FAMILY ECONOMIC SUCCESS STRATEGY INSTITUTE PRESENTATION ON FINANCIAL SERVICES March 14, 2002

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FAMILY ECONOMIC SUCCESS STRATEGY
INSTITUTEPRESENTATION ON FINANCIAL SERVICES
March 14, 2002
THE ASPEN
INSTITUTE

• Kirsten S. Moy
• The Aspen Institute

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This presentation will cover

• The landscape for consumer financial services in
  lower-income neighborhoods today
• Concepts and directions for financial services
  programs and projects
• A look at challenges facing site teams as they
  move forward on financial services initiatives

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To begin, lets review some statistics and trends
about low-income people and financial services

• Approximately 13 of U.S. households do not have
  a checking account
• over 80 of this unbanked population have incomes
  under 25,000
• 60 are non-white or Hispanic
• 1/3 of American households, including 60 of
  African-American households, have zero or
  negative net financial assets
• Check cashing companies are increasingly becoming
  the financial service institution of choice in
  low-income neighborhoods
• Credit cards going down-market
• Caskey/Filene, 1997 Davidson/Ford, 2000

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And why many low-income persons do not use banks

• Do not have enough money to justify opening an
  account
• Large fees, penalties for bounced checks
• Lack of convenience location or hours
• Banks turn down applications for checking
  accounts on basis of bad or no credit history
• Fear that financial matters will be disclosed to
  creditors or others
• Embarrassment of turn-down for loans
• Banks do not provide convenient bill paying
  services or access to small loans
• Deposit accounts can be liened by creditors
• Landlords and businesses in inner-city areas may
  not accept checks for payment

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Research indicates that low-income persons want
three basic financial services Caskey/Filene,
1997

• Convenient check cashing
• Reliable bill paying mechanisms not requiring
  checking accounts
• Quick availability of micro loans between 50 and
  300
• None of these services are generally provided
  inexpensively by depository institutions.

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Massive changes in the financial services
industry and technology are revolutionizing the
delivery of consumer financial services

• Mergers and consolidations have eliminated many
  small and medium-sized institutions and created
  mega-financial institutions which offer banking,
  insurance, securities, pensions, investment
  banking, and non-depository lending services
  under the same roof e.g., CitiBank, Travelers
  Group, Smith Barney
• Competition is fierce and profit margins have
  been squeezed many banks believe they lose
  money on most retail customers
• At the same time, there has been significant
  growth of niche financial companies offering
  specialized products this has been aided by
  technology
• Technology is changing the economics of different
  market channels and driving delivery of financial
  services through electronic means (Transaction
  costs by market channel range from 1 per
  in-person transaction (e.g., teller in a
  branch), to 50 cents per telephone transaction,
  to 25 cents per ATM transaction, to 1 cent per
  internet transaction)

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The implications for low and moderate-income
individuals and communities are significant

• Many financial institutions no longer see retail
  consumer financial services, especially for small
  savers and LMI populations, as desirable business
• Financial institutions may increasingly choose to
  serve these individuals through electronic means
  (e.g., ATMs, kiosks)
• There has been tremendous growth in the fringe
  financial services industries e.g., check
  cashers, payday lenders, car title and
  rent-to-own stores
• Access to consumer credit for LI households was
  more of a problem in the past. The issues now
  are cost and suitability more than availability.
• The financial services infrastructure is
  tremendously fragmented today, making it
  especially difficult for low- and moderate-income
  consumers, immigrants, and others to navigate the
  system

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In addition, changes in the workplace such as the
following are undermining income security and
preservation as well as long-term asset building
for workers and their families

• Declining earning power of many households in the
  growing service economy
• Continuing corporate downsizing and relocation
• Increasing use of contract workers by employers
• Reduction in health care and other benefits
• Replacement of defined benefit pension plans with
  defined contribution plans, and replacement of
  pension plans with 40l(k) and other savings
  vehicles
• The bottom line is less financial security,
  greater fragmentation and increasing complexity
  and risk for the average consumer.

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A comprehensive strategy for building assets
should incorporate the following elements...

• Financial literacy -- knowing how to manage your
  money
• Access to the right spectrum of credit, savings
  and investment products
• Credit repair
• Tax preparation assistance/good tax advice
• Convenient, customer-friendly, reasonably priced
  product delivery system
• More disposable income, salary but also
• manageable housing and utility costs
• affordable health insurance
• The workplace as a powerful facilitator of
  savings with
• payroll deduction for savings
• employer contributions
• access to tax-advantaged, higher-yielding
  savings/investment products
• pensions
• medical benefits
• A microbusiness can be a facilitator of asset
  development as well.

