. It has been offering financial literacy courses and products like checking accounts with no fees or minimum balance requirements ever since it opened in the Bronx, N.Y., in 2007. It has two branches now, both of which qualify for Community Reinvestment Act credit, and it just received certification in December as a Community Development Financial Institution.
In short, Spring Bank seems like the perfect candidate for a New York State program that encourages banks to put branches in low-income neighborhoods that have none. The now 14-year-old Banking Development District program helps make these branches more affordable with incentives such as potential real estate tax relief and $10 million in government deposits at below-market rates.
But two years ago, when Spring Bank expanded into Harlem with the opening of its second branch, its application to participate in the program went nowhere. The reason: the program was being revised and New York's Department of Financial Services was not considering new applications.
"For a small bank like ours, the BDD program has the potential to encourage a lot of deposit activity," says Brian Blake, vice president of marketing and CRA officer for the $95 million-asset Spring Bank. "We have been disappointed that it hasn't kicked in for us."
This revision apparently has been going on for the last four years, leaving what had been a popular program in limbo.
Back in 2010, what New York then called the Department of Banking conducted a review of the program to evaluate how well it was doing 10 years in and how it could be made even better. A report with numerous recommendations was published.
In the years before the review, the Banking Development District program had been going strong. The banking department was its loudest cheerleader, even sending representatives around to other states to promote the idea. Louisiana established a similar program in 2008 and Pennsylvania, Illinois and California were among those working to do so.
But all that momentum has come to a grinding halt since then. The proposed legislation in Pennsylvania, Illinois and California died. And despite having had a program in place for six years, Louisiana has yet to receive an application for a branch. New Jersey approved its own program in 2011, but has never seen a single application either.
As for New York, the branches in the program have dwindled to just 18, half as many as there were four years ago. A spokesman for the Department of Financial Services says it continues to revise the Banking Development District program, with the hope of approving new branches "in the near future."
Industry observers say the impact of the financial crisis and the advent of mobile technology are changing the financial calculations for making a branch feasible. The incentives offered through such programs are less attractive as a result.
"It's all very telling," Jennifer Tescher, CEO of the Center for Financial Services Innovation in Chicago, says of the lethargy around Banking Development Districts. "These days, convincing anyone to open a branch is an uphill battle, and not just in low-income communities."
Regardless of a community's income level, branch-building has slowed considerably in the last few years. As of June 2013, there were 96,339 bank branches in the United States, down 1% from 2012 and 2.8% from 2008, according to the Federal Deposit Insurance Corp.
Low-income neighborhoods have been affected disproportionately, according to an SNL Financial study from April 2012. The study shows that 2008 was the last time the number of branches increased in census tracks with a median household income of $25,000 or less. Since January 2009, these neighborhoods have lost 70 branches, or nearly 3% of their total branches; by contrast, areas with a median household income of $100,000 or more have gained 57 branches, for a 1% increase in total branches.
Even so, there has been some unrequited interest in building branches in low-income areas of New York. In the last two years, 10 other New York banks besides Spring Bank have inquired about the Banking Development District program, according to the Department of Financial Services. (It's unclear if any have opened their branches, given that the program is not approving new applications.)
At least for the branches remaining in the program, business seems to be steady. Ralph Branca, CEO of Victory State Bank in Staten Island, N.Y., says he would consider opening even more. Along with the traditional banking services at its two Banking Development District branches, the $303 million-asset Victory State also offers financial literacy courses—including one specifically for unwed mothers—and serves as a central rent-collection hub for the New York City Housing Authority.
Branca says that foot traffic is what he expected, though not as heavy as some of Victory State's other branches. With the subsidized government deposits, the branches break even. "There is a sector of the community that likes to come into a branch and talk to bankers face to face, and many of them are in lower income communities," Branca says. "In the end, we are a people business and you need the branch to serve the people."
But some say that when it comes to helping the underserved in the future, encouraging traditional bank branches will be futile.
Tescher suggests that banks invest in mobile banking, and getting low-income consumers—many of whom are already savvy with smartphones—to set up personal finance and banking apps.
Saurabh Narain, CEO of National Community Investment Funds in Chicago, says to effectively reach unbanked areas, state and local governments should reward solutions that pair up big banks and community banks, rather than having them compete against each other. For example, larger banks could share their ATMs, at no cost, with a community bank in a low-income neighborhood. Or a larger bank could share some of its back-office technology with a community bank and get CRA credit for that.
"CRA needs to be strengthened and regulators need to be thinking outside the box," Narain says. "And it's not about increasing branches because we don't want empty branches with no activity."