A Full Cycle Financial Model to Serve the Financial Needs of Low-income Customers

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A design of a life-cycle, full-cycle financial model to serve the financial needs of low-income communities.

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  • A Full Cycle Financial Model to Serve the Financial Needs of Low-income Customers

    1. 1. A Life Cycle - Full Service BankingModel to Serve the Financial Needsof Low Income Consumers WealthInvestment SavingsIncome Alvaro Lima, Revised in 2011
    2. 2. Executive SummaryDemographic and Economic Profile of Low-Income Financial Consumers • Who are the low-income consumers? What are the primary characteristics and behaviors that drive their selection of financial services and providers?Potential Market for Mainstream Financial Institutions • Where do low-income shop for financial services? • What is the size of the low-income market?A Life Cycle - Full Service Strategic Model • What are the key strategic shifts that banks and other financial institutions need to make to serve this market effectively? • What are the benefits for Financial Institutions and low-income consumers?AppendicesCase Studies
    3. 3. Executive SummaryDemographic and Economic Profile of Low-Income Financial Consumers • Who are the low-income consumers? What are the primary characteristics and behaviors that drive their selection of financial services and providers?Potential Market for Mainstream Financial Institutions • Where do low-income shop for financial services? • What is the size of the low-income market?A Life Cycle - Full Service Strategic Model • What are the key strategic shifts that banks and other financial institutions need to make to serve this market effectively? • What are the benefits for Financial Institutions and low-income consumers?AppendicesCase Studies
    4. 4. DRAFT for discussion only EXECUTIVE SUMMARY• Background • This research is based on the portfolio of high priority areas and opportunities identified in in low-income communities • Provide a fact-base analysis for promoting awareness of• Expected opportunities and mobilize market forces Project Output • Identify obstacles with specific recommendations for overcoming them • Identify specific strategies that increase participation of low- income residents in main stream financial institutions thereby increasing wealth building opportunities for these residents • Translate strategies into actionable programs • Identify public and private roles in tapping some of the identified opportunities and removing identified barriers 4
    5. 5. Executive SummaryDemographic and Economic Profile of Low-Income Financial Consumers • Who are the low-income consumers? What are the primary characteristics and behaviors that drive their selection of financial services and providers?Potential Market for Mainstream Financial Institutions • Where do low-income shop for financial services? • What is the size of the low-income market?A Life Cycle - Full Service Strategic Model • What are the key strategic shifts that banks and other financial institutions need to make to serve this market effectively? • What are the benefits for Financial Institutions and low-income consumers?AppendicesCase Studies
    6. 6. DRAFT for discussion onlyApproximately 42% of all households (HH) in the U.S. are low-income families 1 All U.S. Households2 Moderate to High Low-Income Income Households1 Households ( < $35K) ( > $35K) approximately 44.5M HH < $10,000 - about 9.5M approximately 62M HH HH 58% 42% $10,000 to $24,999 about 22M HH $25,000 to $34,999 about 13M HH Data Source: Detailed Income Tables from the Current Population Survey, U.S. Census Bureau, March 20011 Total number of low-income households are calculated by the number of HH at or below 80% of median regional income ($45,106.00 for the Northeast,$44,646.00 for the Midwest, $38,410.00 for the South and $44,744.00 for the West).2 According to the Current Population Survey of the US Census Bureau there are a total of 106.5 HH in the US; average household size is about 2.5persons, 2000 Decennial Census. 6
    7. 7. DRAFT for discussion onlyApproximately 9.5% of these households do not hold any kind of transactionaccount1; 85% of them have incomes less than $25,000 and 50% have incomesless than $10,000 Distribution of “unbanked” HH by income3 $50,000 to $99,999 > $100,000 2% 0% $25,000 to $49,999 13% 0.2M HH 1.2M HH 5MHH 3.4MHH Under $10000 50% $10,000 to $24,999 35% Data Source: Survey of Consumer Finances (SCF), 1998. The 1998 SCF represents 102.6M HH; Calculated from results presented in Arthur B. Kennickell, Martha Starr-McCluer and Brian J. Surette, “Recent changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances Transaction Accounts comprise checking, savings, money market deposit accounts, money market mutual funds, and call accounts at brokerage firms 1 2 The SCF does not separate out data for HH in the $25,000 to $34,999 category. The estimated number of low-income HH without transaction accounts is between 8.4M and 9.6M or ~22% of all low-income households. Unbanked HH are those HH without any kind of transaction account. 3 7
