A Non-Predatory Financial Services Program for the Unbanked and Underbanked: A New, Encompassing Strategy

Many important, innovative and effective programs to address these issues have been implemented around the country and have had a positive impact on large numbers of people in the U.S.  However, in total, these existing programs, while excellent in so many ways, have not been able to address the changing needs of unbanked people or the changes in the banking system and the economy on the necessary scale.  As a result, they have not had adequate impact in helping people to improve their financial conditions or to fully reach the financial mainstream.

Moreover, other options – both mainstream financial institutions and predatory, nonbank financial institutions – have not provided adequate service to help people improve their economic conditions either.  While there have been some smaller efforts from mainstream financial institutions, few if any large, ongoing successful, scaled programs have been implemented.  They either cannot and/or do not want to offer these services on scale.

Therefore, a major new community development program of financial services is needed with a different approach. Here, a new approach will be outlined. First, it will combine existing services – Bank On, financial coaching, and non-predatory, nonbank financial services will be at the core of these services, and the approach will build on the excellent work and program development that has already been created.  In addition, proposed revisions to some existing programs will be outlined. The proposal also will incorporate new approaches that have worked in different parts of the country, offer new ideas that have been considered but still need development, and link a wide range of programs that presently operate independently but, when joined together, can strengthen existing efforts and offer a much fuller range of assistance.

This approach differs from many types of existing financial coaching efforts because most 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.

These efforts have assisted large numbers of people.  Existing approaches are excellent individually and have had great success in many instances.  Many people have dramatically improved their lives through these programs and entered the financial mainstream partly or wholly.

However, in total, these existing programs, while excellent in so many ways, have not advanced enough to address the changing needs of unbanked people or the changes in the banking system and the economy.  As a result, they have not had adequate impact in helping people to improve their financial conditions or to fully reach the financial mainstream.

• The existing programs have not been working fast enough – the numbers of unbanked and underbanked have fallen, but very slowly and not rapidly enough to make an adequate impact on the very large number of people who need assistance as the overall numbers of unbanked and underbanked have not changed much over the last decade. Furthermore, many of these changes have occurred during a very strong U.S. economy; it is not clear how these changes will hold up during a recession or economic downturn.
• The existing programs haven’t worked deeply enough either – i.e. the assistance that is available has not been able to make a deep enough impact on too many individual participants who need greater assistance than what has been available to date.
• Furthermore, some conditions have gone unnoticed or not had much effort made to address them. For example, a primary goal of many of these programs is the creation of bank accounts for unbanked people; while very important, this goal does not take into consideration that much more assistance may be needed to help people move from being underbanked with an account to being fully banked with an account.  The goals and definitions need to be expanded and modified.  Bank accounts, alone, will not solve the issues and existing programs need to be strengthened.  ChexSystems offers another example where greater effort is needed to help people be removed from this listing whether they were placed there unfairly or when they made a relatively minor mistake and want to try again.
• The number of banks and the number of branches has shrunk substantially over the last decade and a large percentage of bank closures has occurred in low income neighborhoods – 1,915 more branches in low income neighborhoods were closed than were opened between the years 2014 and 2018 alone. And these trends are expected to continue in the future and could both impact people with existing accounts and make it more difficult for people without accounts to obtain them.
• Enormous wealth has been created in the last decade, creating greater inequality. These changes also may have generated a larger shift by the banking community toward serving higher income clients, an obvious goal for a long time but one which might have intensified with all the new, extreme wealth created in the last decade.  The banks seem to have quietly begun shifting their emphasis toward this demographic which offers much higher returns than banking high-risk, low and very income people.  In this type of scenario, the returns from a handful – or even one or two – wealthy clients can far outweigh the returns from one or two hundred low income people with bad credit.
• And, finally, many of the programs are excellent, thoughtful, complementary approaches, but they do not seem to get at the core issues presently facing low and very low income people who are unbanked and underbanked and have bad credit (credit scores roughly between 400 and 600). They are typically fragmented, separated from other approaches that could complement their activities, and do not meet the direct needs of many unbanked people, such as fair loans to replace the predatory lending that mostly is available to them.

Current State of Banking the Unbanked and Underbanked

Nationally, 6.5% of U.S. households were unbanked in 2017 according to the 2017 FDIC Survey of Unbanked and Underbanked Households.  This percentage was a decrease from 2009 when the rate was 7.6% (and from 8.2% in 2011).  Nevertheless, this 2017 percentage still represented 8.4 million U.S. households consisting of 14.1 million adults and 6.4 million children, a very large number and one which now exists during excellent economic times.  The numbers for 2009 and 2011 reflect the possibility of great regression if present economic conditions worsen.

