ALTERNATIVE FINANCIAL SERVICES · Alternative financial services (AFS) refers to products and...

ALTERNATIVE FINANCIAL SERVICES

Community Economic Development Manual

Disclaimer

This fact sheet was produced by the California Community Economic Development Association, in

partnership with the Community Action Partnership National Office, as part of the U.S. Department of Health

and Human Services, Office of Community Services. The “Community Economic Development” publication

series is designed to increase the knowledge of processes for community economic development projects

nationwide. The contents of this manual are presented as a matter of information only. Nothing herein should

be construed as providing legal, tax, or financial advice. The materials referenced and the opinions expressed

in this product do not necessarily reflect the position of the U.S. Department of Health and Human Services,

Office of Community Services, and no official endorsements by that agency should be inferred.

Support for the Community Economic Development project and this toolkit is provided by the

Department of Health and Human Services Administration for Children and Families,

Office of Community Services (OCS), grant award number: 90ET0426/01.

Entire contents copyright © 2011 Community Action Partnership. All rights reserved.

AlternativeFinancialServices Page1

COMMUNITYACTIONPARTNERSHIP

ALTERNATIVEFINANCIALSERVICES

TOOLKIT



TABLEOFCONTENTS

BackgroundandIntroduction……………………………………………………………………………………………………………….3IndustryProgramInformation……………………………………………………………………………………………………………...4

A. SizeofRetailAlternativeFinancialServices……………………………………………………………………….4B. Products,Services,andFees……………………………………………………………………………………………..4C. OtherRetailsProvidersofAlternativeFinancialServices………………………………………………..…5D. BanksOfferingCheckCashingandOtherAlternativeFinancialServices……………………………6E. SizeoftheMarketforAlternativeFinancialServices…………………………………………………………7F. ReasonsLow‐IncomeConsumersChooseAlternativeFinancialServices…………………………..8

CommunityDevelopmentModelstoProvideAlternativeFinancialServices……….………………………………9A. CommunityDevelopmentEngagementinFinancialEducationandAssetBuilding……………9B. CommunityDevelopmentCheckCashingModels………………………………………………………..…10C. CommunityDevelopmentCreditUnion–CheckCashingPartnerships..………………………….10

Process:ExploringAlternativeFinancialServicesEngagement……………………………………………………….….11A. DueDiligence/MarketResearch……………………………………………………………………………………..11

1. ExistingAlternativeFinancialServices………………………………………………………………..112. MarketDemandforAlternativeFinancialServices……………………………………………..123. Gap/OpportunityAnalysis………………………………………………………………………………….12

B. OrganizationalConsiderations–QuestionstoAsk………………………………………………………….12C. SelectingAnApproach……………………………………………………………………………………………………13

Resources………………………………………………………………………………………………………………………………………….14



TheAlternativeFinancialServicesGuideisintendedforusebycommunitydevelopmentorganizationsforthefollowingpurposes:

1. Organizationswantingtolearnaboutalternativefinancialservices2. Organizationsconsideringdevelopmentofalternativefinancialservicesfortheircommunity