    8. 8. DRAFT for discussion only However, data from the Consumer Expenditure survey indicates that income is not necessarily a good indicator of buying power for the lower-income market Spending as a percentage Share of total annual of reported Income expenditure by income 285% 300% 27% Lower-income > $70K < $30K category 36% 250% 20% 17% 200% 160% $30K to $50K 141% $50K to $70K 150% 118% 102% 92% 85% 100% 68% 50% Note: This data is at the national level 0% <$10K $10K to $14,999 $15K to $19,999 $20K to $29,999 $30K to $39,999 $40K to $49,999 $50K to $69,999 $70K and over Income CategorySource: Calculated from “Income before Taxes: Average annual expenditures from the Consumer Expenditure Survey, 1999”Note: Similar analysis based on 1997 data appears in 8
    9. 9. DRAFT for discussion onlyIn contrast, low-income families with transaction accounts are more likely topurchase more sophisticated products such as asset-building, investment andinsurance services Percentage of HH holding financial assets in the two lowest income categories 100 90 86.5 80 Percentage of Families 70 61.9 60 Transaction Accounts. CDs Savings Bonds 50 Stocks Mutual Funds Retirement Accounts 40 Life Insurance 30 25.4 20.9 20 16.8 15.7 10.2 10 7.7 7.2 7.6 6.4 3.5 3.8 1.9 0 < $10,000 $10,000-$24,999 Income CategorySource: Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances by Arthur B. Kennickell, Martha Starr-McCluerand Brian J. SuretteJoanne Hogarth and Kevin H. O’Donnell show that lower-income HH with a deposit account are more likely to own other financial products;Analysis from the 1995 survey in “Banking Relationships of Lower-Income Families and the Governmental Trend toward Electronic Payment” 9
    10. 10. DRAFT for discussion onlyDetailed analysis reveals at least six distinct segments within banked and“unbanked” low-income households Annual % of US Earned Income Income Source Education Race/Ethnicity Income population Tax Credit >50% HS Welfare Govt. > $12,000 diploma or No Dependent assistance GED Wages + govt. New Immigrant > $14,001 Unlikely assistance >50% HS 66% white, 18% Wages + govt. diploma or Working poor $17k - $34k 16.7 black, 11.6% Yes assistance GED; 10% Hispanic College Grad >50% HS diploma or Bootstrapper $14k - $25k Wages Yes GED; 10% College Grad >50% HS Emerging Middle diploma or $15k - $35k Wages Yes Class GED; 10% College Grad Wages, Seniors No retirement, SSI 10
    11. 11. DRAFT for discussion onlySome economic characteristics of the unbanked• The unbanked live from “paycheck to paycheck”, typically spending the entire value of their checks on bills, wire transfers, debt payments, etc.• As a result, they are likely to bounce checks frequently, compounding their “unbanked” status; fees charged for bounced checks accumulate quickly, and often amount to a significant proportion of their meager income• They typically have no access to credit from mainstream financial institutions because of late or missed payments in the past• They typically have no financial savings• They are subject to high fees imposed by alternative financial providers such as check cashers and payday lenders; over time, these can be substantial• They rent, rather than own homes• They typically carry a high debt burden (see Appendix A for details) 11
    12. 12. DRAFT for discussion only Besides having low incomes, the unbanked are more likely to be young minorities with less than a high school education • Results from the 1998 Survey of Consumer Finances present the following profile of HH without transaction accounts: – 15.4% of HH with heads of households under 35 years do not have a transaction account – 33% of all African-American HH and 29% of Hispanic HH are unbanked • Three out of ten low-income families are headed by individuals with less than a high school education, and one-third of the heads of households have only a high school education11 “Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances” by Arthur B. Kennickell, Martha Starr-McCluer and Brian J. Surette 12
    13. 13. Executive SummaryDemographic and Economic Profile of Low-Income Financial Consumers • Who are the low-income consumers? What are the primary characteristics and behaviors that drive their selection of financial services and providers?Potential Market for Mainstream Financial Institutions • Where do low-income shop for financial services? • What is the size of the low-income market?A Life Cycle - Full Service Strategic Model • What are the key strategic shifts that banks and other financial institutions need to make to serve this market effectively? • What are the benefits for Financial Institutions and low-income consumers?AppendicesCase Studies
    14. 14. DRAFT for discussion onlyLow-income consumers without transaction accounts often seekalternative service providers for their routine financial needs1 Routine Financial Needs Delivery Channels • Receiving income • Banks • Cashing checks • Check Cashers • Paying Bills • Bodegas • Sending Money to families • Pawn Shops • Building Savings • Loan Sharks • Borrowing Money (short term • Short-term loan companies loans, e.g., payday loans) • Liquor stores • Buying convenience items • Western Union or similar outfits (stamps, pre-paid calling cards, etc.) • Informal savings circles • Cookie jars1 However, there is evidence in the literature that alternative service providers are also used by consumers with transaction accounts 14
    15. 15. DRAFT for discussion onlyMainstream financial offerings are at odds with the financial needs of low-income consumer segments (banked and “unbanked”) Mainstream Financial Services and Products Financial Needs of the Low-income Segments Check cashing, Traditional bank money orders, accounts, high wire transfers, fees, high min. etc. balance Traditional bank Check cashing, accounts, high money orders, fees, high min. wire transfers, balance etc.In order to serve this market effectively, financial institutions and banks in particular need to undergo a strategicshift towards a more customer-driven, life-cycle, bundled product and services... 15
