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Proximity and Access for All

Distrust, lack of access, and language barriers are among the reasons millions of Americans don’t use mainstream banks. The Cleveland Fed’s Bonnie Blankenship explains how that disconnect impacts the economy as well as what community leaders can do.

It was supposed to be a safe place.

In 1865, with slavery abolished, a bank for ex-slaves, African American veterans, and their families opened its doors: The Freedman’s Bank.

Not even a decade later, in 1874, the bank failed, taking the savings of most depositors with it. That failure was a tremendous blow that some historians say created within African American communities a deep distrust of banks.

So shares an exhibit on display through December at the Federal Reserve Bank of Cleveland.

See the Exhibit

The Freedman’s Bank: An American Story of Faith, Family, and Finance

Where: Federal Reserve Bank of Cleveland Learning Center and Money Museum, 1455 East Sixth Street, Cleveland, Ohio

When: Through December 2016 during normal Money Museum hours: Monday through Thursday, 9:30 am to 2:30 pm (except holidays)

“During its brief life, the Freedman’s Bank expanded to serve nearly 100,000 customers—an indication that former slaves understood the connection between financial empowerment and well-being, a tenet that continues to be true today,” says Loretta J. Mester, president and chief executive officer of the Cleveland Fed. “The bank’s failure and the ensuing lack of confidence in the banking system is a lesson for us today, as the Federal Reserve works to ensure that the financial system remains stable and that people in low- and moderate-income communities have access to the financial services they need to ensure a better future for themselves and their communities.”

Millions of adults in the United States today are without such access.

In industry-speak, people who do not use conventional bank services and products are “unbanked.” Those who use some services and products but also tap nonbank sources such as payday lenders and check-cashing services are “underbanked.”

According to its 2013 National Survey of Unbanked and Underbanked Households, the Federal Deposit Insurance Corporation (FDIC) found that 7.7 percent of US households (or 1 in 13) were unbanked and 20 percent (or 1 in 5) were underbanked. Those percentages represented households composed of millions of children and approximately 16.7 million adults and 50.9 million adults, respectively.

Bonnie Blankenship

Bonnie Blankenship, a regional community development advisor for the Federal Reserve Bank of Cleveland, is concerned the numbers could grow as banks shutter more branches as people increasingly bank online and as mergers and acquisitions continue to consolidate the industry.

“When there’s a lending institution that pulls a branch out of a low- and moderate-income neighborhood, it makes access harder,” Blankenship explains. “If there are transportation issues and people can’t readily get to a bank to conduct everyday business, they’re going to look at alternative lenders.”

Blankenship, who previously worked on an initiative in Cincinnati and Lexington—called Bank On—to encourage and assist unbanked and underbanked people to engage in banking relationships, is involved presently in a series of listening sessions wherein bank supervisors and staff of nonprofits are meeting to discuss access to credit. It’s a series convened by the Federal Reserve Bank of Cleveland, the Office of the Comptroller of the Currency, and the FDIC. The next is scheduled for October 4 at the Boone Tavern Hotel in Berea, Kentucky.

Forefront asked Blankenship about what’s at stake for the broader economy when so many are disconnected from banks, the role that trust plays in banking, and more. An edited transcript of the conversation follows.

Forefront: Who is generally unbanked and underbanked, and why?

Blankenship: Generally, unbanked and underbanked individuals are the working poor or those living in poverty. Many of these individuals have become accustomed to using payday lenders or check-cashing services as their financial institutions.

Many are minorities. In Cincinnati, there are a few neighborhoods that have large Hispanic populations. In one of them where I ran a nonprofit [Carthage], we found that residents in the community were more comfortable carrying their cash or having cash at their residence. They were suspicious of banks. Part of it possibly could be a language barrier. Another could be documentation: They may not be documented citizens, and banks recognize only certain ID cards.

Forefront: What are the advantages and disadvantages of being unbanked and underbanked?

Blankenship: I’ll start with the disadvantages. It’s typical that somebody will pay higher fees for general banking services such as check cashing or obtaining money orders. A 2008 study by the Brookings Institution found that a worker can pay as much as $40,000 in fees over the course of his career by using check-cashing services rather than having a checking account. Individuals without a banking relationship are prone to paying higher interest rates. It’s also difficult for them to establish credit for mortgages, and there’s a lack of ability to store their money away from their residences. Folks who carry their money are targeted.

The primary advantage I see is convenience and ease of transactions at alternative lending venues. Many payday lenders have nontraditional hours, so they’re accessible for people.

A worker can pay as much as $40,000 in fees over the course of his career by using check-cashing services rather than having a checking account.

Forefront: How is the broader economy impacted when millions of people are unbanked and underbanked?

Blankenship: Unless you’re already wealthy and you have enough cash to buy a home, without a banking relationship to build wealth, you’re not in a position to establish credit, and you will have a hard time obtaining a loan and purchasing a home. I do believe that homeownership can be one mechanism for wealth building.

I think the number of unbanked and underbanked is a challenge for all of society because if you’re not moving up through the economy, you’re not participating in overall economic growth.

If you work with somebody and you help him establish credit and build wealth into an asset, there’s also residual business from that. There are lending institutions that earn interest on the loans. There are title companies, and there’s somebody who’s selling him furniture. It just goes on. It ties into the overall economic engine of our country.

