Meeting the challenge of the unbanked (September 2007)

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Meeting the challenge of the unbanked (September 2007)

Banks find ways to serve the unserved by breaking out of conventional thinking

By Steve Cocheo, executive editor, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Politicians and pundits love big concepts wrapped in short labels—issues in icons—hence the adoption of the term “unbanked.” In eight little letters, one can put oneself on the side of all kinds of people—estimated to number anywhere from 12 million to 40 million or more—and put oneself at their service.

But what if such thinking does them all a disservice?

To Jennifer Tescher, the word “unbanked” is amorphous. Tescher, director of The Center for Financial Services Innovation, and her staff work extensively with banks and other financial services providers, including Wal-Mart. (Earlier this year the giant retailer announced a massive expansion of its check cashing and related services.) One of the key points Tescher makes is that serving the “unbanked” is not like serving the mass market.

The truth about the “unbanked,” and its cousin the “underbanked,” is that they represent not a market, but a group of niche markets that need niche products, says Tescher. On the one hand, there are many people who would like to have bank accounts. On the other hand, some people who don’t deal with banks now don’t want to, says Tescher. Research conducted by the center, which is a nonprofit affiliate of community development institution ShoreBank Corp., Chicago, has found some segments that are perfectly happy with check cashing and transacting by money order and other nonchecking means. (See the digital edition for in-depth coverage of this research and additional insights from Tescher—www.ababj.com.)

“At the core,” Tescher continues, “it’s all about understanding the customers and giving them what they want.”

ABA’s James Ballentine agrees. “There is no single ‘Eureka!’ product out there” to meet the needs of all, he says. Ballentine, director, grassroots and community outreach, says the supercategory of “unbanked” comes loaded with numerous sub-categories. Among them: the unbanked immigrant markets; the unbanked who think they are unwanted by mainstream institutions, feeling that way due to perceptions of prejudice; the unbanked who think they don’t fit due to the level or source of income; and the unbanked who are unbanked because they have income and assets they need to hide, for numerous reasons. Furthermore, these people and others lumped into the unbanked market overlap among categories, and further sub-niches arise by age and other demographics.

Tescher points out, for instance, that some think the unbanked market doesn’t want technology. But she says evidence is strong that young unbanked people like, and may even prefer, technology for some purposes as much as their banked contemporaries.

Add to that religious issues. Somalian followers of Islam who emigrated to Minnesota, for example, are barred by faith from payment or receipt of reba (interest), and so can’t use many conventional banking services. Nevertheless, there are some ways that banks can work with Muslims within their law, as an article in the digital edition shows.

Washington has a poor record in product design (think of the All-Savers CD) but that doesn’t keep it from trying to devise products and legislate how the market reaches out to such customers and prospects.

Case in point: FDIC’s small-dollar loan program blueprint, published for banks’ potential adoption earlier this year. Banks that take part in the two-year pilot may be given Community Reinvestment Act credit.

“I haven’t found a banker yet who says that they can offer that product, as outlined by FDIC,” says Wayne Abernathy, ABA’s executive director for financial institutions policy and regulatory affairs. “You can’t offer a product like that profitably.”

It’s not that the industry isn’t trying—and succeeding—in serving the previously unbanked, Abernathy says. “We’ve made tremendous inroads in bringing people into the mainstream,” he says.

FDIC’s Chairman, Sheila Bair, has made the unbanked and underbanked a key focus of her agency. The most recent Quarterly Banking Performance report, once strictly a statistical product, came packaged with a special report: “Individual Development Accounts and Banks: A Solid ‘Match’.” The title is a play on words for the funding of these starter accounts by matching payments.

Many banks are reaching out to the unbanked, often by breaking out of mainstream thinking and by taking a fresh look at things. In the following report we present case studies of some of those efforts.

One thing to keep in mind. These banks have all taken the view that serving the unbanked is not a matter of charity nor strictly of compliance, but ultimately, a matter of good business. Perhaps Jennifer Tescher puts it best. She believes a bank can be both profitable and responsive. In the end, a program has to be both.

“If it’s not,” says Tescher, “it’s just a nice pilot, a nice Community Reinvestment Act effort.”

KeyBank
Just give people what they want

If it’s possible to have a financial epiphany, KeyBank’s Michael Griffin has had one.

A while back, Griffin was part of the bank’s effort to bring the unbanked into the fold by offering free checking and free savings accounts. People who opened the free accounts had a year and a half to bring their balances up to a target level of $500.

The program began as part of an effort by the $89 billion Cleveland-based regional to find a product set that would bring new customers into its urban branches, in an attempt to make the offices more profitable.