BACKGROUND&INTRODUCTIONAlternativefinancialservices(AFS)referstoproductsandservicesthatprovidebasicfinancialtransactionsutilizedbylow‐incomeindividualsandhouseholds.Retailbusinessessuchascheckcashers,pawnshops,andpaydayadvancelendersarefrequentlyfoundinlow‐incomeneighborhoodswherefewbankorcreditunionbranchesarelocated,andarejointlyreferredtoasAlternativeFinancialServiceProviders(AFSPs).Thesealternativefinancialservicesprovidersofferanarrayofservicesthatarepopularwithlow‐incomeconsumerswhodonothavebankaccountsorwhochoosenottousebanksfortheirdailyfinancialtransactions.Servicesincludecheckcashing(forafeethatistypicallyapercentageofthecheck’sfacevalue),paydayadvanceloans,moneyorders,wiretransfers(includinginternationalremittances),utilitybillpayment,andsaleofpublictransitpasses.Criticismoverthefeeschargedbythesebusinesses,especiallyforcheckcashingandpaydayadvanceloans,andconcernovertheir‘predatory’natureandpotentialtolocklow‐incomefamiliesinacycleofdebt,hasledtoexperimentationwithavarietyofmodelstomeetthesamebasictransactionalneedsoflow‐incomehouseholdsinlowercost,moreresponsibleways,withaneyetowardhelpingthembecomemorefinanciallystable,aswellasaccessmoremainstreamfinancialservices,begintosavemoney/buildassets,andultimatelybecomemoreself‐sufficient.Avarietyofeffortshavebeenlaunchedbycommunityeconomicdevelopmentorganizations,particularlycommunitydevelopmentfinancialinstitutions(CDFIs)andcommunitydevelopmentcreditunions(CDCUs),aswellasbyprivatesectorbankinginstitutionsandbig‐boxretailstorestobettermeetthetransactionalneedsofthelow‐incomepopulationwithoutrelyingoncheckcashersandsimilaralternativefinancialservicesproviders.Thisguidewillexaminethesizeofthecheckcashing/alternativefinancialservicesindustryaswellasestimatesoftheunbankedandunderbankedpopulationsintheU.S.bywayofdocumentingthemarketsizeforalternativefinancialservices.ItwillalsoexplorethevariousmodelsbeingusedbyCDFIsandothernonprofitstoprovidecheckcashingandotheralternativefinancialservicestolow‐incomefamiliesinresponsibleandsustainableways.Itwillthenwalkthroughthepossibilitiesandconsiderationsforacommunitydevelopmentorganizationjustbeginningtoexploreengaginginprovidingalternativefinancialservicesasanewprogramorlineofbusiness.


INDUSTRY/PROGRAMINFORMATION

A. SizeoftheRetailAlternativeFinancialServicesIndustry

TheFDICestimatedin2009thattheAFSindustry’stransactionvolumeexceeds$320billionannually,withacaveatthatthisfigureislikelyunderstated,asestimatesarenotalwaysavailableorupdatedforallindustrysegments.Moreover,precisedataonthevolumeofAFStransactionsarenotavailableduetotheabsenceofasingleagreed‐upondefinitionandscopeoftheindustry,andbecausethissectorishighlyfracturedamongmanydifferentprovidersthatareoftensmallorprivatelyheld.1

FinancialServiceCentersofAmerica(FiSCA),thenationaltradeassociationthatrepresentsnonbankfinancialservicecenters,estimatesthesizeoftheindustryat13,000locationsnationwide,conductingmorethan350milliontransactionsworth$106billionto30millioncustomers.Transactionsincludemorethan$58.3billionincheckcashingtransactions,$17.6billioninmoneyorderssold,$8.3billioninwireremittances,$13.2billioninpaydayadvances,and$5.4billoninsalesofpre‐paidstored‐valuecards.2

Check‐cashingfirmsvarywidelyinsizeandscalefromverysmallmom‐and‐popoutletstopubliclytradedcompanies.AceCashExpress,withabout1,700stores,isthelargestcheck‐cashingcompany.

DollarFinancialCorporationisthelargestpubliclytradedcheck‐cashingcompany,withabout470storesintheUnitedStates.3

B. Products,Services,andFees

Inadditiontocheckcashing,AFSprovidersofferanarrayofotherproductsandservices,includingmoneyorders,automatedtellermachine(ATM)access,electronicbillpayment,paydayadvanceloansorpawnbrokingservices,andelectronictaxpreparationandfiling.Checkcashersalsosometimessellpublictransitpasses,postagestamps,andphonecards;issuemotorvehiclelicenseplatesandtitles;processparkingtickets;andprovidephotocopyingandfaxingservices.Inotherwords,AFSoutletsseektoofferthefullrangeofdailyfinancialtransactionsthatmaybeneededbylower‐incomeshouseholds.ThisconvenienceisfrequentlytoutedasoneoftheattractionsandadvantagesofAFSprovidersovertraditionalfinancialinstitutions.4

