Federal Government Offers Incentives
It costs more to be poor in the financial world.
It is estimated that 12 million households in the United States do not have bank accounts. Often they are immigrants wary of banks or don’t have the money for a minimum checking account deposit.
Instead, these low-to-moderate income households are forced to rely on “fringe” financial services , check cashing stores or lenders who tack on a 2 percent or 3 percent fee with each transaction.
Until recently, banks ignored this segment of the market because the services they require were too expensive to offer. So why are banks now realizing the potential of this untapped market? Two reasons: the explosive growth in check-cashing outlets plus a little incentive from the federal government.
Check-cashing outlets have tripled during the past five years to 6,000 with another 17,000 outlets, such as grocery chains and liquor stores, also routinely cashing checks for their customers.
– Federal Government Provides Incentives
In an effort to assist more low-income residents, the feds last summer gave financial institutions a little nudge.
Banks are now eligible to receive reimbursement and Community Reinvestment Act credits for offering special or no-cost minimum balance accounts to those receiving federal benefits via electronic transfer. Electronic distribution costs the government less as well as helps recipients manage their money a little better.
As a result, major financial institutions across the country signed up to participate in the program.
Let’s face it, banks are a business with shareholders and regulators scrutinizing their activities, and as such, are always trying to expand their markets and generate more profits.
But there’s the larger societal question of educating customers to be self-sufficient and financially savvy. It takes a lot of outreach, commitment and a sincerity to establish an ongoing relationship with a customer. Not all banks are willing or able to do this.
Consider the financial history of Lillian and Joaquin Cuadras. The Cuadras family immigrated from their home in Mexico eight years ago. As the family’s sole provider, Joaquin works as a delivery driver for a restaurant supply firm. They and their four children live in South Gate in Los Angeles and speak limited English.
– Family Lacked Banking Experience
Up until a year-and-a-half ago, the Cuadras’, like many lower-income, blue-collar families, lived week to week and relied on check-cashing services to provide access to Joaquin’s paycheck. The family didn’t have enough money to open a checking account and had never had a relationship with a bank.
But all that has changed. The Cuadras’ started by opening a no-fee savings account, went on to establish a checking account, and now hold a certificate of deposit account. Three of their four children also have their own savings accounts.
The Cuadras’ want to teach their children about money management, something they never learned growing up in Mexico. Lillian Cuadras says turning banking into a family affair has helped raise her children’s self-esteem, assimilate into life in the United States and generate opportunities.
A big problem for people like the Cuadras’ is the lack of access low-income inner city communities have to bank branches. To remedy this, banks must go into communities and establish alliances with community groups and organizations to establish credibility, trust and access.
Without involving community organizations and leaders, banks run the risk of alienating just those people they’re trying to reach who are often distrustful of traditional financial institutions.
As many financial institutions are discovering, many of these “fringe” bank customers are following the path of the Cuadras family and becoming mainstream customers. This helps expand a bank’s product line, creates a larger customer base and adds self-sustaining individuals to the economy.
Brown is a senior vice president and division manager of Union Bank of California’s Cash & Save program.