    16. 16. DRAFT for discussion onlyFew financial assets, level of comfort, privacy, and lack of appropriateproducts and services drive low-income consumers away from banks and toalternative providers Few Financial • Not enough money Assets • Don’t write enough checks Level of Comfort • Prefer dealing with humans (“high touch”) • Do not trust banks Privacy and Legal Risk • Undocumented immigrants are afraid to enter branches with security guards or that a bank record may reveal their identifies to the INS • Fear that their unfavorable credit histories will be revealed Products and Services • Fees are too high • Period for cashing checks is too long • No “one-stop” shopping experience • Minimum balance requirements are too high Note: See Appendix B for supporting survey data 16
    17. 17. DRAFT for discussion onlyCheck cashers dominate as alternate service providers operating as a “one-stop-shop” offering in some locations additional items such as transittokens, vehicle licenses, etc. Routine financial needs Borrowing Buy convience Sending Money (short- items Receiving Cashing Building Paying Bills money to term loans, (stamps, pre- Income Checks savings families e.g., payday paid calling loans) cards, etc.) Welfare Dependent C C C C C New Immigrant C C C Working poor C C C BootstrapperEmerging Middle Class Seniors Key Banks Loan Sharks Check Cashers Liquor Stores Bodegas Informal Savings Grocery Stores Mechanisms Western Union or Cookie Jars similar Institution Pawn Shops Government 17
    18. 18. DRAFT for discussion only Alternative service providers have enjoyed tremendous growth despite their high costs • The number of check cashing outlets in the United States has grown from about 2,151 outlets in 1986 to about 5,400 in 1997 • There are between 12,000 and 14,000 pawnshops across the country, outnumbering credit unions and banks • Payday lending grew nationally from 300 stores in 1992 to more than 8000 in 1999 (Michael A. Stegman in Savings for the Poor, 1999) Example: Check Cashing Fee Summary Average fee Mode Low High 1987 1997 1987 1997 1987 1997 1987 1997 Type of Check Paryroll 1.62% 2.34% NA 2.00% 0.78% 1.00% 3.00% 6.00% Social Security 1.59% 2.21% NA 2.00% 0.77% 0.80% 3.00% 6.00% Personal 4.51% 9.36% NA 10.00% 1.60% 1.85% 12.00% 16.00%Source: Check cashers charge high rates to cash checks, lend money, Consumer Federation of America, 1997 There is clearly a perception among the lower-income, unbanked population that it is cheaper to do business with alternate providers, while in reality, the cumulative expense may be significantly higher 18
    19. 19. DRAFT for discussion onlyAlternative service providers conduct approximately 280 million transactionsper year, representing $78 billion in gross revenues (5.5 billion in fees alone) Fee/Rate per Volume of Gross Service Fee Total Transaction Transactions Revenues 2-3% payroll and Check cashing government checks 180 Million $60 billion $1.5 billion (can exceed 15% for personal checks) Payday Loans 15-17 per 2 weeks $10-13.8 billion $1.6-$2.2 billion 55-69 million 400% APR 1.5-25% monthly N/A Pawnshops 30-300% APR 42 million $3.3 billion Rent-to-own 2-3 times retail 3 million $4.7 billion $2.35 billion 1.5-25% monthly N/A N/A N/A Auto Title Lenders 30-300% APR Total N/A 280 million $78 billion $5.5 billionSource: Table 1, Fringe Lending is Real Money: Estimated Annual Transactions, in “Financial Services in Distressed Potential market for banks?Communities: Framing the Issue, Finding Solutions”, by James H. Carr and Jenny Scheutz, Fannie Mae Foundation,August 2001 To put this in perspective the total fees ($5.5 billion) are only slightly less than the entire asset base of the more than 460 community development Financial Institutions (CDFIs) operating in the US (Carr and Scheutz) 19
    20. 20. DRAFT for discussion onlyIn addition, several facts and ongoing initiatives provide compellingevidence of an untapped opportunity... • About 46% of the unbanked have had bank accounts in • Previous or existing banking relationship the past, and several use banks to cash checks • By redesigning their products and services, some banks have (re)capture a sizeable portion of the lower-income, unbanked market (e.x. Brazil) • Case Studies of banks that have been • E.g., Union Bank, Shorebank, others successful in this space • EFT ‘99, First Accounts 2000, the Community • Government Initiatives Reinvestment Act, Individual Development Accounts (IDAs), CDFI Fund, other government programs to encourage the unbanked to build savings • The America Saves Campaign launched with the support • Initiatives by Consumer Organizations of Bank of America • Other Strategic Alliances 20
    21. 21. Executive SummaryDemographic and Economic Profile of Low-Income Financial Consumers • Who are the low-income consumers? What are the primary characteristics and behaviors that drive their selection of financial services and providers?Potential Market for Mainstream Financial Institutions • Where do low-income shop for financial services? • What is the size of the low-income market?A Life Cycle - Full Service Strategic Model • What are the key strategic shifts that banks and other financial institutions need to make to serve this market effectively? • What are the benefits for Financial Institutions and low-income consumers?AppendicesCase Studies