Checkcasherstypicallycharge1to4percentofthefacevalueofthecheck,dependingonthecheckissuerandsubjecttolimitationsofstatelaw.Thelargestcheckcashingbusinessesinthecountrytendtochargearound3percentofthecheckamount.Abouttwo‐thirdsofcheckscashedatnonbankoutletsarepayrollchecks;another18percentarestateorfederalbenefitschecks.FDICanalysisofDollarFinancial’soperationsshowsthatnetwrite‐offs,whileincreasing,remainlessthan1percentoftheface1AlternativeFinancialServices:APrimer.(2009.)FDIC.http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/AltFinServicesprimer.html(lastaccessedJanuary25,2012).http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/AltFinServicesprimer.html(lastaccessedJanuary25,2012).2DatafromFinancialServicesCentersofAmerica(FiSCA)website,www.fisca.org,accessedJanuary25,2012.3AlternativeFinancialServices:APrimer.(2009.)FDIC.http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/AltFinServicesprimer.html (lastaccessedJanuary25,2012).4Ibid.


valueofcheckscashed,suggestingthat,giventhegenerallylow‐risknatureofmostcheckscashed,lossestendtobelow.5

Paydayadvanceloansareanotherofthemajor(andmostcontroversial)servicesprovidedbyAFSretailers.Thesearehigh‐cost‐,small‐dollar,short‐termloans,dueinfullontheborrower’snextpayday.Inthethirty‐twostateswherethesearelegal(APRnotregulatedordefinedasbeingconstrainedbythestate’susurycap)andinterestratesunrestricted,effectiveAPRsaverage417percent.6Inaddition(andeveninstateswherethestandardpaydayadvancearestrictlyregulatedorprohibited),AFSprovidersoffercartitleloansandsix‐monthandone‐yearunsecuredinstallmentloansatoftenunlimitedinterestrates.7

C. OtherRetailProvidersofAlternativeFinancialServices

Retailersareincreasinglyrecognizingtherevenue‐generatingpotentialofcheckcashingandothertransaction‐basedfinancialservices.Inparticular,Wal‐Mart,theworld’slargestretailer,beganoperatingMoneyCentersinsideitsstoresin2002toprovidecheck‐cashingservices.Infiscal2008,MoneyCenterscashed45millionpaycheckswithafacevalueof$17billionandprocessedmorethan2millionmoneyorder,remittance,andcheck‐cashingtransactionsperweek;thevolumeoftheseservicesgrewmorethan40percentintheretailer's2008fiscalyear,makingWal‐Martthe‘800‐poundgorillaincompetitiontomom‐and‐popcheckcashingoutlets.8Aswithitstypicalpricing,Wal‐Martundercutsthecompetitiononcheckcashingfees;itchargesaflat$3feeforcheckswithvaluesupto$1,000and$6forchecksupto$5,000.9Inaddition,Wal‐Marthasenteredthepre‐paidcardmarket.Itsellsthemostpopularandrecognizable“GreenDot”cardinitsstores,andrepresents64%ofthecard’ssales.Wal‐Martcutthecostofthecardfrom$9to$3,andalsoboughtastakeinthecompanyin2010.10

Conveniencestorechain7‐ElevenInc.alsoofferscheckcashing,moneyorders,billpay,andmoneytransferservicesinselectstoresthroughapproximately2,000self‐serviceV‐Comkiosks.11BigboxretailerBestBuybeganofferingbillpaymentservicesthroughkiosksinitsstoresin2011.Thekiosksare

