Banks Seek to Scoop Up the Underbanked

THE TOP REASON that people who have never used a bank cite for not having a savings or checking account isn't that they don't trust banks (that's seventh). It's not that they don't see the need for an account (fourth) or that they encounter language barriers at banks (sixth).

Instead, half of the unbanked and underbanked households surveyed by the Federal Deposit Insurance Corp. last year cited a simple lack of money or high minimum balances as their top reason for not using banks for their financial services.

Financial institutions in Arkansas--which has a high rate of unbanked and underbanked residents--fairly scoff at that idea. Amid an upturn in national savings rates and creativity in banking services, those institutions' message to the unbanked and underbanked is, your money is welcome, no matter how little of it there might be.

"That misperception is probably very common," said Arvest Bank Vice President Jason Kincy. "I think there's a lot of people out there that feel like the bank doesn't want them as a customer, and that's just not true."

The challenge for banks and credit unions in reaching the unbanked and underbanked has been not only to develop checking and card services with a low degree of risk for all parties involved, but also simply to reach out to people who don't use banks.

It's simple for them to tout the benefits of using a bank: Your money is safer than carrying it as cash, maintaining a checking account is cheaper than buying individual money orders, having a bank that knows you makes credit easier to acquire and will help secure you a loan, if needed.

What's harder, say bankers and those in community-outreach positions, is getting people up to speed on how to bank responsibly, or simply to trust banks.

"The scars are hard," said Larry Biernacki, president and CEO of Arkansas Federal Credit Union of Jacksonville. "If a consumer has had a bad experience with a financial institution, the propensity for that consumer to establish another financial relationship diminishes greatly."

Part of Linda Tucker's role as director of education and marketing for Consumer Credit Counseling Service, a program within the North Little Rock nonprofit Family Service Agency Inc., is to prep people for both managing their money and to realize the benefits of banking in the first place.

Much of that education comes down to the very basics of money management, such as drawing a line across the "dollars" field of a check after writing the amount or balancing a checkbook. Once a person completes the course, he can re-apply bearing a certificate that some participating banks accept as a step toward qualifying for an account.

"What we get is, 'I don't have a savings [account] because I don't have any money for savings. All my money goes out," Tucker said. "When you have an in-community bank you're dealing with, that opens up that many more loan products to you. They know you, they know how you manage your accounts. It's not quite back to the old handshake routine, but they at least know what's going on."

Unbanked

The 2009 FDIC National Survey of Unbanked and Underbanked Households found 10.1 percent of Arkansans unbanked and another 22.3 percent underbanked, both above the national averages of 7.7 percent and 17.9 percent. That's about a third of Arkansans and a quarter of Americans either unbanked or overbanked. The FDIC defines unbanked as households with no savings or checking account. Underbanked refers to people who have an account but rely on what the FDIC terms "alternative checking services" such as check-cashing services, payday loans, rent-to-own agreements, pawn shops or non-bank money orders.

Nationally, unbanked and under-banked households are more likely to be uneducated, single, poor; young, African-American or Spanish- speaking. More than 40 percent of unbanked households describe the likelihood of opening a bank account in the future as "not likely at all."

"In some instances, they've just never had the experience before and they don't know what to expect," said Bea Worden, a consumer sales manager over 11 Little Rock branches of Regions Bank. She reaches out to employees of businesses that bank with Regions.

"I think they may have heard about fees at banks and all of those kinds of things, and it's a turn-off. But they don't go into a bank and stop and ask questions.

"Some of the folks we've talked to, they've always had cash in hand. Always. The thought of taking their cash and putting it somewhere where they can't touch it is uncomfortable."

Still, the cash-in-hand crowd can be valuable customers, if they can be reached. The personal saving rate in the United States, according to the Bureau of Economic Analysis, jumped from just above 1 percent of disposable personal income in the first quarter of 2008 to 5.4 percent in the second quarter of 2009, and remained above 4 percent the following quarter. The last time that rate was higher was the second quarter of 1998, when it was 5.5 percent.

"How profitable can those customers be?" Arvest's Kincy said. "The optimistic view is, as you work with those customers, that down the road they blossom. You want to foster that."

Worthwhile

Higher deposits gives banks greater ballast when they lend to consumers and businesses, which, according to Regions Bank spokesman Mel Campbell, the bank is quite ready and able to do. Regions, based in Birmingham, Ala., counted its opening of more than a million new checking accounts in 2009 as a key to its adding $10 billion in new deposits from September 2008 to the end of last year. Regions attracted almost $400 million in new deposits in Arkansas during the year that ended June 30, 2009.

According to the Center for Financial Services Innovation, a Chicago firm that researches the unbanked and underbanked for financial institutions, the competition from alternative financial services threatens what could be a profitable market for banks.

"[M]any low-income consumers make rational financial services decisions, particularly given the limited range of options that mainstream institutions offer to them," the CFSI concluded in "Getting to Know the Underbanked," its 2005 report. "Convincing them to change their current behavior requires concerted effort and careful thought--about appropriate outreach strategies and delivery channels (including partnerships), products, services, customer service strategies, and, in general, making the banking experience meet the customer's needs."

Banks, for their part, seem to be meeting consumers halfway. Liberty Bank of Arkansas, headquartered in Jonesboro, offers a checking account it calls "New Opportunity Checking," which, in not so many words, is aimed at people who probably blew their last try at using a checkbook.

Along with the "convenience of paying by check or debit card" and the elimination of "check-cashing hassle and costly fees," the bank advertises the card as a product that "helps reestablish financial credibility." If you have had "banking challenges" in the past, Liberty's brochure assures customers, not to worry. The fees--$10 a month without direct deposit, $8 with--presumably are worth it to someone trying to wean off check-cashing stations.

Money orders tend to be cheap--89 cents will get you one at E-Z Mart--but payroll cashing isn't. For example, Ace Cash Express, which has four Little Rock locations, charges a customer 2 percent to cash a payroll check. EZ Check Cashing in Sherwood charges 3 percent. Wal-Mart since 2007 has offered alternative financial services, claiming in its announcement then that Americans spend $13 billion annually on 340 million such transactions. And as you'd expect, Wal-Mart does it cheaper: $3 per payroll check up to $1,000 and $6 for larger checks.

Arvest has a product, launched in September 2008, meant primarily for teenagers and students that the bank can offer adults who otherwise might not qualify for a checking account. For a $2.97 monthly fee, the bank issues a secured spending card that can be refilled and used in the same ways as a gift card, which would allow a customer to participate in the electronic economy. Another tack, to improve a customer's credit, is to issue a loan backed by money deposited into a CD.

While the failures of investment banks and Wall Street houses has been blamed for the recession, and has added "bankers" to the roster of professions--lawyers, reporters, Senators--with a connotation of sleaze, lenders say the blowback on Main Street hasn't been all bad.

"People are asking more questions now," Biernacki said. "That's a good thing. When you take a look at what's going on, those questions probably should have been asked five years ago."

And if people find that, because of low income, bad credit or a history of fiscal mismanagement they can't easily qualify for standard accounts, Biernacki said, "We put you through some counseling, put you through some education. We give you a second chance. And a return to the mainstream."

Copyright Arkansas Business Jan 18, 2010

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