    22. 22. DRAFT for discussion onlyIn order to serve the financial needs of low-income residents effectivelyand profitably, financial institutions need to develop new retail bankingmodels, integrate product lines, and leverage education and technology. Three Strategic Adjustments Increased market size Increased sales New Retail Banking Models Network Externalities The value to customers is in the full Increased customer Increased investment and Increased value attractiveness High-volume and reduced risk commitment to sales drive product/service down fixed-cost component Leverage Education and Integrated Product Lines Technology Increased value Switching costs increase due to Technology development and financial to customer of investment in offering, education reduce operating, fixed, product/service learning and use and distribution costs High margin Lower Increased loyalty from prices and increased switching costs marketing and decreased value of costs competitors’ product/service 22
    23. 23. DRAFT for discussion onlyThese three key strategic adjustments should follow the generalcharacteristics... 23
    24. 24. 1 DRAFT for discussion Model New Retail Banking onlyRedesigned branches may welcome more unbanked, lower income consumersand help banks keep costs in check• Key features of a redesigned branch – provide “one-stop shopping” services: check cashing, money orders, wire transfers, bill payments, stamps, fax and copy services, etc. – structure, operation and location of branch designed to fit in with needs of local demographic (e.g., in-store branches such as in supermarkets, video stores, etc.) and real-estate options in lower-income areas – low-cost operations with optimum use of technology and human resources to offer “high-touch” personal service, yet lower operations costs for banks · flexible staffing · use of technology, with option of personal service (“bricks and clicks” model) · share costs with strategic alliance partners 24
    25. 25. DRAFT for discussion only 2 Integrated Product LinesEvidence suggests a mix of traditional and non-traditional products andservices customized to the needs of the lower-income segment Banks Banks will need to provide some non- traditional services to attract the lower-income consumer baseAlternateFinancialServiceProviders Non-traditional products Traditional products and and services services 25
    26. 26. DRAFT for discussion only 2 Integrated Product LinesPossible partnerships and delivery mechanisms for product/service portfolioincludes...Product and Service Portfolio Possible Partnerships Delivery Channels• Basic Services• Asset Building Accounts• Credit Cards and loans• Insurance and investments• Financial Literacy and Education 26
    27. 27. 2 Integrated Product Lines DRAFT for discussion only Banks might potentially structure their portfolios to first meet the needs of low-income residents, then transition them to more mainstream services, ultimately building wealth creating instruments WEALTH!! A full-service portfolio structured to create wealth and serve the life- cycle needs of the low- income BUILD AND GROW • Health, life, auto and mortgage consumer e Insurance and insurance ycl Investments Life C • Savings bonds, he ut t pensions, other gho investment th rou • High-risk, deposit options red RETAIN secured emergency of f e loans be m ust Credit and loans • Loan guarantees ms gra • Creative financing for pro tion small businesses and d uca homes E nd ya • Traditional savings accounts ite rac CONVERT with some non-traditional al L features, e.g. Union Bank Nest a nci SavingsFin Egg account • Check cashing and otherINCOME ATTRACT AND ACQUIRE services provided by traditional check cashers, Basic Services • Low minimum balance deposit account See Appendix D for a detailed product/service descriptions 27
    28. 28. DRAFT for discussion only 2 Integrated Product LinesProduct and service bundles may be designed to move low-incomecustomer relationship further along the life-cycle Basic, “one- stop shopping services Product/Service bundle Product/Service bundle Financial Asset-building Investments Literacy and accounts and Insurance Education Product/Service Credit and bundle loans Product/Service bundle 28
    29. 29. 3 Leverage Technology and DRAFT for discussion only EducationTechnology has changed everyday transaction costs in dramatic,observable ways. Old Economy Approximate Cost Per Transaction Banking $1.07 eEconomy $.01 Travel Booking $10 $2 $6 Trading $150 29
    30. 30. 3 Leverage Technology and DRAFT for discussion only EducationTechnology can provide significant savings for banks, and better accessand options for lower-income consumers • Examples abound in the literature of the use of technology in this market Technology used and service Financial Institution Benefit provided U.S. Postal Service in partnership with Key • ATMs in Post Offices, access via debit Greater access, convenience to lower- Bank, sponsored by the U.S. Treasury or credit cards income consumers • Direct Deposit with “Acceso ETA”, a low- Banco Popular Greater access to consumers, lower cost cost account that allows customers to to Banco Poplar receive their federal benefits via direct deposit, and offers full access to all traditional distribution channels as well as access to over 22,000 ATMs and POS terminals in Puerto Rico Citicorp Significant cost savings to Citicorp • Delivery of Electronic Benefit Transfer funds through ATMs and POS terminals, grocery stores, pharmacies and check cashers • “PayTM” - a program with an embedded savings account that allows certain corporate customers to deliver payroll to employees electronically •• Online distance learning totelephone, Delivery of services to via provide Wider reach, consumer education Operation HOPE in partnership with ATM and online banking Financial Literacy, computer literacy and Smartforce.com and UCLA other training Extension School 30