5Ibid.6Borné,R.,Frank,J.,Smith,P.,andSchloemer,E.(2011).BigBankPaydayLoans:High‐interestloansthroughcheckingaccountskeepcustomersinlong‐termdebt.CenterforResponsibleLending.http://www.responsiblelending.org/payday‐lending/research‐analysis/big‐bank‐payday‐loans.html(LastaccessedJanuary25,2012)7SmallDollarLoanProductsScorecard–Updated.(2010).NationalConsumerLawCenter.8Ibid.9Kawamoto,D.(2011.)Wal‐MartExpandsCheckCashingServices.DailyFinance9August.http://www.dailyfinance.com/2011/08/09/wal‐mart‐expands‐check‐cashing‐service/(lastaccessedJanuary25,2012)10Mui,Y.(2011).Retailersofferfinancialservicesto‘unbanked’.WashingtonPost31January.http://www.washingtonpost.com/wp‐dyn/content/article/2011/01/31/AR2011013106177.html?hpid=topnews.(LastaccessedJanuary25,2012)11AlternativeFinancialServices:APrimer.(2009.)FDIC.http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/AltFinServicesprimer.html (lastaccessedJanuary25,2012).


operatedbyTioNetworksandareintendedtocatertoLatinocustomerswhomaybelesstrustfulofbanks.12

D. BanksOfferingCheckCashingandotherAlternativeFinancialServices

Anincreasingnumberofbanksalsoofferfee‐basedcheck‐cashingservicesfornon‐accountholders,frequentlywiththegoalofmigratingcheck‐cashingcustomerstomoretraditionalbankproducts.Forexample,KeyBankinCleveland,Ohio,hasbeenexperimentingwithoffering1%‐feecheckcashing,moneyorders,andothertransactionalservices,alongwithfinancialeducationclasses,underaprogramcalledKeyBankPlussince2004.13KeyBanknowoperatesKeyBankPlusCentersinsomeneighborhoods–smallwalk‐inservicecentersofferingcheckcashingandmoneyorderswithoutbeingfull‐servicebranches.14

Birmingham,AL‐basedRegionsFinancialCorp.beganofferingasuiteofservicesknownas“nowbanking”in2011.Seekingtoattractnewcustomersaswellasgetmorebusinessfrom30%ofitsexistingaccountholdersitfoundtobeusingAFS,Regionsexpandedcheckcashingservices(feebetween1.5percentand3percentofthecheckamount,withaminimumfeeof$3),andbegansellingreloadableprepaidcards,moneytransfers,andwalk‐inbillpaymentservices.15

FirstNationalBankofSyracuse,Kansas,operatesaninnovativebranchintheworld'slargestbeef‐processingplantand,amongotherthings,cashescloseto400payrollchecksaweekthroughanATM.16

Somemajorbankshavealsobegunofferingpre‐paidandreloadabledebitcardsasameansforunbankedandunderbankedlow‐incomeconsumerstomanagetheirmoneywithoutavailingthemselvesofAFSproviders.AmericanandExpressandU.S.Bancorphaveofferedtheseproductsonthemarketinthepastyear.17

Thelongest‐runningandperhapsmostinnovativeeffortofaprivatebanktomeetlow‐incomeconsumers’transactionneedsisthe“Cash&Save”programofferedbyUnionBankofCalifornia(UBOC).Beginningin1993,UBOCestablished“Cash&Save”program,offeringlow‐costcheckcashingtonon‐accountholdersthroughdedicatedtellerwindowsinsomeofitsbranches.Takingtheprogramtoanewlevelin2000,UBOCboughta60%stakeinNixCheckCashing.InpartnershipwithOperationHOPE,anonprofitofferingfinancialeducationandcounseling,UBOCestablisheddedicatedservicewindowsinsideNixCheckCashingoutletstoprovideaccesstoUBOCaccountservicesaswellasfinancialeducationresources.18

12Ibid.13Finkle,Victoria.(2011)BanksBeginRollingOutServicesforthePoor.AmericanBanker10Nov.14InformationfromKeyBankwebsite:https://www.key.com/personal/checking/key‐bank‐plus‐check‐cashing.jsp,accessedJanuary25,2012.15Finkle,Victoria.(2011)BanksBeginRollingOutServicesforthePoor.AmericanBanker10Nov16AlternativeFinancialServices:APrimer.(2009.)FDIC.http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/AltFinServicesprimer.html(lastaccessedJanuary25,2012).17Ibid.18Cash&Save–UnionBankofCalifornia.(2003.)Partofaseries:InnovationsinPersonalFinancefortheUnbanked:EmergingPracticesfromtheField.FannieMaeFoundation.