The numbers of underbanked households were even higher.  In the report, “underbanked” was defined as a household in which at least one household member held a savings or checking account in an insured institution while also using one or more alternative financial services or institutions – such as check cashing, payday loans, money orders, international remittances, tax refund loans, pawn shops, auto title loans, rent-to-own services, etc. – in the last 12 months.  By this definition, in 2017, 18.7% of U.S. households was underbanked – representing 24.2 million households comprised of 48.9 million adults and 15.4 million children.  These numbers represented a decrease from 20% of U.S. households in 2013.

In total, 25.2% of U.S. households was either unbanked or underbanked in 2017.  The total number of unbanked and underbanked households was 32.6 million households comprised of 63 million adults and 21.8 million children.

In contrast, the number of “fully banked” households (defined as households with an account and not using any alternative financial services in the past 12 months) totaled 68.4% of U.S. households, an increase from 68% in 2015.

It is important to note that the percentages of African American and Hispanic households in the unbanked and underbanked categories were significantly higher than the overall averages. These numbers have remained steadily high decade after decade.  In 2017 for example, 16.9% of African American households was unbanked in addition to 14% of Hispanic households.

These numbers can vary by neighborhood, city, region and state.  Some places have more unbanked and underbanked and others have less.  In addition, in the U.S. as a whole and in various locations, there has been ongoing population increase.  The number of people in poverty has been slightly reduced overall but, while many escape poverty’s definition and may obtain or hold on to their bank accounts, large numbers of people also still fall into poverty every year, sometimes for the short term and sometimes for the long term.  They may gain or lose bank accounts accordingly.  The conditions are very fluid and it can be very difficult to determine actual numbers of unbanked and underbanked people and the changes they go through.

Bank On has heroically stepped into this situation.  From its inception, the program has created about 3 million accounts nationwide.  In 2017, there were 1.3 million open accounts.  Also in 2017 alone, Bank On programs across many cities assisted in creating 600,000 new accounts.  These are extraordinary efforts.

But unfortunately, they are not enough, as the data for the total numbers of unbanked and underbanked households demonstrate.  Additional efforts are needed.  However, for the most part, new options are limited.  There is one solution that many people involved in the field want and expect: they want banks and credit unions to address these issues and help unbanked and underbanked people to become fully banked on the scale that is needed.

This is unlikely to happen if independent actions on a large scale by banks and credit unions are expected.  The reasons are complicated, but they include a lack of economic feasibility for providing services to this clientele – the banks cannot make enough money from these customers to break even or make enough profit from some of the services while substantial profits are available more easily from serving other, wealthy clients.  Since the numbers of the unbanked and underbanked are so large, the amount of time, effort and cost becomes far too large for these institutions to address these issues on scale for a small return.

Another reason is the lack of support from regulators who have determined that there is too much risk in providing services such as loans to people with low credit scores of 400 to 600.  Banks and credit unions can participate in demonstration programs, but it appears unlikely that they will be able to participate in large-scale programs. San Francisco’s Payday Loan Plus Program is a good example, which ended after participating credit union institutions could not make it a long-term viable product. There have been many other attempts, some still in operation.  But none has reached any real scale as few large scale options exist, especially for people with bad credit.

Therefore, an entirely new approach is needed.  It can combine elements of existing public sector and private programs, create new ones, and then bind them together in a totally new effort.

Introduction to The Proposed New Program

This proposal is based on combining the existing resources and programs of a city or other public sector entities with other programs and regional and local partners that exist in the private sector and/or the nonprofit sector.  A full range of financial services can be created to serve the unbanked, underbanked and otherwise financially fragile residents of any location, including those who might already have bank accounts but still are suffering from various financial issues and dislocations.  Together, these services would offer almost all the needed financial services that people in these situations would need to advance their financial conditions and move into the financial mainstream if desired or remain outside the mainstream, if desired, with a full suite of financial services provided at fair rates and fees.

There is a full range of financial conditions and needs that faces unbanked and underbanked households across the country today.  Many people are unbanked entirely or are underbanked.  Even those who have bank accounts of some type may not have access to the full suite of services offered to fully banked customers.  Often, they pay high and sometimes predatory fees, have to suffer a lack of full transparency, and experience greater inconvenience to use non-bank financial services institutions to meet their financial services requirements.

