WASHINGTON — A new Federal Deposit Insurance Corp. rule could make it easier for students to hone banking skills alongside English and math, while giving banks a possible path to underserved areas.
The agency said last month that banks can operate inside schools, taking deposits and making loans, without seeking branch approval. Though the exemption applies only to programs where the bank's "primary purpose" is teaching financial literacy, and current school branches are rarely profitable, bankers see a clear benefit.
Students work at the branches as tellers, in some cases earning a wage, and sign up as customers. Parents and teachers typically can bank there, as well, and in immigrant communities in particular, the programs act as customer outreach to families not served by a traditional bank.
"We found that some of the kids were cashing their parents' paychecks," said James Maloney, the chairman and chief executive of the $81 million-asset Mitchell Bank in Milwaukee, which runs a full-service branch at South Division High School there. "We feel that if we can get the kids in an unbanked family banking, the parents will soon acquire some of those skills."
Dory Rand, who has consulted for organizers of in-school programs in Chicago and California, said the FDIC rule, which resembles one the Office of the Comptroller of the Currency issued in 2001, will persuade more banks to participate. The rule responded to some bankers' confusion over whether a branch application is required.
"It encourages more banks to do this kind of partnership to help reach unbanked and underserved communities in a really safe and familiar setting of a school," said Ms. Rand, the supervising attorney for community investment at the Sargent Shriver National Center on Poverty Law in Chicago.
The rule's language leaves room for banks to include school programs in their growth strategies, she said. In addition to the convenience an in-school banking location offers parents and teachers, she said, students working as tellers inside the school can become a bank's future work force.
The FDIC rule says literacy is "the 'primary' purpose," but "it doesn't mean you can't also have a business purpose to get customers and deposits," Ms. Rand said. "There's nothing wrong with that, as long as the primary purpose is education."
Cardinal Bank of McLean, Va., opened its first school location in 2005 in an elementary school without seeking branch approval. Like most programs, the branches are supervised by actual bank officers. In Cardinal's case, fourth-, fifth-, and sixth-graders help run the branches, and each is associated with an outside branch that processes the transactions.
Members of the school community can make deposits, but withdrawals are not allowed for security purposes. (Students can withdraw money at other bank branches.)
Interest on certificates of deposit is on the decline, but the Cardinal Financial Corp. unit is offering a 5.25% rate to students through its "Kid's Club" program for depositors 17 or under with $1,000 or less in their accounts. The program currently has $250,000 of deposits in 1,140 accounts.
Kevin Reynolds, Cardinal Bank's president, said the school program's goal is to "teach students the importance of savings, so they understand financial needs versus wants." It also seeks to teach "financial terms like interest rates, compounded savings, and budgeting." However, "it's a two-for if I can get school faculty or parents also to open accounts," he said. "That's an added benefit."
Mitchell's program is closer to a full-service branch. The school bank has approved branch status from the FDIC and offers every product available at the bank's other branches, including an automated teller machine. Students help staff the location, but the branch is open to the general public.
Mr. Maloney said he would have still sought branch approval even if the FDIC rule had been in effect when the program started.
"We wanted to get away from the idea that it would just be kids playing 'bank,' " he said. "Unless you say you're going to be a full-service branch, my opinion is that the program is going to devolve into that, and the kids aren't going to get a real live experience."
Mr. Maloney said the program largely has paid for itself, as deposits raised through the branch — about $870,000 at one point, a large chunk of it from community donors — have funded quality assets and led to a growth in customers. In its first five years the branch made over $300,000 of loans to parents and school staff members, and it conducted over 300 transactions a month.
"We've seen a great increase in our customer accounts at our main bank since we opened" the school program, he said. "Even though we have a lot of small accounts, we're acquiring customers every day, and we think it is directly attributable to having this school branch."
Others emphasized the cost of operating a school program and said they doubted it could ever produce a direct financial benefit for the bank.
Mr. Reynolds said Cardinal Bank participates in the program mainly as a community service. The main bank has "42,000-plus accounts," so "I don't think we've gotten a sizable increase" from the in-school branches.
"Bluntly, it would be difficult if you looked at it from a hard-core standpoint of return on investment," he said. "Would you be able to … make a full-service branch bank within an elementary school profitable? I think you can do it in a university setting, or in a school that has a campus environment."
David A. Remijas, the chairman and CEO of Park Federal Savings Bank in Chicago, said it partnered with Curie High School there on a program after other institutions had declined.
The FDIC's change would "eliminate one step," but the programs have to be about financial education, because creating a growth opportunity for banks is a challenge, he said.
The Park Federal branch received approval from the Office of Thrift Supervision, Mr. Remijas said. The branch offers deposits and withdrawals, and loan referral forms can be processed by the full-service branch a half-mile away. At its peak, the school branch had only 270 accounts, but three student tellers have gone on to full-time jobs at the thrift.
"The purpose is financial education, so if anything, it probably operates at a loss," he said. "We get some grant money that helps out a little bit, but it's pretty much an expense item. I don't know if there's a lot of incentive out there for other places to open them up."
But he said the thrift also hopes to establish relationships through the school branch with families that have been outside the banking system.
"There is a large immigrant population, and they're wary of the U.S. banking system," Mr. Remijas said. "Our original intent is it would be a good way to reach the parents through the students. A lot of times it's the students who are bilingual. Information, whether it's financial information or other types of information in the area, is actually funneled through the children."