TheNixpartnershipultimatelyended,andtodayUBOCoperates16Cash&Savelocationsinlow‐to‐moderateincomeneighborhoodsthroughoutCalifornia.MostareadedicatedtellerwindowinsideatraditionalUBOCbranch,whileothersaremini‐branchesingrocerystores.ThroughCash&Save,UBOCthroughwhichitoffers1‐1.5%checkcashingservicesandtransitional(electronic‐access‐only)accountstolow‐incomecustomers.19(NixCheckCashing,meanwhile,nowhasanagreementwithKinectaFederalCreditUniontoprovideaccesstoitsaccountservicesthroughitscheckcashingoutlets.20)

Severalmajorbanksalsonowoffersmall‐dollarloan‘checkingaccountadvances’or‘directdepositadvances’toaccountholders.Theseproductsfunctionnearlyidenticallytotraditionalpaydayadvanceloans.Thebankprovidesadvancefundstocustomerswhoareoverdrawnorneedcashtomanageexpensesuntilpayday,andthenusesthenextdirectdeposittocovertheloanandfee.Whilebankstoutthisasalow‐costalternativetopaydaylending,advocatescriticizethepracticeascarryinganeffectiveAPRof365%andasevadingandunderminingstaterestrictionsonpaydaylendingaswellasfederalprotectionsfrompaydaylendingformilitaryfamilies.21

E. SizeoftheMarketforAlternativeFinancialServicesCustomerswhoutilizealternativefinancialservicesaretypically‘unbanked’–meaningtheyhavenocheckingorsavingsaccount,or‘underbanked’–meaningtheymayhaveabankaccount,butdonotutilizeittoconducttheirbasichouseholdtransactions,usinginsteadalternativefinancialservices.In2009,theFDICconductedtheauthoritativestudyofbankingandfinancialservicesbehaviorinthenation.Keyoverallfindingsofthisstudyincludethefollowing22:

• Anestimated7.7percentofU.S.households,approximately9million,areunbanked.Thesehouseholdsdonothaveacheckingorasavingsaccount.

• TheproportionofU.S.householdsthatareunbankedvariesconsiderablyamongdifferentracialandethnicgroups,withcertainracialandethnicminoritiesmorelikelytobeunbankedthanthepopulationasawhole.Minoritiesmorelikelytobeunbankedincludeblacks(anestimated21.7percentofblackhouseholdsareunbanked),Hispanics(19.3percent),andAmericanIndian/Alaskans(15.6percent).RacialgroupslesslikelytobeunbankedareAsians(3.5percent)andwhites(3.3percent).

• Inadditiontotheunbankedhouseholds,anestimated17.9percentofU.S.households,roughly21million,areunderbanked.Thesehouseholdshaveacheckingorsavingsaccountbutrelyonalternativefinancialservices.Specifically,underbankedhouseholdshaveusednon‐bankmoneyorders,non‐bankcheck‐cashingservices,paydayloans,rent‐to‐ownagreements,orpawnshopsatleastonceortwiceayearorrefundanticipationloansatleastonceinthepastfiveyears.

• Certainracialandethnicminoritiesaremorelikelytobeunderbankedthanthepopulationasawhole.Minoritiesmorelikelytobeunderbankedincludeblacks(anestimated31.6percent),

19Cash&SavePlansGrowth.(undated.)https://www.unionbankcareers.com/.../P3_Article_Cash_and_Save.pdf20InformationfromNixCheckCashingwebsite:http://nixcheckcashing.com/kinecta.aspx.LastaccessedJanuary25,2012.21Borné,R.,Frank,J.,Smith,P.,andSchloemer,E.(2011).BigBankPaydayLoans:High‐interestloansthroughcheckingaccountskeepcustomersinlong‐termdebt.CenterforResponsibleLending.http://www.responsiblelending.org/payday‐lending/research‐analysis/big‐bank‐payday‐loans.html(LastaccessedJanuary25,2012)22FDICNationalSurveyofUnbankedandUnderbankedHouseholds.(2009.)http://www.fdic.gov/householdsurvey/(lastaccessedJanuary25,2012).


