Approaching a year since its inception the Bank on LA campaign is gearing up to offer its results to the Mayor’s office and other involved entities of the private/public sector. With curiosity abound, concerns of how effective the Villaraigosa-backed initiative has faired against the challenging economic climate can be felt swelling the hallways and boardrooms of financial institutions across Los Angeles County. There is no doubt that the campaign has made some impact or influence on the community organization level. The issue is whether those perceived positive affects can be measured. Sometimes we hate playing the number game, but unfortunately hard-fast numbers paint a better picture of what did and did not work rather then a heart-felt “success story”.
My concern is not the numbers – for I know they do not in fact tell the whole story. Numbers offer straight-to-the-point answers, but what happens if the approach is wrong? Bank on LA serves as a city-wide project to target the “unbanked” communities of Los Angeles. The campaign assumes that the “unbanked” remain without banking accounts because of lack of information and access to financial institutions. This is partly true, yet at the same time dangerously incorrect.
Financial institutions aren’t giving the people enough credit. Yes, some truly aren’t familiar with banking, period. Others are completely aware and opt out of “the system” for specific reasons. Where the banks slipped up is hoping that by furnishing the community with fancy literature outlining generic benefits of low cost checking and savings accounts the ‘unbanked’ would suddenly abandon their usually more convenient and practical fringe financial services.
Sure, on paper it looks great. The banks collaborate with community organizations – who have the trust and history with under-served communities. Through them banks can reach populations that historically were ignored. The bank earns new clients, which leads to more deposits, and now more revenue potential. On top of all that they get to boast and brag about their strides in dis-invested neighborhoods. Comes off as a mini stimulus package.
But, what the banks don’t understand is that community organizations are not banks. We cannot do the work for them, but since their expectations are framed with that assumption it is unlikely they will get the results they desire. The first flaw with the campaign is that many bankers (not all) do not know the profile of the very demographic they would like to target. Research would do a body a good to tell them ‘unbanked’ people typically live in areas severely underserved by financial institutions – which in fact is why we call them “dis-invested” communities. Imagine the scenario of promoting free checking and basic savings accounts to a person when the closest branch of any kind is miles away. The second flaw is that the banks are underestimating their competition. Alternative financial products such as check cashing vendors, payday loan lenders and cash advance services are better at marketing to these communities and offer attractive products. Banks haven’t fully adjusted and there really was no need to. However, if their aim to attract the untapped audience they must come up with something to rival what’s preventing them from getting the business in the first place. And since the creation of any new product must be justified and thoroughly supported by proof of feasibility and profitability i.e. results a more appropriate product will never reach the counter. Instead, it places us in an incessant loop of catch 22; to get better products for the poor and low income banks must be convinced they would realize a profit. The way they measure this is by piloting a program, without making any changes to the existing model, that will generate some kind of result. The results will fall short of their expectations and in their view deemed a failure. Thus, prematurely preventing any innovation. The ‘unbanked’ remain shut out from the banking system. The community misses out and the banks are only reaffirmed of their assumptions. To make the campaign more effective banks must understand their audience.
Without numbers, here is a typical profile of the ‘unbanked’:
- Two-parent household with one income earner
- Usually four member household with at least younger children
- Likely to be foreign-born
- Residents of under-served neighborhoods – many times in the eastern and southern regions of Los Angeles county
- Are considered by City standards to be from low-income households
- Have little to no savings/low disposable income
- Prone to cash outflow and inflow issues
- Frequent public transportation
- Typically work longer hours in any day
There are other barriers to opening a bank account asides from lack of information. I mentioned convenience, earlier, as being a factor. For many the hassle of spending time + money to go to their closest bank branch, which is not even close, outweighs any benefits the bank could offer. The second barrier I described was the competing cash advance/payday loan vendors. You can find several of these businesses occupying corners and mini-strip malls in lower income neighborhoods. An existing bank customer might find them predatory but they do fill a need. These vendors are able to offer specific services (cash advances, check cashing, payday loans) that are attractive to customers for their convenience (many have later open hours, some are 24/7) and transparency (rates are upfront). Check cashing businesses are even better staffed – many have bilingual employees. And there’s no membership required to utilize services.
What needs to be understood is that some people will never open up a bank account, for whatever reason. For that slice of the ‘ubanked’ population financial institutions should develop direct competition to the Nix Check Cashing and similar vendors, if they want in on some of the untapped profit. Union Bank of California has already responded with their Cash and Save services available at specific branches. Even Wal-Mart has caught on with the best rate of $3 flat fee.
For other ‘unbanked’ a process must occur before they can be ready to open up bank accounts. Bank on LA is a great campaign, but it should not spearhead the initiative to turn people to the financial system. Participants must want to open up a bank account because they realize the benefits and weighed them in comparison to the alternatives. Before this realization to happen one must go through some sort of financial education “training” that teaches that person how to empower themselves. And on top of that, other issues must be addressed, simultaneously to “rehabilitate” the person completely. We find that with the ‘unbanked’ it is not just lack of a formal banking relationship that is an issue, but also unemployment, citizenship issues, childcare, credit issues, and essentially anything that threatens the stability of an otherwise healthy household. We can show clients how storing our cash in bank accounts, CDs, and bonds can help combat inflation with competitive interest rates but for a household with rapid cash flows (meaning anything that comes in the house is immediately consumed for immediate expenses, making it difficult to maintain even short-term savings) this long-term thinking doesn’t mesh well with the “day-by-day” lifestyle. I would even dare say that encouraging bank accounts to some participants might be predatory given certain circumstances.
Bankers could probably expect better results if the campaign was coupled with a long-term plan that included financial education as well as collaborative efforts with community organizations to help families resolve other issues with social services. It is possible that a person may not realize their problem is money-related and for this the empowerment must be comprehensive. And if banks truly want to take advantage of this market they should design markets that attract clients at all stages of this time line.