    31. 31. 3 Leverage Technology and DRAFT for discussion only EducationHowever, none of this is possible without the appropriate financial andbasic math literacy, education and credit counseling programs• Financial Literacy services are mutually beneficial to both the provider and the consumer when bundled with other life-cycle products mentioned earlier; two models follow, but there others, including Operation Hope (see Case summary in Case Studies section of the document) Financial Institution Strategies Deployed Educational Components • Invested at least $50 million to finance • State Farm funds loans once homeowners State Farm Insurance outreach, training, insurance underwriting have undergone training in repair and fire and home safety loans safety • Created the Home Safety Program in alliance • Established home buying seminars in co- with Neighborhood Housing Services (NHS) operation with NHS; corporate of Chicago representatives explain the home and insurance purchasing process, help with • NHS sponsors inspections of potential credit repair, and educate prospective safety hazards such as furnaces and buyers on property inspection and upkeep electrical systems and provides loans if repairs or replacements are needed • These courses help future homeowners in the neighborhoods and identify new business for State Farm • Bank of America’s increased mortgage lending • Courses cover personal finance, how to Bank of America portfolio has been facilitated through its qualify for a loan, how to repair a credit relationship with the nonprofit Neighborhood history and how to save money for home Assistance Corporation of America (NACA) repairs • Prospective buyers attend a mandatory, 10- week training program in order to qualify for a Bank of America Loan with no downpayment, but at market-level interest rates. Those who complete the class must invest in a neighborhood stabilization pool to cover late payments 31
    32. 32. DRAFT for discussion only Benefits to Banks and Low-Income ConsumersWhy should banks consider this market? Several “unbanked” (about 50%) consumers already cash their checks at banks, thrifts or credit unions; banks can grow these into more profitable relationships by providing basic accounts to this market By providing both, non-traditional and traditional banking services, banks can benefit from economy of scale and generate enough revenue to cover fixed costs Banks have a few advantages over check cashers: direct access to check clearing systems and a relatively low cost of financial capital, both of which will help them control costs There are several government initiatives, incentives and policies geared towards bringing the lower-income market into the financial mainstream; banks can benefit from these (e.g., the Community Re-investment Act, CRA)Benefits to Low-Income ConsumersAdditional savings: it is difficult to accumulate savings and financial assets without a bank account paying high costs for financial services (check cashing, payday loans) can significantly reduce the amount lower income households can saveAccess to credit: without a bank account, it is difficult to establish credit, obtain a credit card, qualify for loans or obtaining any kind of financing for a small businessAccess to online services and commerce without a bank account or credit card, it is impossible to conduct transactions onlineAbility to take advantage of government savings investments and other plans (e.g., IDA) 32
    33. 33. DRAFT for discussion onlyChallenges to Banks• High risk due to the impaired credit history of this market• Careful planning to ensure profitability in a reasonable time frame – market research – product/service design – redesigning existing cost structure, and finding innovative ways to keep costs low (e.g., redesigned branches) – cost-effective delivery systems – alternate risk management systems• Existing investment in fixed assets and product lines• Overall revenue opportunity may be perceived as too small by banks, given the low fees for basic services; however, this opportunity could grow considerably as banks consider not only the unbanked but other customer segments within the lower-income category• Branding or product positioning could pose a challenge to banks as they will need to balance their ability to appeal to the lower-income market, while retaining their positioning and image in their current target markets• Fragmentation and varying quality of existing financial literacy, credit repair, and investment counseling programs• Extensive consumer research to identify micro-markets within this complex and diverse population, and tailor products and services accordingly 33