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..and strive for the following goals

• Broad and easy accessibility outreach and
  marketing to everyone user-friendly distribution
  channels convenient hours and location of
  physical facilities
• Affordability bringing the cost of these
  services down -- technology, cross-subsidization,
  market aggregation, strategic alliances --
  recognizing that small transaction size and high
  touch costs more
• Appropriateness or suitability a sufficiently
  wide spectrum of products to span the whole range
  of income levels, circumstances and needs
• transactions, and savings in small amounts
• savings deposited on continuing basis, access on
  emergency basis, but also longer-term savings
  products
• services which protect the consumer, not just the
  creditor
• use of direct deposit and payroll deductions
• protection of principal with higher earning
  opportunities than passbook savings
• role of medical and other insurance
• Opportunities to increase financial empowerment
  and engagement over time

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The Casey Foundation framework for building
family assets and wealth thoughtfully describes
the need to link workforce strategies with a
range of asset building strategies

• Earned Income Tax Credit (EITC) outreach
• Volunteer tax preparation (VITA)
• Financial Literacy Training/Credit Repair
• Individual Development Accounts (IDAs)
• Consumer Financial Services
• Linking Economic Opportunity Strategies To Build
  Family Assets and Wealth, A Making Connections
  strategy paper, Irene Skricki and Amanda
  Fernandez, August 7, 2001

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Financial services can be grouped along a
spectrum reflecting increasing financial
empowerment and engagement
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Spectrum of Consumer Financial Services
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While individuals have different financial
services needs and may move along the spectrum at
different rates, it is useful to think of
providing, or facilitating the provision of,
access to a minimum bundle of services including
at least

• Non-predatory transactional services, e.g., check
  cashing, money orders, wire transfers
• Debt consolidation and credit repair where needed
• Free or non-predatory tax preparation assistance
  in conjunction w/ the federal EITC and other tax
  credit programs
• Financial literacy training or counseling or
  support, as needed in connection with a real life
  situations e.g., major purchases such as
  automobiles and furniture, homeownership
  (purchase and improvements), family/life
  emergencies
• A relationship with a welcoming financial
  institution with a full range of suitable
  financial services and products, including small
  savings and loan products, and alternatives to
  traditional checking accounts
• Health insurance
• In addition, every effort should be made to
  promote an individuals financial development in
  the workplace e.g., by encouraging direct
  deposit, payroll deduction, and participation in
  401 (k) and other savings vehicles where
  available.

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There is significant market segmentation, one
size does not fit all utilization of financial
products and services and patronage of different
types of institutions by customers will depend on
factors such as the following

• Quality of customer ID
• Financial services architecture/system in country
  of origin, and/or prior experience with financial
  institutions
• Family circumstances
• Degree of life stability or instability
• Amount of disposable income
• Hours of employment
• Access to workplace-based financial services,
  products and mechanisms (e.g., direct deposit and
  payroll deduction, savings plans)
• Degree of comfort with technology

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Table of Financial Services Providers
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Clearly, many financial services
innovations/initiatives require partnerships or
strategic alliances since no one party can
provide all the pieces. Two versatile and
increasingly active players may be check cashers
and credit unions.
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Check cashing companies started in the 1930s as
a response to Depression-era banking practices

• Well over 6,000 outlets, per the national check
  casher trade association majority owned by local
  operators w/1-3 stores several large,
  publicly-traded companies number of stores have
  more than doubled last 5 years
• Services check cashing, money orders, wire
  transfers, public assistance benefits and food
  stamp distribution, electronic bill payments, bus
  passes, license plates and motor vehicle titles,
  postage stamps, short-term loans
• State-regulated in approximately three dozen
  states enormous variation in scope and
  strictness of regulation
• Neighborhood-based most customers within 4 block
  radius
• Convenience-oriented locations, hours,
  customer-friendly, fast decisions on loans Our
  goal is to say Yes to customers, not turn them
  down
• Predatory lending is a major issue, particularly
  pay day loans -- however transaction costs are
  high
• Industry leaders see need to provide savings
  products

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Credit unions are making renewed efforts to
attract low, moderate-income members

