Why is the Federal Deposit Insurance Corp. determined to recreate the wheel when it comes to serving the financial needs of low- and moderate-income consumers?
The FDIC's Advisory Committee on Economic Inclusion's most recent meeting highlights many of the challenges and shortcomings associated with the ongoing efforts to convince millions of Americans that they are better served by using banks and other mainstream financial institutions than alternative providers.
The financial service center industry, with 13,000 locations nationwide, conducts more than 350 million transactions each year. These companies are regulated by a variety of federal and state laws. The transaction-based model for accessing day-to-day financial services is well established and functioning efficiently on a cost-effective basis.
Perhaps more importantly, millions of people use these alternative providers, not because they have to, but because they chose to. Stores are located in neighborhoods, keep convenient hours (up to 24 hours a day, seven days a week), have friendly employees who speak the customer's language and offer a wide array of services.
Through new technologies, many stores that belong to my organization, the Financial Service Centers of America, have expanded those opportunities to include "virtual bank accounts" that offer FDIC-insured savings options with a 5% interest rate tied to a prepaid debit card.
A national customer satisfaction survey confirmed the popularity of financial service center. It found that 92% of respondents rated the overall value of products and services received at centers from "excellent" to "good" for the money. In addition, 95% of respondents rated the overall quality of services from "excellent" to "good."
Two recently published reports by Aite Group ("Debunking the Myths About the Unbanked and Underbanked") and the FDIC ("Banks' Efforts to Serve the Unbanked and Underbanked") highlight common misconceptions about this market segment and the shortcomings of banks to adequately serve it. For example, Aite Group said its study "reveals that people are unbanked for very practical reasons, including credit, pricing, cash flow and service issues." The FDIC study found that more than 70% of respondents "have not identified" expanding services to the underbanked as a priority.
The Advisory Committee on Economic Inclusion is exploring the value of expanding government incentives to help banks serve the underbanked.
What is most perplexing is that even with the financial service center industry's solid record of service to this market segment and the inadequate performance of banks, the FDIC has repeatedly rebuffed my group's efforts to participate in the committee.
One area where we could be of particular assistance is with small-dollar loans. Financial service centers handle about $13.2 billion of these loans each year. The FDIC itself has acknowledged the need for such a product by implementing its Small Dollar Loan Pilot Project.
It is important for policymakers and those who advise them to have solid answers to the following questions:
- What are the standards for judging the success of the FDIC's pilot program?
- Can the bank model for small-dollar loans be economically translated to the current volume nationwide?
- What levels of loan losses are being reported by participating banks?
- Are banks' pilot programs profitable, sustainable and scalable?
- Is the FDIC granting banks relief from existing loan-loss reserves for this product? (Subprime loans require a 25% capital reserve.)
A core question to consider: Is it better for consumers to have access to banking services or access to banks?The FDIC should work to create a collaborative, inclusive environment where banks and financial service centers can work together to provide the services customers want and expect.