Therefore, the people who would be the focus of these programs are the ones who are most difficult for banks and credit unions to independently provide services at scale:

• Low and very low income households who do not generate extensive possibilities for revenue and profit for financial institutions at the present time due to their low incomes.
• Households with low credit scores (roughly 400 to 600) whom the financial institutions cannot reach at scale due to regulatory and risk issues. These low scores may occur from bad debts and collections, high debt levels, high utilization rates, late payments, etc.
• Unbanked and underbanked households who have had financial issues in the past, such as being placed on ChexSystems, incurring extensive overdrafts, incurring high fees, etc.
• Individuals facing special conditions such as participating in workforce development programs, facing different financial justice or leviable debt issues, or who are young or without proper ID.
• Households often living in neighborhoods where branches are being closed at a much higher rate than branch openings. The lack of physical proximity can make it more difficult to provide assistance.

They may range widely from people who have an account and are fully banked (defined here as having a full banking relationship with access to all the available banking services).  Or, they may be underbanked – i.e. they have an account but do not have a full-service relationship with a bank or credit union so they would not have full access to all bank products and they may pay higher fees and rates.  These households often rely on non-bank financial services to fulfill part of their financial needs.  They are considered underbanked.  Or, they may be completely unbanked but still very close to entering the financial mainstream, needing only modest assistance in any one of a few areas to reach underbanked or banked status.  On the other end of the spectrum, there would be people with very serious financial issues who are far from becoming eligible for a banking relationship.  In all cases, these partnerships and the related services would have the capacity to assist people to address their specific issues, although the necessary time and effort would vary.

Presently, a wide variety of programs exists to assist people in these situations, but they are incomplete.  Moreover, they often are fragmented and exist with little coordination or common baseline standards or definitions.  They may also represent incomplete silos, working separately without much coordination, thereby reducing their impact and the ability to more effectively assist the unbanked.  In addition, there are major gaps in the availability of needed, alternative, non-predatory financial services.

This proposal presents a much more complete range of programs with effective coordination and common definitions that will be able to address most if not all of the issues facing most unbanked and underbanked people.

Program Description

This proposed program focuses on developing a range of partnerships to provide the necessary services.  The partners for providing the proposed range of services would include banks and credit unions, nonprofit financial counselors, and nonprofit and for profit lenders and providers of other financial services.  Parts of this network already exist and many local governments already may have relationships and programs in place in some instances, such as the Bank On program with bank and credit union partners and perhaps a financial counseling program with nonprofit financial coaches.  In other cases, the partners exist in the region (such as Community Development Finance [CDF] in Oakland) and new programs and additional relationships could be established as needed relatively easily and quickly.

Core Financial Tools and Services

The program would have many potential tools and financial services available.  The core of these services and partners would include the following:

• Financial counseling would be at the center of most activities including creating budgets, improving credit, reducing debt, preparing long term debt plans and financial plans, etc. Presently, there are varying approaches and goals used by different coaches and organizations. A baseline, partially standardized process would be included with this new program.  For example, standard definitions, methodologies and goals could be implemented for baseline, minimum-level coaching functions while allowing important variations at the neighborhood and organizational levels.  A different approach may be needed with some of the social justice program participants – leviable debt, youth, ex-offenders, etc. – who have additional financial issues and will require additional training for the financial coaches.
• Bank On partners – banks and credit unions – would be another key and would serve as the entry point for people to join the financial mainstream through checking and savings accounts, loans and other services, and help their customers to develop their capacity to greatly enhance their financial lives.
• A new ChexSystems program would be implemented with the Bank On partners, which would include standardized definitions for placing people on ChexSystems and the standardized steps required for removing them from ChexSystems.
• Tax preparation services would be available at no cost through referrals to VITA sites which also could be available at the Financial Hub.
• Savings programs such as the KtoC (Kindergarten to College) program in San Francisco would be available.
• Non-predatory loans would be available if needed to refinance predatory loans, support other debt reduction efforts, and assist with other borrowing needs until participants can obtain bank loans. Unsecured consumer loans would be both short term for smaller amounts, and longer term installment loans for larger loan amounts; both would have affordable rates and terms.  Financial coaching would be required for the larger consumer loans. Community Development Finance, which operates the only nonprofit check cashing store in the U.S. and is located in Oakland, California, has been making both larger consumer installment loans and lower-priced payday loans for several years.  Other local lenders also are involved in variations of these loans, such as small business loans and car loans.  Fintech companies might be interested in participating although the returns might be too low for the risk involved and they might have to develop new algorithms for this population.  Baseline standards for rates, eligibility, underwriting, etc. would be created for these loans and, if needed, payday loans could be excluded.
• A debit card would be developed which can include a savings account, payment of all bills automatically according to an adopted budget, sending of funds to family members and others, obtaining loans, and performing other key banking functions until a bank account can be obtained. (CDF has worked on creating this debit card with a software developer, but more assistance is needed to make it operational.)
• People who cannot obtain a bank account may need alternative service providers. Check cashing at very low rates and related low-cost financial services (e.g. money orders) could be helpful for people who do not qualify for a bank account. Therefore, during the interim before an account can be established, an inexpensive way to cash checks through a smart phone with funds sent to a debit card would be available.  (CDF has offered in-person check cashing services at very low rates for over 10 years and has explored this newer tech approach, but needs more assistance to make it operational and affordable.)
• Ties would exist to a variety of city or state programs designed to assist people with job training and placement, equitable consumer services and consumer affairs, re-entry programs for people leaving prison, leviable debt, obtaining ITINs, etc. These programs focus on social justice issues in addition to the financial issues facing their participants.
• The necessary network and administrative framework would be created by the partnership needed to provide these services through program design, implementation coordination and control, development of incentive programs to encourage a wide participation among potential network partners, staffing, etc.