    34. 34. Executive SummaryDemographic and Economic Profile of Low-Income Financial Consumers • Who are the low-income consumers? What are the primary characteristics and behaviors that drive their selection of financial services and providers?Potential Market for Mainstream Financial Institutions • Where do low-income shop for financial services? • What is the size of the low-income market?A Life Cycle - Full Service Strategic Model • What are the key strategic shifts that banks and other financial institutions need to make to serve this market effectively? • What are the benefits for Financial Institutions and low-income consumers?AppendicesCase Studies
    35. 35. DRAFT for discussion onlyAppendix A Indicators of Debt Payment Difficulties 35.0% 32.0% 30.0% % w ith ratio of debt 25.0% 19.9% paym ents to fam ily 20.0% incom e above 40% 15.1% 13.8% 15.0% 12.7% 12.3% % w ith a debt paym ent 8.1% 9.2% late 60 days or m ore in 10.0% 5.7% 4.5% previous year 5.0% 2.1% 1.5% 0.0% k s 0k 0k 5k k 00 10 e -5 10 -2 ili -1 < m > k k fa k 10 25 50 ll A Source: Federal Reserve 1998 SCF 35
    36. 36. DRAFT for discussion only Appendix B Survey data on reasons why LIC do not have a Survey data on reasons why LIC do not have a checking account transaction account Inconvenient bank hours/locations No bank has convenient hours of location 8.5% Credit problems Banks w ont let us open an account 9.5% Other reasonsWhy families do not own Checking accounts Not comfortable dealing w ith banks 17.6% Do not need/want an account I w ant to keep my financial records private 21.6% Cannot manage/balance an account Banks require too much money just to open an account 22.1% Minimum balance is too high Bank account fees are too high 23.1% Service charges are too high Dont need account because I have no savings 53.3% Not enough money 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Do not like banks Do not write enough checks 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Percentage of Families Source: John P. Caskey, Source: Federal Reserve, 1998 Survey on Consumer Finances Lower Income American, Higher Cost Financial Services (Madison, WI: Filene Research Institute) 36
    37. 37. DRAFT for discussion onlyAppendix C - Service/product description summary• Basic Services – Commercial Check Cashing services · Check cashing services for both government and paychecks - (fees should be set such that they are lower than those set by typical check cashers, but high enough to be profitable for the banks) · One stop shopping services such as thought offered by check cashers (money orders, wire transfers - both domestic and international, bill payment, calling cards, etc.) – Traditional banking services · Low -cost, low-minimum balance deposit accounts, with creative product/service “bundling:” schemes such as those offered by Union Bank of California · ATM and debit cards for qualifying households, and in some cases, ATM access to those with problematic credit histories as well · Direct deposit of paychecks and government checks• Asset building accounts (similar to IDA accounts, but more general purpose) – Customers make regular contributions of a fixed amount for a fixed duration of time; the amounts should be set at levels affordable by the LIC, and could be deducted via direct deposit from their paychecks or government checks – Creative bundling of asset-building accounts with check cashing services – Risk/Reward program to encourage regular contributions• Credit cards and loans – Creative use of technology and other efficient operations to enable smaller-value loans in cost-effective manner – Partnerships with Community Development Organizations or philanthropic organizations to provide deposit- secured loans or loan guarantees 37
    38. 38. DRAFT for discussion onlyAppendix C - Service/product description summary, continued• Insurance and Investments – insurance and investment products (both individual and employer-based) offered through “aggregation point” in neighborhood or community (e.g., faith-based organization, community-based organization) to gain economies of scale – examples · Metropolitan Life Insurance Company has a significant investment in loans, guarantees and equities in community ventures with business development as a primary goal. Community Development Corporations (CDCs) use 20% of funds from MetLife on commercial ventures that maximize profits in low-income areas. MetLife has reaped more than the below-market rates it charges for community investments, and has numerous relationships with nonprofit groups that benefit the company · State Farm Insurance developed a long-term, strategic relationship with Neighborhood Housing Services (NHS) of Chicago to expand its markets in low-income neighborhoods. It has invested at least $50 million to finance outreach, training, underwriting of property insurance and home safety loans 38
    39. 39. Executive SummaryDemographic and Economic Profile of Low-Income Financial Consumers • Who are the low-income consumers? What are the primary characteristics and behaviors that drive their selection of financial services and providers?Potential Market for Mainstream Financial Institutions • Where do low-income shop for financial services? • What is the size of the low-income market?A Life Cycle - Full Service Strategic Model • What are the key strategic shifts that banks and other financial institutions need to make to serve this market effectively? • What are the benefits for Financial Institutions and low-income consumers?AppendicesCase Studies
