Service Delivery – Financial Hubs
A Hub would consist of a location bringing together all the needed services to assist low and very low income, unbanked and underbanked households with bad credit (usually about 400 to 600 credit scores). The use of Hubs or financial centers could provide the most complete set of financial and related services possible. Several services would be at the core of the Hub’s activities. For example, financial coaching and nonprofit lending (installment loans for consumers) would be key financial products offered. Other services could include nonprofit check cashing services at much lower rates and related check cashing services also at much lower costs. These services would offer a first line defense against the predatory services that exist in low income communities and allow great financial savings for participants compared to other options. These services then could be combined with larger scale financial coaching.
These services also could be combined with bank or credit union services and would focus on working through the Bank On programs around the country. This could be accomplished through operation of one of the teller windows in which a bank or credit union could offer some limited banking services on site (making this a much less expensive operation for a bank or credit union than operating a full-service branch). Alternatively, the bank or credit union could have its own separate teller space and client meeting space, but still much smaller than a full-scale branch. It would facilitate the movement of clients into the financial mainstream through direct, on-site referrals to the bank/credit union.
Other services could be added: small business lending and technical assistance services; perhaps a CDFI lending office; workforce training and development activities such as a tech training center along with job placement services; housing programs such as first-time homebuyer programs (especially if a large number of foreclosures is threatened), etc.; private sector businesses such as insurance and/or perhaps a real estate company, or export/import services if there are many immigrants in the neighborhood.
This would allow an aggregation of services in one space and the offering of complementary products and services. It would enhance and improve the products of all the participating partners and lower costs while increasing the efficiency in providing services. It more easily would allow for collaborations among the different partners in solving specific issues for clients.
The Hub also could offer an ideal location for social justice activities. For example, a consumer protection agency office could be located there, a location where some solutions could be immediately available. Other programs that assist people with leviable debt, youth banking, financial justice programs, ex-offender re-entry programs, etc. include people who most likely will need some of the other services located in the Hub. The financial coaches and others involved with these programs will need additional training to offer the best services, but the co-location with financial coaches and lenders will offer extensive opportunities to learn about the special needs of the program participants, provide necessary training to the providers and enhance possibilities for solving problems and offering the best possible blend of services.
While the Hub is the ideal approach, smaller steps also are possible. A smaller approach could focus on core services such as alternative lending products and financial training along with possible check cashing and perhaps a bank/credit union presence through the use of a teller window. A full-scale Hub could be phased in later and electronic financial services also could be offered during the interim so that a larger circle of potential participants could be reached.
Operational Issues
This program would need a great deal of coordination and referral along with careful record-keeping that meets strong privacy protections. There could be a central control/coordination mechanism set up by a city or county that would offer intake, program planning, coordination, oversight and monitoring, troubleshooting, program management, training, etc. The intake function probably would be centered around a staff person(s) located in the Hub who would look at all the issues facing a client and then coordinate the referrals. If useful, a committee of partner representatives could review and discuss the plan. This initial conclusion/plan would be modified over time based on the client’s activities and changes in the profile. Formats for reporting and planning along with procedures would be developed for each stage in this process.
Financial Coaching
It is not clear how successful existing financial literacy training programs are at this time, especially in their capacity to reach people consistently who are not too close to being bankable. Coaching by itself may not be adequate to reach people facing more difficult conditions as many existing programs are not tied to immediate programs or solutions such as affordable loans, lower check cashing fees, intercessions to correct ChexSystems issues, or expanded efforts to assist underbanked households become fully banked. This proposal makes these crucial ties by tying coaching to actual services that offer solutions to the problems that become highlighted in the counseling which might increase the effectiveness of the coaching.
Therefore, this revised financial coaching/training program and staff will be at the center of the overall program, with the intake coordinator’s playing a key role in planning, partner oversight, troubleshooting and problem-solving, program development and training, etc. Once the intake coordinator makes a referral, the coaches will be creating the key relationships with the participants. In some situations, a network of nonprofit organizations that provides various types and levels of coaching throughout the city or region already may exist. But there is typically little standardization. To make this kind of a network more effective, greater clarity will be needed with basic definitions of the terms and specific activities and processes included in the coaching/training activities. There also may be a need for clearer definition of organizational roles and of the specific staff roles within each organization. Some organizational specialization may occur naturally and it will be important to acknowledge and build on these existing strengths through the referral mechanism.
In addition, further definition of the types and depth of coaching will be needed. People working in this field frequently use the terms “unbanked” and “underbanked”. A revised goal could be changed to helping people become “fully banked” rather than having the creation of a bank account as the final goal. This likely will entail development of an entirely new set of coaching modules and approaches as this area presently does not appear to have a formalized program to address these issues after a bank account is obtained.
The financial coaches also will need to incorporate other issues into their work. One key area of financial coaching training could be mobile banking that would lower costs for the banks and increase convenience and save time for clients.