Program Reach

The goal of the new program: To reach roughly 35% to 50% or more of eligible households through an alternative financial services program, that could eventually lead to entering the financial mainstream.  The remaining people may not be reached due to a variety of reasons:

• They may believe that the banks/credit unions do not offer needed products or services (13.1% of respondents in the 2017 FDIC banking report), charge fees that are too high (24.7% of respondents) or are unpredictable (20.2%), or do not offer adequate privacy controls (28.2% of respondents in the 2017 FDIC study).
• They may be unable or unwilling to take on the work to get themselves on a stable financial path, even though some may start but then drop out due to the time frame and effort needed. The proposed program will require substantial effort on the part of participants and not everyone will be willing to undertake these efforts.
• They may not be reachable through available marketing methods.
• They may be too busy or too overwhelmed by the normal activity and/or turmoil in their lives to be able to participate.
• They may be uninterested in these programs because of the extreme lack of convenience that exists for some people. For example, the 2017 FDIC study cited 9.4% of respondents’ stating the banks had inconvenient hours; 9.2% indicated that the locations were inconvenient.
• They may distrust banks and not want a bank account. (The 2017 FDIC study indicated that over 30% of respondents did not trust banks.)
• They may not like or trust government or institutions in general
• They may be “scammers”, although this number is likely to be low.

Examples of the Proposal’s Operations

This new approach would create a full set of integrated programs and approaches to meet the financial services needs of the unbanked and underbanked populations. There are several scenarios/examples that demonstrate the types of possible programmatic assistance that could be offered depending on the level and type of assistance that each person needs.

Scenario 1: Person is unbanked; 1-6 months to transition to financial mainstream. There may be two possibilities in this category.  The first is someone who has no credit or very little credit.  Someone in this situation may be able to move fairly quickly into obtaining an account by obtaining a secured credit card, a credit-builder loan, a car loan, etc.  The other person is someone who might have one or two relatively small credit issues – a borderline credit score; an old, small mistake resulting in placement on ChexSystems; a small unpaid debt that ended in collections; etc.  However, this person can be very close to becoming bankable.  This person, for example, could have stable long-term employment, a reasonable income, and be married with one child; this person might have a credit score between 570 and 600 that has been trending slightly upward, carry some combination of a slowly declining debt load of around $1,000 (none of it predatory), have bad debts in collections of $500 to $1,000 and is on ChexSystems due to a non-fraudulent unpaid overdraft bill of $125. With a relatively small effort, this person could become banked and enter the financial mainstream in a fairly short time period.  Depending on the exact nature of the issues, the partnership could have several different possible options to assist this person under the program:

• Referral to a Bank On partner to address the ChexSystems issue through a reformulated ChexSystems program in which participating institutions have agreed to a common definition of what is required to be placed in the System and a common definition of what is needed to be taken off the System.
• Referral to a financial counselor from among a large number of partners who would help create a workable budget to be followed that can generate some excess funds for addressing the debt and collections repayment issues. Counselors also would be available to provide any needed assistance for getting off ChexSystems, improving credit scores, accessing needed training programs, obtaining a secured credit card if needed, etc.
• Financial counseling also could assist in creating savings for an emergency fund and a larger savings fund needed for larger matters such as job loss, assistance in making restitution of the ChexSystems debt, reducing other debt and repaying collections debts.
• Use of a low-cost loan could enable restitution of the ChexSystems record, or to provide funds for debt repayment of collections debt or other critical needs that could be provided by a nonprofit or for profit lending partner when saving would take too long to reach these goals.
• Referral to free tax preparation and savings programs.
• Referral to other local government and nonprofit programs and resources as needed to address social justice issues, mistakes by financial institutions, improving job skills, finding jobs and finding effective ways to supplement incomes.
• Later, financial counselors also would be available to help people prepare long term financial plans to address their long term financial goals: college for children, homeownership, starting a small business, saving for retirement, becoming debt-free, etc.

