Profitably serving low-income customers is a longstanding challenge for banks, but it’s especially tricky when the prospects are former prisoners.
Wage garnishments for old debts, difficulty finding employment with a criminal record and other issues make it hard for these people to build significant deposit balances, much less become creditworthy. And then there’s the adjustment to life on the outside after years, or decades, locked up.
It’s “a whole new world,” said Amber Paxton, director of the Lansing, Mich., Office of Financial Empowerment.
Yet since 2015, her agency has helped four local institutions open 89 bank accounts for people coming out of prison, and aims to hit 110 this summer.
For the banks, participation earns Community Reinvestment Act credit, public goodwill, and relationships that, perhaps, might one day prove lucrative, Paxton said.
“These people will not be getting back on their feet forever,” Paxton said. “There will come a time when that person … is going to come in there for an auto loan” or a mortgage.
For now, though, the banks are more likely to lose money on the accounts, she acknowledged. “It’s a highly unbanked population and we know that banking is sort of step one” to financial stability.
Indeed, bankers at the institutions framed their involvement as a matter of duty more than as a growth opportunity.
“We have some responsibility to try to re-establish people, I believe,” said Sally Rae, executive vice president at the $378 million-asset Dart Bank in Mason, Mich.
Keith Wright, a local branch manager at Flagstar Bancorp, similarly said his institution, which has opened 14 accounts through the program, is “very community oriented” and wants to make sure all people get the chance to do rejoin the financial mainstream.
The $15.3 billion-asset Flagstar, based in Troy, Mich., understands that people might need a second chance, Wright said. “It’s one of the great things that we’re able to serve our community by offering the opportunity to do banking again.”
Amiyatosh Purnanandam, a finance professor at the University of Michigan’s Ross School of Business, said Lansing’s work “should be applauded,” but cautioned that the “long-term issue” is whether the people the program is targeting will continue to use traditional banking services. If a customer regularly gets something like a government check deposited into their account or some kind of subsidy, they’d be more inclined to keep that relationship, he said.
“Education is a good first step, no doubt about it,” he said.
The former prisoners themselves tended to be wary of re-entering the financial mainstream, according to Paxton.
“It was a much harder sell than we thought to get this population [to] trust a bank,” Paxton said. “It definitely took more than one meeting.”
Some customers might have garnishments they’ve accrued from various debts while they were behind bars. When they open a new bank account, creditors will be made aware, Paxton said. Child support in particular was a big problem.
Another problem the program came across was an issue with state dormancy law, Paxton said, meaning that if an account was inactive for three years, it was shut down and the money was deemed unclaimed property by the state.
Because of that, Paxton said her agency looked up all of the former prisoners who came to its bank recruitment events to see if they had unclaimed property.
“That was a huge lesson learned,” she said.
The events are held twice a month in places where the former inmates would meet with parole officers. Snacks and coffee are served and the four financial institutions — Flagstar, Dart, CASE Credit Union, and PNC Bank — come to market their accounts to potential customers.
Paxton said her office is familiar with each type of account offered so it can help potential customers pick out the right one.
“We’re really straight with the people we serve,” Paxton said. “We know exactly how they compare to one another.”
The office also passes out a list of questions from the FDIC’s MoneySmart curriculum for attendees to ask the bankers in part to make potential customers feel they have more power.
“We found that super powerful, but again, a hard sell on the trust,” Paxton said, noting that those who met with the bank representatives wanted to mull over the decision.
Flagstar’s Wright said customers recruited through the program tend to sign up for one of two accounts: either the Simply Checking account or its Simply Plus account. With Simply Checking, there’s no monthly fee. There is a charge for customers to get paper statements, but Wright says the bank helps customers set up online banking so they can avoid that cost.
The Simply Plus account is for customers more than 50 years old and includes paper statements for no charge. Both accounts offer checks and customers will be charged a fee if they overdraw.
If customers don’t qualify for either account, Wright said the bank also offers a “second-chance product,” but those customers cannot overdraw or get checks.
Michael Bloomberg, the philanthropist and former mayor of New York City, donated just over $16 million to the Cities for Financial Empowerment Fund for other cities to create financial empowerment centers similar to the one in New York. The centers provide counseling on things like budgeting and credit to a broad population. Lansing was one of the five cities granted money in January 2013.
Later, the city applied for another grant through the fund and used the money to start the prison program in 2015, Paxton said. Lansing’s office then received a six-month extension to keep the 18-month grant going.
Initially, Paxton said, the office ran on grant money. Now its funding largely comes from the city, she said.