• Historic mission Savings for people of modest
  means. Loans for provident purposes. Not
  for profit, not for charity, but for service.
• Credit Union National Association (CUNA) reports
  (1998) of 74 million CU members nationwide, 2.2
  million w/ incomes 10-20,000 10.2 million between 20,000-30,000
• Caskey survey (1997) 1/3 of households w/
  incomes members
• Natl Credit Union Foundation Asset Building
  Program promote CU program models and
  innovation to help build assets for
  low-to-moderate-income members explore
  partnerships between mainstream credit unions and
  CDCUs, other CBOs
• Gallup Poll credit unions have high level of
  trust compared to other financial institutions

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One example of such a strategic alliance is being
implemented in the South Bronx

• A pilot project for shared services between check
  cashers and credit unions which will initially
  include
• Bethex Federal Credit Union
• Rite Check, a check casher with multiple
  locations in the Bronx and Manhattan
• Check cashing outlets will serve as branch
  offices for credit unions, offering applications
  forms for membership in the credit union,
  providing ATM card services, and accepting fund
  transfers to credit union accounts
• Credit union will refer members for check
  cashing, bill payment and other services offered
  by check cashers provide marketing materials
• Check cashing services provided at discount for
  CU members
• Status in process for last few years, formally
  launched in 2001

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• The benefits of partnering with a financial
  institution to address the need for financial
  services as part of a comprehensive
  neighborhood-based initiative can go far beyond
  the level of the individual to impact
  neighborhood institutions, local employers, and
  the broader community.

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Different types of community-based organizations
can participate in financial services
initiatives in different ways

• CDCUs, retail CD banks and microenterprise
  programs are best positioned to promote and
  implement financial services programs because
  they have a direct customer relationship with LMI
  households
• Housing CDCs and other nonprofit housing
  developers can partner with a local financial
  institution to provide an array of financial
  products and services to residents, analogous to
  enriched social and employment services
  financial service centers can be located in
  housing developments and enhanced through the use
  of technology
• Workforce development intermediaries can add a
  financial services component to their training
  and placement programs, assisting previously
  unbanked workers to begin identifying and
  accessing appropriate financial services

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Different types of community-based organizations
can participate in financial services
initiatives in different ways (contd.)

• Social service organizations may wish to partner
  with a consumer credit counseling service and a
  local financial institution to assist clients
  with debt reduction and credit repair
• CDFIs and other CBOs involved in business
  development can help their small businesses
  provide a financial services benefits package to
  employees e.g., check cashing, payroll deduction
  (with matching where possible) for savings and
  retirement plans, credit counseling for
  financially over-extended employees, and
  emergency loans, at little or no incremental cost
  to the employer, by partnering w/ a local
  financial institution
• Organizations administering IDA programs can make
  IDAs part of a much more comprehensive program to
  promote financial engagement and empowerment
  among participants

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But involvement in financial services initiatives
is likely to require knowledge, relationships,
resources and skills that many of these
organizations lack for example,

• Knowledge about financial services and financial
  institutions
• Working relationships with financial institutions
  and their regulators
• Market research skills to assess financial
  services needs
• Business planning and development skills to
  explore and launch new partnerships, a new
  product or service, or a new institution
• Actual experience operating a business or
  delivering a financial product/service
• The capital base to support a new initiative
  and/or the expertise to raise capital for a new
  venture
• Adequate staff and funds to conduct outreach and
  successfully market a new initiative to its
  client base

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The challenge is great, expectations may have to
be adjusted, and principles for launching
successful initiatives will most likely include
the following

• Get knowledgeable or get someone who is.
• Never re-invent the wheel, never make it when
  you can buy it, and never try to do something
  that someone else can do better and more cheaply.
• Better still, borrow it i.e., utilize someone
  elses existing infrastructure instead of
  creating your own if theyll let you.
• Make sure your partner(s) hopefully you have at
  least one has compatible business objectives.
• Get good help and make sure its experienced
  help if youre going to run anything RD can
  be an amateur pastime operations or running
  something is not. Never underestimate the
  difficulty of actually implementing something.
  The for-profit sector is usually better at
  running anything that involves money and profits.
• Remember you get what you pay for. Be willing to
  pay what you have to in order to get good help.
• Business plans and projections are only best
  guesses. Everything costs more and takes longer
  than your most conservative estimate. Budget
  seriously for contingencies to make sure you have
  the time and money to see a project through.