This person may be eligible to be referred to a Bank On partner at the start, but may require some period of time before becoming fully bankable.  Other people may need to take some additional steps before being referred to a Bank On partner especially if ChexSystems is involved.  In either case, both should be able to enter the financial mainstream fairly quickly and easily and to become fully banked after some period of time once the banking relationship is established.

Scenario 2: Person is unbanked; 6-18 months from becoming banked. There also are people whose financial conditions are not as strong as the person in Scenario 1, but are still in a reasonable situation.  For example, someone in this category could be supporting a couple of children, might have a fluctuating credit score between 525 and 590, have a stable debt load of $2,400 (mostly non-predatory, but with one $1,000 loan with a 105% rate, plus two payday loans), make mostly minimum payments on credit card debt while also missing occasional payments, and have collections of $1,000.  This person also is on ChexSystems due to a non-fraudulent debt of $300 from overdrafts.  The person has a decent primary job but is a relatively recent employee with one and a half years on the job and has little seniority; the income is decent, but a second, part-time job also is needed to make ends meet.

Similar steps and referrals that occurred for the person in Scenario #1 also would guide this person.  However, this person will take longer to become fully bankable, but could reach that status relatively easily in perhaps 6 months to two years with assistance in ways to create a sound budget, increase income, reduce debt, increase the credit score and pay off collections and ChexSystems debt.  However, an additional step –  an interim, lower-interest loan from one of the partners – could be useful to refinance the predatory debt in particular but also collections and overdraft debt; also, the lower-cost check cashing service also could be helpful if needed.

Scenario 3: Person who is 2-4 years from becoming banked. At the other end of the spectrum, someone who is in a much worse financial condition would need to undertake even more extensive steps before becoming bankable and capable of being referred to a Bank On partner.  This person, who is married to a working spouse and the couple has three children, may have a very low credit score between 450 and 530 that has been declining over the last two years, be deeply in debt with an increasing amount of both predatory (e.g. $5,000 at 152% with a 42-month term) and non-predatory debt (for example, $2,500 in credit card debt at 28% but only making minimum payments when payments are made at all), have a high level of collection debt (e.g. $3,000) and is on ChexSystems due to a non-fraudulent debt of $600).  The job history is spotty and contains turnover and multiple low-paying jobs at the same time, although this individual has some relevant skills with potential for finding higher-paying jobs.

Due to these issues, this person has a great deal of confusion about how to handle basic everyday financial issues, may have a spending or gambling issue, earn inadequate income, may have no idea how to get out of this financial situation and may have given up on solving these issues.  This person likely has stopped caring about these issues and just focuses on getting through financial matters on a day-by-day basis; it is unlikely that this person would be interested in financial counseling without some contact with an agency or organization or friend/family member who might offer some advice about seeking assistance.  To assist this person, the partnership would have extensive options available.

• Entering counseling would be the first step, assuming the person has a real desire to get out of these conditions, which may take a few years. (Setting expectations in the beginning is very important; these financial conditions can be addressed, but they will take time and discipline.)
  • Create and follow a workable budget that can generate some excess funds for addressing the debt and collections issues.
  • Create a plan to increase the credit score: pay down debt, address collections, meet necessary utilization rate credit card requirements, pay on time, make more than minimum payment requirements, etc.
  • Negotiate with the holders of collection debt to reduce the amounts if possible.
  • Create a longer-term financial plan.
• Cash checks much more inexpensively through one of the nonprofit partners.
• Refinance predatory, high-interest and/or collection debt through one of the nonprofit or for profit lending partners. These loans can be refinanced with a credit union later at even lower rates once the person becomes bankable and joins the Bank On program.
  • Use other mechanisms to get away from predatory loans through savings, paying off the debt more rapidly, etc.
• Obtain loans for other needed purposes through one of the lending partners.
• Use the debit card (co-branded with the partnership and/or nonprofit sponsors) that would
• Automatically pay bills according to the adopted budget as soon as the payroll or other income, check or payment is deposited.
  • Place some funds from the payroll or other check into a savings account as soon as possible in the process but after most of the debt issues have been resolved. A smaller emergency fund, however, should be created as soon as possible.
  • Send money to relatives through the card, as needed.
• Find ways to increase income.
• Make referrals for developing or improving job skills, if needed, and in addressing gambling/spending issues, if needed.
• Make a referral to free tax preparation and savings programs.
• Take steps to get off of ChexSystems through one of the Bank On partners even though opening a bank account may be much farther off in the future.
• At an appropriate time, refer the person to a Bank On partner to set up an account and maybe obtain a secured credit card.
• Make a referral to other local government and nonprofit services, as needed.

