For a surprising number of American households, the process of banking is a foreign concept -- 12.7 percent do not have a checking account, and 9.1 percent have no bank account at all. Of those approximately 10 million "unbanked" households, 80 percent earn less than $25,000 a year and 57 percent are minorities. It is clear banks avoid struggling communities, but it is also clear their residents avoid banks.
Conventional banks, with high fees, lengthy waiting periods, and complicated restrictions, are unappealing to low-income people who often live paycheck-to-paycheck. Moreover, many potential customers neither trust the institutions nor appreciate the benefits of saving. And with so few banks in their communities, there is nothing to convince them otherwise. So these would-be customers turn instead to pawnshops, pay-day lenders, and check cashers. As a result, rather than investing their limited financial assets, many city residents just concentrate on staying afloat.
Meanwhile, many banking institutions believe that they cannot open branches in underserved communities and tailor their services to low-income residents while still making a profit. But successful efforts to do just that -- involving innovative partnerships and expansive consumer education programs -- have been carried out in cities around the country for the last decade. New York City Comptroller William C. Thompson Jr. has successfully launched a notable citywide initiative.
Thompson aims to transform the relationship between banks and the residents of underserved low-income communities from one of mutual ignorance, to one of mutual benefit. The city has pledged to deposit $100 million of city funds in existing and future bank branches located in neighborhoods that currently suffer from a dearth of conventional banking services. The city will accept below-market interest rates in order to give those banks greater freedom to invest in expanding services to their surrounding communities. Officials hope the investment will yield significant long-term dividends, benefiting not only the many "unbanked" residents of poverty-stricken neighborhoods, but also those neighborhoods as a whole, spurring job growth and economic opportunity.
"Neighborhood banks can encourage and help to sustain economic development in the communities they serve," Thompson said. "Unfortunately, there are communities in our city that are under-banked and therefore undercapitalized, which hinders the area's economic activity."
In return for the large city deposits (up to $10 million, depending on available funds and the capital needs of the specific branch) and a 10-year partial property tax exemption, the banks agree to open new branches and expand services in designated sections of the city known as Banking Development Districts (BDDs). The districts are chosen by the State Banking Commission, which evaluates and determines the communities that are underserved. The banks also agree to provide reduced-rate loans and comprehensive financial literacy classes to teach residents how they can take advantage of savings accounts, loans, and other services to improve their lives.
For example, in December 2005, New York City approved the application of Carver Federal Savings Bank to open a branch in the underserved communities of Northern Harlem. Once open, this specific branch will not only provide a full assortment of banking services, but also home-repair loans tailored specifically for low-income home owners, and a children's savings program.
Since the program's creation, the city has created 18 BDDs, and deposited 40 million at below market levels to bank branches in five boroughs. Another 100 million will be deposited in the upcoming years. While the comptroller's program is unique, similar efforts have been implemented elsewhere in partnership with private companies and nonprofit organizations in order to expand opportunities for investment.
FDIC Money Smart -- Adult Education Program
State of New York Banking Department, Banking Development Districts
Banking on Communities Initiative
Community Development Bankers Association
New Dem of the Week: William Thompson Jr., Democratic Leadership Council, November 24, 2003
Anne Kim, Taking the Poor Into Account: What Banks Can Do To Better Serve Low-Income Markets, Progressive Policy Institute, August 2, 2001
Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances, U.S. Federal Reserve, January 2003
Office of the Comptroller
City of New York
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Chief Operating Officer
Democratic Leadership Council
Progressive Policy Institute
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