The program flopped—but the Griffin and the bank learned a critical lesson.

What do the unbanked want?
The bank didn’t come up with the plan out of thin air, but as the result of focus groups and consultation with various community development organizations. Among the things staff heard was that the unbanked often had no choice but to deal with check cashers and payday lenders. Key believed it had a better plan.

“But once we’d gone out with our offer, we found not a lot of takers,” says Griffin, whose title is senior vice-president and director, multicultural markets and asset management, Community Development Banking.

Some of the problems became clear on examination.

“Many people were on ChexSystems and couldn’t open accounts,” says Griffin. “Also, it was not a product that the market easily understood.”

But the biggest revelation for KeyBank was that many seeming prospects for its basic banking accounts didn’t want them. They appeared to be content with check cashing service.

This is where the change of mind began to come, for Griffin and for Key.

“We’re a bank and we think that people should manage their finances through a checking account,” says Griffin. “But that’s not necessarily everybody’s model.”

Delving deeper, Key found that check cashers enjoyed the benefit of familiarity, and bankers didn’t. Some people felt banks didn’t really want them in the branch.

To these people, says Griffin, “a check casher is someone from the neighborhood, someone like them. By contrast, a banker is a guy in a suit, someone from downtown, someone cold.”

So Key decided to become a check casher, but with a difference.

A bit of a stretch
In early 2004, the company rolled out KeyBank Plus, which provides check cashing for payroll and government checks at selected Key branches. The program also features financial literacy training, and is promoted in materials with graphics featuring representatives of many ethnic and racial groups to whom the bank is trying to reach out. Hence the “hip hop” dancer in the graphic, appearing on page 28, which Griffin admits was a bit of a stretch for somewhat conservative Key.

KeyBank Plus customers can cash checks without opening a checking or savings account with Key. Initially the company launched the service in urban Cleveland branches, and then it began moving out to the suburbs and into other states. A total of 120 branches offer check cashing, now, and, roughly 10,000 people are being served that previously didn’t have any relationship with Key.

Griffin says the program has cashed over $20 million in checks with minimal losses. The bank does not handle third-party checks, which it believes are too risky.

What first brings people to Key, frankly, is price. In going head-to-head with check cashers, the bank decided to undercut the going rates in its markets, subject to local laws. In Cleveland, for instance, Key charges 1.5% of face value, with a minimum fee of $3 and a maximum of $22.50.

Finger scanning used
Service is provided at a designated KeyBank Plus window on the teller line. The designation is necessary because only that particular station is equipped with the check cashing terminal and related equipment, supplied by Valid Systems, Fort Worth, www.validsystems.net.

KeyBank Plus customers give the teller their driver’s license or similar official ID and provide the teller with their Social Security number. First-time customers have their index finger scanned, as well. This expedites subsequent transactions. The vendor’s system quickly checks various databases, and, assuming no hitches, the teller pays out the cash, less the bank’s fee. Concerns that customers might not accept the finger scan requirement turned out to be a nonissue.

In spite of charging below-market rates and paying for dedicated technology, Griffin says that Key makes money on the check cashing service. He declined to share specific numbers.

“Graduation” isn’t everyone’s goal
Recent research by Key and the Center for Financial Services Innovation (available in our digital edition at www.ababj.com) indicate that some customers have feet in both the “banked” world, of checking accounts, and the “unbanked” world of check cashing. Griffin says this jibes with Key’s experience.

“Access to the money quickly is an issue,” Griffin explains. He notes that check holds present a challenge to low-income wage earners who live paycheck to paycheck. Some prefer check cashers, he’s learned, because they consider it more private, at least from someone in their life.

In all KeyBank Plus markets, Key has found usage strongest when the head of the household is 45 or younger. (John Templer, CEO of Valid Systems, says about 60% of the customers of the institutions using his service are between 18-29.)

“We would love to transition as many of these customers as we can to checking and savings accounts,” says Griffin, “and, hopefully, to credit products.” However, the bank has come to realize that some customers will remain content with cashing checks and buying money orders.

In the meantime, Key continues to look for ways to expand this effort with the unbanked. Griffin is pushing for a reloadable debit card onto which check cashing customers could have their funds placed, if they chose. The bank has also been experimenting with a standalone ATM that cashes checks, a remittance program, and utility bill payment.

“What we’re trying to do is to look at what people are doing at check cashers,” says Griffin.

In other words, the bank is continuing to give people what they want. BJ

Amalgamated Bank
State program makes a difference

One of the key arteries linking Manhattan and the borough of Queens in New York City, is the 59th Street Bridge, spanning the East River. On the Manhattan side of the massive structure, there’s been a branching battle beyond belief in recent years. In the neighborhood at the other end of the span—a neighborhood known as Queensbridge—there hadn’t been a branch built in years.