A person in this financial condition most likely will require a few years to turn the situation around and become bankable.  It is likely that both the second and third scenarios comprise the large majority of low and very low income, unbanked and underbanked people with bad credit.  There may be a substantial number of people in the first category as well and they are much easier to assist; but the next two categories represent people who are much more difficult to reach and may exist in much greater numbers.  The greater need is with these latter two categories and they will require more time and resources to assist.

Scenario 4: Person who is underbanked. Finally, there is the person who has an account, but is may still be considered underbanked. This person may have been placed with a bank or credit union through the Bank On program or obtained an account independently. However, there is a ChexSystems issue in this person’s background or any of the other smaller issues shown in the above examples such as a small bad debt or collections, a borderline credit score, etc.  As a result, the initial banking relationship may be limited in the following ways:

• The checking account actually is a checkless checking account with online bill payment.
• No unsecured credit card is available although a secured credit card with a low spending cap is possible.
• No unsecured loans are available.
• No small business loans are available.
• Mobile banking is not being used.

To become fully bankable, the account holder needs to have all these conditions changed: a fully operational checking account is required; an unsecured credit card with a reasonable spending limit is needed; unsecured and secured loans must be available; small business loans should be available for those who need this support; and mobile banking should be used in order to reduce costs for the financial institution as well as the customer.  Financial coaches will need to keep working with this person after creation of the initial account until full bankability is reached, the final goal of this program for those that want to enter the financial mainstream.  These steps would include increasing the credit score, making restitution for any bank debt causing ChexSytems placement, removing collections, etc.

Service Delivery – Financial Hubs and Related Approaches

The use of Hubs or financial centers should be explored as methods of providing the most complete set of services possible.  A Hub would consist of a location for these proposed services along with other services offered by an existing financial institution or nonprofit partner.  For example, nonprofit lending (installment loans for consumers) and financial coaching 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 (as illustrated by CDF’s Oakland store).  These services would offer a first line defense against the predatory services that exist in low income communities and would allow great savings over other options.

These services could be combined with bank or credit union services.  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 also 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:

• Larger scale financial coaching,
• 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 could be located there, a location where solutions would be immediately available.  Other programs that assist people with leviable debt, youth banking, financial justice programs, ex-offender re-entry programs, etc. and 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, 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 issues such as offering 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 could offer key banking services on a more limited level.

Other combinations also are possible depending on the local conditions and needs.  For example, the program also could start smaller and grow over time with other services that would be phased in to allow a more controlled growth.  During this period, the new service providers still would work to create links to the other needed resources but would not be co-located with them.

Ultimately, many of these services will be offered digitally.  The costs of maintaining large numbers of brick and mortar storefronts will be too great.  But a smaller number of existing storefronts and operations can provide the necessary base for the electronic delivery of these services as well.

Other Operational Issues

This program would need a great deal of coordination and referral along with careful record-keeping that meets strong privacy concerns.  There could be a central control/coordination mechanism set up by the local government starting with initial intake of clients and would include program planning, coordination, oversight and monitoring, troubleshooting, program management, training, etc.  The intake function probably would be a staff person(s) located in the Hub who would look at all the issues facing a client and then coordinate the referrals based on a plan.  The plan would be based on information coming from the partner agencies if the client started there or from the intake specialist’s own intake analysis if the client started there.  If useful, a committee of partner representatives could review and discuss the plan and the referral strategy in order to reach a final conclusion.  (This process could be aided by the use of technology to automate some of the intake materials to increase the speed and lower the time and cost spent on breaking down the client’s basic information.)

This initial conclusion/plan would be modified over time based on the client’s steps and changes in the profile.  Further, it may benefit the participants if each client has an assigned staff person who can evaluate progress, be available to the client for questions or concerns, and generally lead each client through this process acting as a firm base of contact for clients over time.  Formats for reporting and planning would be developed for each stage in this process.

In addition, some partners may need greater incentives to be created to encourage participation; these incentives could occur through different mechanisms offered by the local government. Some examples of this assistance could include:

• Use of temporarily idle public sector funds and public sector assistance in attracting deposits for banks and credit unions (i.e. a linked deposit mechanism) could be used to incentivize banks and credit unions to participate in the program;
• Use of guarantee programs for the ChexSystems program changes for the participating banks and credit unions to assure that they don’t lose money from unpaid bills or other customer issues;
• Guarantees for some of the lending and check cashing programs which could involve high risk, especially in the beginning;
• Assistance for nonprofit partners in finding adequate sources of capital and technology.