    40. 40. DRAFT for discussion onlyCase Summaries - Category and Sources Matrix Fleet Community Shorebank Union Bank of Operation Banco Nehemiah Banking Group Corporation California Hope Popular Corporation Full service Community x x x Banking Check Cashing x xFinancial Literacy x x Technology x x x Down Payment x Assistance Community x x x Development Small Business x x Lending “Reaching out Community Fleet Community to the Developments Focus magazine , SOURCES Web site, Annual Web site Unbanked”, Web site (Fall 2000) Web site John Caskey, Newsletter, Report April 2001 Web site 40
    41. 41. DRAFT for discussion only Case Summary - Fleet Community Banking Group, First Community Bank • First Community Bank (FCB), the retail arm of Fleet’s Community Banking Group (CBG) with 67 branches and $2.4 billion in deposits has become a national model for serving inner-city communities Products and Services Delivery Mechanisms• Small Business Lending to • Branches and ATMs in LMI communities entrepreneurs, minority and women- owned businesses, and other small • Partnerships with government, community- based businesses in LMI (Low to Moderate and other private sector organizations Income) areas • CommunityLink program and on-line banking• Affordable Housing / Mortgages to LMI – provides computers, Internet access, training and borrowers community-based content to qualified applicants in LMI neighborhoods; a prototype was introduced in the• Community Development Roxbury neighborhood of Dudley Square in Boston, MA Lending/Investments and the Ironbound section of Newark, NJ• Consumer Lending in LMI areas • Technical Assistance Program (TAP)• Personal Banking – provides specific information and training to individuals, businesses and organizations in the areas of small• Small Business and Equity Investments business development, rural support, predevelopment, financial literacy, community development, affordable• Technical Assistance and Support housing and emerging market – leverages existing partnerships or establishes new 41 relationships to support LMI initiatives as part of TAP
    42. 42. DRAFT for discussion onlyCase Summary - Shorebank Corporation• Shorebank Corporation is the country’s oldest and largest community development bank holding company with $1.1 billion in consolidated assets in 2000 Products and Services Delivery Mechanisms• Consumer Products and Services • Banking Centers and – basic checking and savings ($250 min. deposit, 3 withdrawals, no monthly ATM locations fee), savings accounts for minors (min. $25 deposit, no fees) – 2 new supermarket – consumer loans (personal, savings secured, auto, home equity) branches – Certificates of Deposit • Shorebank Affiliate – IRAs, Retirement & Investment services companies – development deposits - socially responsible investing – budget planning • On-line banking• Business Products and Services – business Loans (commercial line of credit, equipment financing, debt financing, real estate acquisition & expansion loans, term loans, working capital loans) – business Deposit Services (commercial checking, account reconciliation, custom reporting, Corporate ATM, sweep accounts) – cash Management Services• Churches and not-for-profit services – church loan program, other products and services, including Individual 42 Development Accounts (IDAs)
    43. 43. DRAFT for discussion onlyUnion Bank Case summary1• Union Bank of California, with $33 billion in assets had (as of early 2000) twelve “Cash and Save” outlets in Los Angeles and San Diego, and has a 40% stake in a check cashing companyProducts and Services Delivery Mechanisms• Basic Services • Cash and Save outlets – One-stop shopping for check cashing, money orders, located in: bill payments, wire transfers (domestic and international), etc. (1% fee for govt. checks and 1.5% – Large Discount Stores (highest for paychecks); money orders cost $1 or $.50 volume of transactions); cater mostly to moderate-income – Low-cost, low -minimum balance checking and consumers (four outlets) savings accounts – Traditional Bank branches · Benefit Transfer Service similar to the ETA account; no ATM card – High tech laundromat which includes a video-rental and a – Membership cards and service plans, e.g. a Money fast-food store (one outlet) Order Plan designed to build trust and customer loyalty ($3 fee for Cash & Save member, and $10 • Community Based annual fee for Money Order Plan with six free money Organizations (for Financial orders, with a 1% fee for all checks for 1 year) Literacy and Education)• Asset-building accounts – The “Nest Egg” savings account open to anyone, with no fees and a passbook ($10 initial deposit + $25 a month for one year); no ATM card From “Reaching Out to the Unbanked”, John P. Caskey, 1 – A service bundle consisting of the Nest Egg and April 2001 Money Order Plan 43
    44. 44. DRAFT for discussion onlyUnion Bank Case Summary, continued ... • Results from Union Bank of California study: – between 120,000 to 125,000 check cashing customers 1 – expect 40% of these to transition to a traditional deposit account 1 – Cash and Save outlets in large discount stores are the most profitable 2 · they have a very high volume business, cashing at least 3 times as many checks as the outlets in the traditional bank branches · most of the revenue in these outlets is generated from check-cashing fees · relatively few conversions to deposit accounts at these branches Transcribed from comments made by Jim Laffargue, Union Bank of California during a conference call sponsored by 1 Business for Social Responsibility, on Oct. 18, 2001 2 From “Reaching Out to the Unbanked”, John P. Caskey, April 2001 44