In a sense, you could say the entire area was “unbanked.”

The neighborhood—part of the larger district of Long Island City—includes Queensbridge Houses, the nation’s largest housing project, with 15,000 residents, and Ravenswood Houses, another large project, both operated by the New York City Housing Authority. The thousands of residents of these units are predominantly black and Hispanic. There was no bank within a mile of the neighborhood. One survey found more than one third of the area’s residents had never used a bank account.

Unusual bank takes a challenge
In April of this year, things began to change when Amalgamated Bank, based in Manhattan, turned a former fast-food restaurant into an attractive new branch, complete with a drive-up window, ATMs, extended hours, and Josh André, a veteran city branch banker who came out of retirement to become branch manager of Amalgamated’s outreach. The Queensbridge branch is only the second Queens office for $4.6 billion-assets Amalgamated.

The bank was one of several banks that Queens community leaders reached out to in an effort to bring banking back to the neighborhood. This was a natural choice because the bank was founded in 1923 by the Amalgamated Clothing Workers of America, and still markets itself as “America’s Labor Bank.” Today it is owned by UNITE HERE, representing the merger of the clothing workers and two other unions, and it is the country’s only bank fully owned by a union. It has branches in three of the five boroughs of New York and one each in California, New Jersey, and Washington, D.C.

Using a government tool
Nearly a decade ago, New York State acknowledged that bringing people a bank or branch where others had departed, or never been, represents a challenge. So the state created the “Banking Development District” concept in 1998, specifically as a means of bringing banking to the unbanked. The program is administered by the New York State Banking Department and requires financial institutions and local government to jointly apply for designation of a location as a banking development district. Long Island City was one of 11 areas identified as potential sites for these special districts.

Amalgamated Bank, which had already opened branches in several low-income areas of New York City, applied with the county government to have the Long Island City area designated as a banking development district.

Designation of a branch as part of a district brings numerous benefits, according to Peter Mosbacher, head of Amalgamated’s community development efforts. These include government deposits at below-market rates; property tax exemptions; and CRA credit. Over time, levels of some benefits are pegged to performance, Mosbacher adds.

Outreach required
In many ways Amalgamated has been breaking new ground: getting previously unbanked folks to come to the bank.

Mosbacher notes that just opening the doors isn’t enough. The bank has gone out to community organizations, partnering and presenting financial education workshops and conducting on-site account openings to connect with the community. Long Island City residents are being offered packages Amalgamated is offering to both businesses and consumers throughout its branches, a deal where the more services the customer starts, the more cash rewards they get deposited in their business or personal accounts. A personal debit card brings $25, for instance, a CD, another $25. A consumer can get up to $150 this way, he says. The offer is built around free checking with free ATM access and free online banking.

Still, the fledgling branch has its work cut out for it.

“Many people are extremely intimidated by banks, because no one in their family has ever had a relationship with a bank,” says Mosbacher.

Josh André, vice-president and branch manager, says “We’re not getting the neighborhood traffic yet.”

The outreach to the community is important not only because many people have never dealt with a bank, but also from a practical standpoint. Some people that André and his staff met in their forays say they didn’t even know the new branch had opened. The neighborhood near the bridge is, in places, a maze of off-ramps and exits and approaches to the big bridge. Some streets, including the one where the branch is located, cater more to vehicles than pedestrians, and many residents don’t have cars. The branch’s immediate neighborhood is somewhat industrial, and lacks stores that would bring customary foot traffic.

The branch is also seeking business accounts, says André, and “we’re getting a few.”

There are other, trickier barriers to breach, as well. André says trust must be built. Some people hesitate to open accounts, he says, because they fear that the government may attach their funds for things such as child support payments. André says these attitudes take time to overcome, and meanwhile he and his staff walk the neighborhood, meeting with people and distributing literature. The branch maintains long hours—8:30-6:00 weekdays, 8:30-1:00 on Saturdays.

Hopeful possibilities
The potential for business bodes well, in time. A state study of activities in 12 bank development district branches conducted in 2005 found an average of $6 million in loans and 920 account openings among the group for the previous 12-month period. Mosbacher says that thanks to the state program benefits at this point, Amalgamated estimates the branch will become profitable in its second year.

The prospects look promising enough that Amalgamated in July applied to the state for establishment of another development district in Brooklyn. BJ

Arvest Bank
Outreach keeps paying dividends

It’s not often that a small regional player in today’s markets introduces an international payment instrument of its own design, but, then again, Arkansas-based Arvest Bank has been pioneering new approaches to banking the Latino market for years.