Many of the partnerships already may be in place in many areas.  Most of the resources exist at this time and new programs can be designed based on past experiences elsewhere in the country adapted to local needs and requirements.

Furthermore, this program may be more effectively phased-in if needed, rather than implemented all at the same time. This particular issue will be determined by the level of resources that can be applied to the program over the necessary time period for implementation.   If a phase-in approach is necessary, the steps required and priorities can be quickly established with partners and potential participants.  Any phase-in approach should have a commitment for a full-scale program over time.

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.  Therefore, this approach differs from many types of coaching because most 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.  This program tries to address this issue by tying coaching to actual services that offer solutions to the problems that become highlighted during the counseling.  It is anticipated that this connection will 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, etc.  Once an intake coordinator makes a referral, the coaches will be creating the key relationships with the participants and the success of this approach will depend on their capacity to work effectively with each other.  In some situations, a network of nonprofit organizations that provides various types and levels of coaching throughout a 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 will 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”.  As noted above, the goal in working with people in these categories has been the establishment of a bank account.  But often, there is little specific, targeted work done in this area after a bank account is established.  There tends to be little definition of the meaning of “underbanked “ and what kind of further coaching can help people in these situations, as noted in Scenario 4 above.  People who are establishing new checking accounts through this program may have low incomes and poor credit.  The types of initial accounts that they can obtain may be limited in several ways as noted above.

Therefore, the revised goal can be changed to helping people become “fully banked” where they can have full use of checks to pay bills along with online capacity, obtain personal and small business loans, have full credit card privileges, use mobile banking, etc. as noted in Scenario 4 above.  The coaching definitions and related activities will need to be modified and expanded to include this goal under this program.  This likely will entail development of a new set of coaching modules and approaches as this area presently does not appear to have a formalized program to address these issues.

The financial coaches also will need to incorporate other issues into their work.  One key area is highlighting the predatory nature of some financial services that presently are not seen as predatory, when they are heavily burdensome in reality.  Bank overdrafts is one of those areas.  While sometimes not considered to be terribly problematic, perhaps because their individual fees are not too high, they are in fact heavily troublesome and often are much worse than payday loans, for example, in many ways.  Financial coaches should train participants about the use and impacts of overdrafts.

Another key area of financial coaching training could mobile banking.  Use of electronic means of banking would assist banks and credit unions because it would lower their costs of participating in this new program.  It would assist the community participants by adding greater convenience and time-saving steps, by lowering costs and by addressing the increasing lack of banking alternatives due to branch closures in low income neighborhoods.

ChexSystems

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.

This is an essential issue.  Many of the participants in this program could be caught in the ChexSystems records, some appropriately but for small infractions and others who may be trapped unfairly.  Participation by people in this proposed program, but also listed on the System, would indicate strong incentive to change their financial behaviors.  However, a banking relationship is the key step in this process; so it will be imperative for people in this situation to be able to have a reasonable way to move off of the ChexSystems listing as a major step to re-enter the financial mainstream.  Reasonable and definable steps need to be developed with participating institutions to allow this process to occur, as has occurred in the past both formally and informally at various institutions.

Coordination with other key City programs, social justice efforts and other partners

There are many excellent efforts and programs now operating within local government departments around the country or that may be implemented in the near future.  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 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 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 by public sector agencies which help safeguard local consumers from fraud, excessive business tactics, etc. Low income neighborhoods may have a higher incidence of consumer issues and inclusion in the Hub could facilitate adequate responses.
• Financial Justice Projects which work to which remove extraordinary fees and other financial burdens facing low income households and ex-offenders.
• Youth banking programs which are designed to meet the special needs of youth and to assist them in becoming become fully banked. Two key elements of this program could include the approach to ChexSystems described above and a type of second chance approach which would allow youth with minor infractions to have a new opportunity to enter the financial mainstream through an account.
• Workforce Programs, which have the goal of supporting workforce development training and job placement for unemployed adults, can be combined with access to a bank account and the other financial services available in a Hub for individuals in workforce programs.
• Leviable Debt and ex-offender, re-entry programs also could be coordinated with these proposed programs.
• Other city programs may be designed to help bring marginalized people into the mainstream, including people without adequate ID, such as ITINs. This new program could work closely with people in these situations to help them address their debt and ID issues and move toward fuller involvement in the financial mainstream.