Similarly, there do not appear to be consistent banking industry standards for placing individuals on ChexSystems, as the standards can vary among institutions. And in some ways, even more critical, there are few consistent standards and definitions for requirements for people on the system to follow to be released from the system before the 5-year term has run its course.
These changes will entail the creation of a new training program, guidelines and procedures.
Coordination with other key City programs, social justice efforts and other partners
There are many excellent efforts and programs now operating in many regions around the country. They can be coordinated with this new approach to strengthen the work done by all of them separately. Many of the participants in these programs are experiencing very similar financial conditions as those described in this program. However, they also may have special additional conditions which need to be addressed and which will require more specialized financial coaching steps and staff training. Once the coaching staff is trained in these particular financial conditions, the programs can be incorporated into this new proposal. Examples of these programs could include: Consumer protection efforts; Financial Justice Projects; Youth banking programs; Workforce Programs which can be combined with access to a bank account and the other financial services available in a Hub; Leviable Debt and re-entry programs; other city programs designed to help bring marginalized people into the mainstream. The program also would make connections to food stamps, health insurance and similar support programs.
Capitalization and Implementation
This new strategy will require funding and additional steps needed to connect the partners, create a truly coordinated effort, oversee the development of an overall strategy, and help to bring financial and technological resources to the program. There are two stages of capitalization: startup and operational implementation, and each will require a separate capitalization plan.
The startup period will require development and implementation of the overall plan and will need to be guided by staff. Several steps will need to be supported during these startup efforts. Staffing will be needed to prepare the overall plan, work with the community residents (this will require extensive time to fully understand the needs of the local neighborhoods and to assure that the programs are correctly structured to meet those needs), create the partnerships, find and develop and lease the space, create a marketing plan, etc. In addition, procedures will be necessary, additional funding will be needed, hiring will occur, contracts will be created, etc. The changes described above – standard baseline definitions and activities for financial coaching, standard programs for being released from ChexSystems, development of a program for helping people become “fully banked”, the additional training needed to assist people coming out of special social justice programs, etc. – will need to be developed and implemented through new program guidelines, policies and procedures.
In addition, funding for other areas may have to be obtained if needed. For example, these areas could include 1) technological development (including new software) needed to complete the creation of some of the programs and to automate some of the lending systems in order to improve services, speed up the process, and reduce costs and 2) guarantees if needed, depending on the degree of risk that the program undertakes.
The second phase, implementation, will need to fund the Hub’s operations once it opens. Some of this public sector staffing already may be in place or new staffing will have to be hired, with commensurate funding put in place. In addition, capitalization for the actual lending and check cashing will be needed. Some of the public sector functions and some of the partners (e.g. small business lending, personal loans, check cashing) may need ongoing operating subsidies into the future and this funding level needs to be determined and funds allocated.
The timeline for startup and implementation is unclear. Once a commitment to proceed is made by the key partners and resources have been allocated, it may be possible to put the program into service within a year or less. A smaller demonstration program could be operational more quickly if this choice is made. The first phase planning will make the timeline clear.
Budget
Since the actual project outline is unknown at this time, the budget also is unclear at this time. Again, it would depend partly on the choice between full-scale implementation of a Hub with many partners or a smaller demonstration program. The funding requirements might range between $250,000 and $1 million to $2 million including putting the technological support in place along with staffing. There also would be a potential need for guarantees and lending capital for the loans, although these would represent different types of capital and could come from different sources. Ongoing subsidies – for the intake specialist and any other function where the pricing is too low to support the actual work – and capitalization also may be needed. A more complete analysis and budget would need to be prepared as part of the planning for this program.
Guiding Principles: Sustainability, Scale and Fairness
This program will not be able to reach everyone. There will be costs associated with it, both the startup and operating costs, as outlined above, and some of the operational costs will be paid by the program participants through fees or interest rates for some of the services. These proposed efforts by the banks and credit unions represent costs for these institutions and some or all of the costs should be paid for on some level.
In addition, the new financial services program generally should follow certain principles:
- The services need to be fair and workable and affordable for the participants. Both the interim and long-term programs are structured to help participants avoid predatory services and save a great deal of money compared to the use of financial services available today.
- The services need to be scalable without much subsidy beyond the initial funding and any moderate, ongoing operational funds for a public agency that are needed.
- The services should be financially sustainable for the providers offering the services. The amount of subsidy needed to support very low or zero rates for accounts, loans, debit cards and other services would be massive unless some fees are involved to cover the costs of delivering the services. Small amounts of ongoing subsidy may be necessary to reach low-cost pricing goals for some of the financial services.
- Finally, the services would need to be as transparent as possible, since so many aspects of providing these services are often shrouded in mystery at this time.
Community Development Finance, Inc. 501(c)(3)
Dan Leibsohn
July 2019