The introduction last fall by the $9.2 billion-assets bank of a special ATM card, called Unidos, was just the latest innovation. Immigrants can send these cards to friends and family back home as an alternative to sending international remittances. The recipient of the card—two can be issued per account—can access a special sub-account of the U.S. accountholder’s account that contains the amount that the sender can afford to let them have.

The cards can be used in ATMs anywhere that Cirrus and Pulse serve, internationally, which sets them apart from some competitive products that can only be used for getting money to a specific country. Transferring cash this way is frequently cheaper than money orders. (These cards can also be used at the point-of-sale, in the U.S.) The account requires a one-time setup charge of about $6, and there are no charges for monthly maintenance, monthly statements, or transfers. A $2 fee, plus any local charge, applies to withdrawals at non-Arvest ATMs. A bonus is that the checking account required to send Unidos cards makes the person opening the account an Arvest customer, and this makes them eligible for free payroll check cashing at the bank.

The cards have sold so well, not only to Hispanic immigrants, but to people of many nationalities, that Arvest is actually considering shifting to a name that isn’t specific to any particular ethnic group.

Serious commitment to Latinos
But that doesn’t mean that Arvest won’t continue going the extra step to reach out to Hispanic customers. Indeed, Manuel Ocasio is living proof of that commitment. He is Hispanic Marketing Director for the four-state Arvest organization.

Ocasio, a career soldier prior to retiring and moving into banking six years ago, has been with Arvest for about a year. He works with the various Arvest local banks to help them reach out to Hispanics in their markets.

One very effective tool has been offering seminars, beginning with a general seminar concerning banking and finance, followed by more specific subjects.

“It’s a slow process, but it’s a very effective process,” says Ocasio, “because it works by word of mouth.” This communication works most effectively among Latinos, Arvest has found.

Ocasio helps Arvest teams get out into the Hispanic community and build connections. While Americans culturally tend to go to specialists when they need advice, Ocasio says that many Hispanics tend to seek out the opinion of one trusted, respected advisor for many different matters.

“It’s usually an elder or a respected business person in the community,” says Ocasio.

But this effort to reach out to those people cannot be a cynical attempt to win over opinion leaders. Nothing, not even language ability, by itself, is so important to the Latino market as trust, Ocasio has learned.

“Trust is the biggest factor in marketing to Hispanics,” he says. “You have to be genuine. If they feel that you are coming to them solely for personal gain, they will blackball you.”

Another step that Ocasio takes is presenting radio programs he’s developed for this market. Ocasio’s typical format is some chat about banking products and services, blended with local community news and issues of interest. Again, this drives word-of-mouth exposure for the bank.

Critical to serving this market, according to Ocasio, is understanding that Latinos come from many countries and cultures—21, by Ocasio’s count—and that their needs, circumstances, and dialects can be very different.

“You have to sing to each group’s particular tune,” Ocasio says. “The subcultures can be as different as rap and rock and roll.”

Salvadorans and Mexicans, for instance, don’t mix well, says Ocasio, and an innocent word in one dialect can be a vulgarity in another. Ocasio warns bankers to avoid automated translation programs, which can produce highly embarrassing results.

Where it all began
“The greatest need for the Hispanic market is building credit and deposits,” says Ocasio, and the education needed to accomplish the first steps is something Arvest pioneered. The effort began in the 1990s in Rogers, Ark.

Chicken processors and other industries were bringing many Hispanic workers to the area, many from Mexico. “We elected, as a bank, to study and understand this new market,” says Rob Brothers, who is president and CEO of Arvest Bank, Rogers.

The most effective strategy turned out to be holding seminars at the plants. Arvest’s contribution was its staff’s expertise, training the immigrant workers in the basics of the American banking.

There were obstacles to overcome. The plant owners were won over by the prospect of building a labor force that was more stable. Up until then, the pattern was to work for a number of months and then go home for a while. Learning the system helped get the workers to put down roots.

The bank’s efforts weren’t always popular in town. “I fielded a lot of telephone calls from folks who said, ‘If you’re serving these folks, we’re finding a new bank’,” says Brothers. But he saw this as a matter of “corporate stewardship,” in his words, and pressed on.

Today, 25% of Rogers’ residents are Latinos, and about the same percentage of the bank’s workforce is also Latino. The bank found it was more effective to train Hispanic workers in banking than to train bankers to speak Spanish.

“The other banks were happy to see us take all the arrows,” Brothers says, but who could afford to say they are not going to serve 25% of the market?”

“Today,” says Brothers, “we enjoy the largest share of the local Latino market.” BJ