In these and other examples, public agencies are working with people who have many of the same financial issues as those described in this program, but they also have additional issues to be addressed.  They can become part of the referral network of this partnership and gain access to all the programs, such as the financial coaching and the financial services.  However, the financial coaches working with individuals from these programs will need additional training to be able to help them address the complexities of the issues they are facing.

Capitalization

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 to the program: 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 the startup efforts.  Staffing will be needed to prepare the overall plan, work with the community residents, create the partnerships, find and develop and lease the space, create a marketing plan, etc.  In addition, procedures will be necessary for the operations as well guidelines for the lending and check cashing, additional funding will be needed, hiring will occur, contracts will be created, etc.

Partnerships with banks and credit unions, financial coaches, nonprofit organizations, public agencies, etc. will have to be created or strengthened if already in place if there is not enough specificity about roles and activities.  Additionally, standardized approaches and guidelines would have to be created and put in place for counseling, ChexSystems and Bank On participation, lending and check cashing, and other functions of the partners.  Financial coaches may need further training in several new areas.  A full network needs to be put in place to implement this plan and it will require some degree of standardization while still allowing creativity and movement away from the standards when necessary.

Funding for technological development (including new software) will be needed to complete the creation of the debit card and the check cashing program, known as remote deposit capture by banks, although the funds in this instance would be sent to a debit card rather than being deposited into a bank account.  The use of technology also will be needed to automate some of the lending systems in order to improve services, speed up the process, and reduce costs.  Some of this technology is not available to some of the potential partners and public sector officials can make necessary connections to assist in creating access to the key technologies at affordable costs.

Guarantees may be needed depending on the degree of risk that the program undertakes, especially for the banking as well as the check cashing and the lending.  If the risk level is medium to high, which is likely, then guarantees would be useful for both the check cashing and the lending as well as for the banks dealing with people listed on ChexSystems. There are many ways to structure guarantees depending on the needs of the participating institutions.  The guarantee structure would be designed in this phase along with allocation of funds.

The second phase, implementation, will require the creation of either a central financial hub or decentralized staffing for intake and case load staffing for each client, or more likely, both.  Some of this staff 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 depending on the anticipated volumes.  Some of the public sector functions and some of the partners may need ongoing subsidies into the immediate future and this funding level needs to be determined and 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.

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.  Ongoing subsidies and capitalization also may be needed by some of the partners and city functions, such as the intake coordinator, would have to be funded while the program is operating.  A more complete analysis and budget would need to be prepared as part of the planning for this program.

Financial Institution Partners

Banks and credit unions clearly already play a major role in the existing financial services programs and approaches created by cities and other public agencies across the country through Bank On, financial coaching and other programs.  These institutions are counted on to provide the bank accounts and other financial services needed by the unbanked people who will be referred to them.

In addition, through this new program, financial institutions can provide further key support, for example through funding for the project along other tracks:

1. Help to fund the network of financial service providers
2. Help to fund third parties that make loans available to the participants
3. Help provide the larger capitalization needed to fund the loans for the participants.

Guiding Principles: Fairness, Sustainability and Scale

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, it needs to be recognized that 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 have much lower costs and are structured to help participants 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 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 chargesd 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.

Conclusion

This approach creates a full system of financial products and services needed by low and very low income unbanked and underbanked people with bad credit to be provided by supporting organizations.  It creates a network centered on financial counselors at every stage of activity.  Using an existing network of financial counselors along with other partners and a full range of financial services, a city or other public sector entity effectively can open up banking services to unbanked and underbanked residents through non-bank institutions as well as conventional financial institutions especially with some key modifications to the Bank On program and the creation of baseline standards for the financial coaches.  This approach differs from many types of coaching because most existing programs are not tied to immediate programs or solutions.  This proposal makes these crucial ties.

This proposed system offers great flexibility for people at all different financial stages and with many different financial issues.  The range of services can provide a very swift and direct path for those who are close to being bankable, a medium path for those a little farther away, and a longer path for those with more difficult existing financial conditions while providing all of them with needed services adapted to their needs during this interim period preceding bankability.  It also is designed to move beyond opening a bank account as the main goal and creates the notion of being fully banked as the ultimate goal.  It will offer protections against predatory financial services and it will save participants a great deal of money in the process compared to the fees and rates they presently must pay in the (often predatory) marketplace.

The system is designed to help the affected people with the support needed to ultimately achieve the end goal of entering the financial mainstream if desired or providing a full suite of affordable and uncomplicated services if they wish to remain outside the system.  And the system offers a full range of additional financial services and products and support to help anyone interested in achieving much greater financial stability and success beyond this first entry stage, if desired.

Community Development Finance, Inc. 501(c)(3)
Dan Leibsohn
July 2019