Banks looking for new customers and more deposits might be able to find them in low-income neighborhoods mostly served by check cashers, payday lenders, and other fringe financial institutions, a study by the National Community Investment Fund says.
“From Margins to Mainstream: A Guide to Building Products and Strategies for Underbanked Markets” gives four case studies on how banks and credit unions recruited low- and moderate-income people as customers. Lisa Richter, the fund adviser for the NCIF, of Chicago, said the study shows there is potential in markets besides the upper-income neighborhoods that most banks prefer for branch openings.
“What I seem to hear is a lot of people feel serving somewhat more affluent customers is a saturated market,” Ms. Richter said. “There is a lot of room to develop long-term relationships with customers” in low-income areas.
Some bankers, of course, are skeptical about actively courting people with low income. Many of these people have had accounts closed in the past for bouncing checks and thus are not good depositors, and they tend to have too little income to be worth the credit risk, these bankers say.
The banks and credit unions that the NCIF used as examples in its study concede that these customers are not profitable when they first open accounts. But they say that with a little extra attention, the poor move up the financial ladder and have the potential to make progressively larger deposits and take out larger loans.
Legacy Bancorp Inc. of Milwaukee has tried to develop long-term relationships with unbanked customers since it opened in 1999. It has taught financial management classes and been flexible about opening accounts with low minimum balances and for people who have a history of bouncing checks.
Margaret J. Henningsen, a founder and vice president of the $113 million-asset Legacy, said, “There is nothing new about what we are doing here at Legacy — this is just good, old-fashioned community banking.”
In 2002, Legacy received a $342,467 grant from the U.S. Treasury Department to launch its Financial Liberty First Accounts program, which targets the unbanked. It has opened 1,800 accounts through the program, and through the third quarter of this year, more than 1,000 were still open, Ms. Henningsen said. She added that the accounts have an average balance of more than $300, and that about 60 of these customers have $5,000 or more in a savings account or certificate of deposit.
The $49 million-asset Alternatives Federal Credit Union of Ithaca, N.Y., has also been able to turn formerly unbanked individuals into borrowers by giving them added attention. It provides free tax preparation services for low-income people in its market and offers to open accounts when it fills out returns, so filers’ tax refunds can be directly deposited.
Amy Audetat, the coordinator of the credit union’s Volunteer Income Tax Assistance program, said that in 2004, when the credit union followed up on customers it gained during the 2002 and 2003 tax seasons, it found that it had 225 new members. It also had made $122,000 of loans, including one mortgage, five car loans, and various personal loans.
Ms. Audetat said tax sites are a good way for banks and credit unions to pick up new depositors at a time when they have some extra money to open an account and think about savings.
“In most cases, there are nonprofits doing this who are just dying to have a bank or credit union on board,” she said of tax preparation services.
Despite these successes, helping low-income people is not always easy. The $9.1 million-asset North Side Community Federal Credit Union of Chicago started making short-term consumer loans in 2002 as an alternative to high-interest payday loans. Though it has gotten about 1,100 new members through the program, Edward Jacob, the manager, said it is difficult to change borrowers’ financial behavior.
“They are holding accounts, but they are not growing balances,” Mr. Jacob said. “They aren’t thinking long-term, two or three years out.”
He said he thinks the problem may be that by the time customers come to the credit union for a short-term loan, their income goes to covering existing debt and expenses.
“I’m really worried about the negative-net-worth position of not just low-income people but moderate-income people,” Mr. Jacob said.
Even moderate-income people, he said, have trouble because they do things like borrow against their home equity as soon as they build it, and this means they are not building any assets, he said.
Christopher Tan, a senior analyst with the Center for Financial Services Innovation, a division of the $1.8 billion-asset ShoreBank Corp. of Chicago, and one of the NCIF study’s authors, said of low-income customers that “one of the remaining challenges for us is, you have got them into the bank, now what do you do with them. Once you get them in, how do you move them to other products and get them to keep using them?”
The NCIF study was released Nov. 11. Results from it were presented at two sessions at the Bank Administration Institute retail banking conference in Orlando last month.
