Title: From Fringe Banking to the Financial Mainstream
1The Center for
Community Capitalism
A Personal Perspective on the Recapitalization of
Communities Prepared for presentation at 2004
Community Development Policy Summit Federal
Reserve Bank of Cleveland Columbus, Ohio May 14,
2004 by Dr. Michael A. Stegman Center for
Community Capitalism University of North Carolina
at Chapel Hill
2Six Policy Challenges
- Attracting into the financial mainstream millions
of households with no banking relationship - Finding creative ways of helping millions of
underbanked households who operate at the
fringes of our banking system who have become
chronically dependent upon high cost credit - Homeownership remains a primary route to wealth
creation - Unlocking Latino demand for mortgage loans a key
- While encouraging strategies to help low-income
families build wealth, help protect the assets of
those who have managed to buy homes - Private equity suppliers are beginning to target
underserved markets in low-income communitieshow
to capitalize on these unsubsidized ventures.
3Why policymakers should care whether people are
banked
- U.S. policy moving toward asset-based social
policiesrewarding work, incentives for taking
more responsibility for financial future
retirement security - People with bank accounts are more than twice as
likely to hold savings, as are people who are
unbanked, and are more likely to add to their
savings on at least a monthly basis. - Wealth disparities are greater than income
disparities growing - The bottom 90 percent of Americans earn 60
percent of all income, - but own less than 30 percent of all net worth
- and less than 20 percent of total financial
assets. -
4Along with deregulation, integration of capital
marketstechnology is a driving force in banking
revolution
- full service branch transaction 1.07
- telephone transaction 0.54
- ATM transaction 0.27
- on-line transaction 0 1.5
5The role of ATMs in increasing access to
mainstream financial services 100 Largest
Central Cities by Neighborhood Location
Racial Composition, 2002 (ATM addresses per
10,000 people)
6Same technology driving banking is driving
changes in social safety net delivery system
- A Revolution in delivery of means tested benefits
- EFT99 --Beginning 1999, federal benefit
recipients start receiving benefits by direct
depositoriginally mandatory, now voluntary - By end of 2002, food stamps had to be delivered
electronically - More than 35 states have added distribution of
welfare benefits to the magnetic swipe card used
to distribute food benefits. - Treasurys First Accounts initiative
- On May 2, 2002,Treasury awarded 15 grants
totaling 8 million to financial institutions to
assist 35,500 unbanked low- and moderate-income
individuals open accounts. - 15 Awards to nonprofits, insured depositories,
CDFIs, faith-based organizations, and local
governments to aggregate unbanked market through
employers, schools, tax preparation services, day
care services. - FDIC Money Smart financial education system
7Electronic delivery of government benefits has
hidden policy potential
- EFT could soon result in millions of Americans
being brought into the banking system for the
first time, and it will change dramatically the
way in which they handle money. - Treasury Secretary, Robert E. Rubin
8Stegmans Flawed Vision?EFT Can Do for
Affordable Financial Services What CRA Has Done
for Affordable Mortgage Credit.
- Technology makes EFT cost-effective
- EFT encourages industry to apply technology to
un-served people and communities - Regulators strengthen CRA service test
- Use EFT to expand economic literacy--a foundation
of community development - Link EFT mandate to a national asset-building
initiative for lower income, low-wealth working
Americans.
9Why banks should care about increasing financial
access
- Strong link between account ownership and use of
bank credit. Lower-income families with
checking, savings, or money market accounts are
six times as likely as to have credit cards and
are more than twice as likely to have a mortgage.
- Nearly 60 percent of all first-time buyers
between now and 2010 will be young minority
immigrant families. - In practical terms, big part of this growing
market segment are not part of the financial
mainstream--more than 40 percent of low- and
moderate-income African American and Hispanic
renters are unbanked..
10A Two-Edged SwordThe growth of fee-based
banking has potential to convert unbanked into
profitable customers
- No longer do banks make most of their money from
the interest spread. - Non-interest revenues, particularly fee income,
is driving bank income. - Bank fees in U.S. accounted for 44 of net
operating revenues for commercial banks in 1999 - Remittances sent home by Mexicans living abroad
totaled 13.3billion in 2003, a 35.1 increase
compared to the previous year - Overdraft protection fees
- ATM surcharges generate 2 billion in revenues
- Bounced check fees generated 6 billion profits.
- Payroll Cards growing new business line
11Origination and appreciated equity by household
incomeSelf-Help/Fannie Mae loans, for homes
purchased 1998-2002Value as of September 2003
12A big chunk of the Latino market is not
accessible without systemic change
- Latino purchasing power more than doubled from
1990 to 2001, from 207.5 billion, to 452
billion, 118 percent - Big segment of this market is undocumented, and
cant open bank accounts or qualify for a
mortgage - Some 150 banks, including at least 19 major banks
such as Bank of America, now permit illegal
immigrants to use the matricula to open accounts.
Wells Fargo is setting up 23,000 new matricula
accounts a month nationwide. - Tapping Latino mortgage market ado requires
providing mortgage loans to individuals without
Social Security numbers, using individual tax
identification numbers (ITIN) instead
13The growing challenge of the underbankedThe
dual financial services system in North Carolina
14You cant build wealth through payday lenders
- Payday lending is 8-14 billion/year business
between 26 47 million loans per year Generates
about 2.5 billion in loan fees per year - Between 2000 and 2003, the number of outlets
offering payday loans more than doubled to
20,000not counting the many Web sites such as
sonicpaydayland.com, mycashnow.com, and so forth
that give high-interest quickie loans. - Ohio-based Check 'n Go opened 100 new stores last
year and anticipates opening another 100 this
year. Advance America, a company that only
started in 1997, already has more than 2,000
stores.
15Fringe banking profits tied to chronic dependency
- Most important contribution to revenues is of
customers - 2nd most important variable is percentage of
chronic borrowersrollovers is key to
profitability - Average payday customer in NC took out 7
loans/year 27 of borrowers took out 13 loans
per year.
16NC predatory lending law works Example
subprime refis with 110 LTVs down in NC up
in neighboring states( change post-NC law vs.
pre-NC law)
17Recapitalizing low income communities cant occur
without growing businesses
- Perhaps, the most important development on the
non-residential side of the recapitalization
process is the growing role of private equity
suppliers in helping to grow minority- and
women-owned businesses in low-income communities - One example is the Banc of America 195 million
California Community Development Venture Fund
18For more information
- Center for Community Capitalism web site
www.ccc.unc.edu. - Call at 919-962-6849