Forefront: Many unbanked and underbanked consumers use products and services such as payday loans. Consumer advocates have called for more agency oversight, regulation, and enforcement of the payday loan industry. The Consumer Financial Protection Bureau proposed in early June a new rule for payday loans. What might you suggest the industry be required to do? Not to do?

Blankenship: I know that payday lenders are looked at in a very negative way, but they are supplying a need for some individuals. If there were a way these entities could be monitored so that the interest rates are not as high, where the fees are not as great, where somebody is not in a perpetual cycle of not getting his or her loan paid because the fees and the rates are so high, that would fulfill a need. It would be terrific if we could figure out a way to encourage mainstream financial institutions to offer small-dollar loan products and to make them accessible. Doing so would help people build a credit score.

Forefront: Much has been made about ongoing efforts to ensure access to capital and credit, including technical assistance providers’ showing people how to use different products. Are there barriers other than access? What role does trust play in the choices people make regarding their finances?

Blankenship: It’s a combination of both: It’s access and comfort. I think that with branches closing, yes, that would be an issue, but there is also an issue if you’re not familiar or not comfortable in a bank.

The role that I see people and businesses and financial institutions playing is to ensure that community branches remain in low- and moderate-income neighborhoods so people have access to a local financial institution.

While in a previous role, I walked into financial institutions with people. There was a gentleman who had a felony conviction, and I was trying to help him reestablish a work history and trying to coach him a little bit financially. When he walked into the bank with me, this great big man kind of shrank. He was intimidated.

I think some of it is history. Maybe someone had a bad experience or even no experience with a bank. If you don’t see your parent doing something, if you’re used to going to a payday lender, you’re going to go to what’s comfortable and familiar to you.

Forefront: What message would you share to people who distrust conventional banks?

Blankenship: I tell many people who don’t have conventional banking relationships to look up and attend free financial fitness days. I also tell people that Community Reinvestment Act officers will meet with customers. I’ve seen them work one on one to talk about products that are available.

Forefront: What role can people, businesses, and financial institutions play in local communities to help address the issues of the unbanked and underbanked? What efforts do you see in the Fourth Federal Reserve District (Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky)?

Blankenship: The role that I see people and businesses and financial institutions playing is to ensure that community branches remain in low- and moderate-income neighborhoods so people have access to a local financial institution.

Some of those conversations are being handled through different councils. One is in the Fourth Federal Reserve District in Dayton, Ohio, the Human Relations Council. It’s working with financial institutions and looking very closely at branches that will be closing or where there’s a threat of closures. The council wants to make sure there’s the ability in low- and moderate-income neighborhoods to access financial institutions. It frequently meets with banks to discuss the needs of the neighborhood and stresses the importance of having an anchor financial institution.

Sum and substance: For reasons such as distrust and lack of access, millions of Americans do not use mainstream banks, and the ways in which that disconnect limits them has consequences for the broader economy.

Five Ways to Better Bank the Unbanked

In late May 2016, the FDIC published research titled “Bank Efforts to Serve Unbanked and Underbanked Consumers” and identified 5 major strategies banks and other stakeholders can use to enhance their efforts to serve unbanked and underbanked consumers:

  1. Recognize that trust is the foundation for strong relationships with unbanked and underbanked consumers.

    The gist: Consumers may not trust banks because of their own past negative experiences or because of the experiences of people they know. Adopting strategies to build or increase consumers’ trust is a first step to increasing their participation in the mainstream financial system. Maintaining and strengthening partnerships with nonprofits that serve residents of low- and moderate-income (LMI) communities is an advantageous strategy.
  2. Adopt a multi-pronged approach to serving LMI [low- and moderate-income] consumers.

    The gist: A wide range of challenges may hinder unbanked and LMI consumers from opening and retaining bank accounts. Banks seem to be most successful when they simultaneously implement multiple approaches to address these challenges, such as offering a range of relevant products and services, establishing accessible and welcoming branches, and hiring and training bank staff to serve said consumers.
  3. Nurture longer-term relationships with community partners.”

    The gist: Nonprofits and local government agencies can facilitate stronger relationships between banks and residents of LMI communities. Banks can provide financial and knowledge-based resources to help organizations pursue their goals. Ideally, partners should build into initiatives a process for regular check-ins and a process for adapting implementation to ensure all partners’ goals are being addressed.
  4. Use technology to increase efficiencies for the bank, its partners, and its customers.”

    The gist: Technology is a crucial battleground on which the competition between bank and nonbank financial services providers takes place. LMI consumers will use the financial services that are most convenient for them, and banks can use technology such as remote deposit capture to increase that convenience.
  5. Develop an understanding of unbanked and underbanked consumers in the bank’s market area.”

    The gist: The most common reason previously banked consumers cite for being unbanked is they feel they don’t have enough money to keep in an account or to meet a minimum balance. Others closed accounts following a negative experience, and some had their accounts closed by banks involuntarily. The unbanked and underbanked are a diverse group; products and strategies that attract someone who thinks she doesn’t have enough money for an account will likely be different from those that will attract the interest of an immigrant unfamiliar with the US banking system. Banks seeking to serve such consumers will benefit from understanding their needs.

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