    45. 45. DRAFT for discussion only Case Summary - Operation Hope • Operation Hope is an LA-based non-profit investment-banking organization that runs an extensive program to help would-be borrowers obtain credit ratings • Since the opening of its banking center in 1996, Operation Hope has educated 26,000 adults and youths on economic and financial literacy and counseled 2,000 individuals in credit counseling programs. It has facilitated $46 million in loans to approximately 400 businesses and new home owners Products and Services Delivery Mechanisms• Economic Education and Empowerment • Partnerships with local churches, – home ownership ( FHA and VA loan products, conventional community based organizations, and jumbo loans, loan programs for low, middle and upper educational institutions, private sector income individuals, no down payment programs, no cost, no corporations and the government using the fee, purchase and refinance, others) following delivery platforms: – small business services (small business enterprise – programs offered at Home Loan Centers, incubation, business plan and marketing plan assistance, Regional Business Empowerment Centers, and hands-on technical support, and small business lending) Inner-city Cyber Café network – HOPE Private Banking Service Center program (credit – programs offered at Operation HOPE Banking counseling, budgeting, financial planning, investment Centers which provide “one-stop” shopping for planning, tax preparation, technical assistance, other banking, financial and education services services) – “BOOF E-learning Across America”, an online• Digital Empowerment distance learning program to deliver BOOF on – IT certification, computer literacy, business fundamentals, the Smartforce platform new economy jobs, others – Operation Hope/UCLA Extension Satellite Centers, Operation Hope/Smartforce Satellite• Banking on Our Future (BOOF) - Economic Literacy for Centers Youths 45
    46. 46. DRAFT for discussion onlyCase Summary - Banco Popular • Banco Popular North America, with 94 branches in the U.S. is a full-service bank, and a subsidiary of Popular North America with $5.1 billion in assets. Since its inception in 1893, its history has been linked closely with the economic and social welfare of the communities it serves. It’s parent company, Poplar Inc. has over $25 billion in assets and continues to expand it’s presence in the United States, the Caribbean and Latin America • Banco Popular has evolved from its origins in Puerto Rico to become the largest Hispanic financial institution in North America • Products and Services for the unbanked: – Popular Cash Express · a “one-stop-shop” retail financial services outlet (check cashing, wire transfers, utility payments, money orders, etc.), with additional value-added products and services such as insurance and travel services. Banco Popular has been working on developing a suite of credit products, including credit cards and personal loans specifically designed with this target market in mind – Educational video and television · Banco Popular participated in a the production and distribution of “El Sueno Americano” an educational video geared towards educating Hispanics on the importance of establishing and building a good credit history. The bank has also sponsored segments on the weekly television show “Sabado Gigante”, where it actively promotes homeownership as a way of attaining financial security and an improved quality of life – Direct Deposit · Banco Popular was the first institution in Puerto Rico and among the first in the United States to offer an Electronic Transfer Account (ETA) to federal benefits recipients. “Acceso ETA” is a low-cost account that allows customers to receive their federal benefits via direct deposit. This account offers full access to all traditional distribution channels as well as access to over 22,000 ATMs and point-of-sale terminals in Puerto Rico 46
    47. 47. DRAFT for discussion onlyCase Summary - Nehemiah Corporation of California• Along with a variety of programs and affiliate organizations, Nehemiah Corporation leads the nation in urban revitalization and redevelopment. To date, Nehemiah has provided more than $335 million in down-payment assistance gifts, resulting in $10 billion worth of investment, and helped more than 98,000 families and individuals achieve their dream of ownership Programs and Affiliates Program and Affiliate Descriptions Provides gift funds (of between 1% to 6% of the contract price) for down payment and closing costs (of any resale The Nehemiah Program® or new property) to qualified buyers using an eligible loan program, such as an FHA loan The Nehemiah Conventional Loan combines a 97% loan- The Nehemiah Conventional Loan to-value first mortgage with a 5% second mortgage to create a 102% combined loan-to-value loan up to a maximum dollar amount of $289,175 for qualifying buyers The NCRF invests in community development projects. The Nehemiah Community Reinvestment Nehemiah has invested $24 million to date to fund Fund (NCRF) development projects in the communities it serves The Nehemiah Community Foundation Develops, sponsors and promotes urban ministries. Provides grants to faith-based and community based Nehemiah Urban Ministries, Inc. (NUMI) organizations Acquires, manages and preserves affordable and special Nehemiah Urban Land Trust (NULT) needs housing for low-income families and individuals 47

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