AmericanIndian/Alaskans(28.9percent),andHispanics(24.0percent).Asiansandwhitesarelesslikelytobeunderbanked(7.2percentand14.9percent,respectively).

• Takentogether,atleast25.6percentofU.S.households,closeto30million,areeitherunbankedorunderbanked.Approximately60millionadultsresideinthesehouseholds.

• Overall,almost54percentofblackhouseholds,44.5percentofAmericanIndian/Alaskanhouseholds,and43.3percentofHispanichouseholdsareeitherunbankedorunderbanked.

• Asubstantialpercentageoflower‐incomehouseholdsareunbanked.Nearly20percentoflowerincomeU.S.households—almost7millionhouseholdsearningbelow$30,000peryear—donotcurrentlyhaveabankaccount.Householdswithearningsbelow$30,000accountforatleast71percentofunbankedhouseholds.

DisaggregateddataonthecharacteristicsandbehaviorsofunbankedandunderbankedareavailablefromtheFDICinasupplementalreport,includingbreakdownsoftheuseofAFSPsbydemographicsanduseofparticularAFSsbystate.23Inaddition,thedatacanbeexaminedatcityandcountylevels,includingdemographicdataandcensustract‐levelmaps,athttp://webtools.joinbankon.org/community/search.MorerecentandlongitudinalresearchconductedbythePewHealthGroupsuggeststhattheranksofunbankedaregrowing,ratherthanshrinking.Between2009and2010,Pewfoundanetdecreaseinbankedhouseholdsamongeightlow‐incomeneighborhoodsinLosAngeles.24Inadditiontoexaminingtheratesofun‐andunderbankednationwide,theFDICexploredtheuseofalternativefinancialservicesbyhouseholds,findingthatapproximatelytwo‐thirdsofunbankedhouseholdsutilizealternativefinancialservicessuchascheckcashing,pawnshops,andpaydayloans.Thisisontopofallunderbankedhouseholds(18%ofallhouseholds),whoaredefinedassuchbytheirrelianceonalternativefinancialservices.25

F. ReasonsLow‐IncomeConsumersChooseAlternativeFinancialServicesTheFDICsurveyfurtherinquiredintothereasonsforun‐andunderbankedhouseholds’choicestoconducttheirfinancialtransactionsthroughalternativefinancialservicesprovidersratherthanbanks.Themajorityofunderbankedhouseholdscitedconvenienceastheirprimaryreasonforutilizingalternativefinancialservicesprovidersforbasictransactionssuchascheckcashingandmoneyorders;speedandcostofthetransactionwerealsogivenasreasonsforthischoice.26ConveniencebeingofferedasthemajorcauseforunderbankedconsumerschoosingtodobusinesswithAFSPsratherthaneventheirownbankwouldseemtosupportresearchsuggestingthatlow‐incomeconsumersutilizeAFSPsbecauseofalackofbankbrancheslocatedintheirneighborhoods–theso‐called‘spatialvoidhypothesis’.27Moreover,otherresearchhasshownthatAFSPsclusterinlow‐incomeneighborhoods;

23Addendumtothe2009FDICNationalSurveyofUnbankedandUnderbankedHouseholds:UseofAlternativeFinancialServices.(2010).http://www.fdic.gov/householdsurvey/(lastaccessedJanuary25,2012)24SlippingBehind:Low‐IncomeLosAngelesHouseholdsDriftFurtherfromtheFinancialMainstream.(2011).PewHealthGroup.www.pewtrusts.org/safebanking.(lastaccessedJanuary25,2012)25FDICNationalSurveyofUnbankedandUnderbankedHouseholds.(2009).http://www.fdic.gov/householdsurvey/(lastaccessedJanuary25,2012)26Ibid.27Smith,M.,Wackes,J.,andSmith.T.(2009).AlternativeFinancialServiceProvidersandtheSpatialVoidHypothesis:TheCaseofNewJerseyandDelaware.FederalReserveBankofPhiladelphia:DiscussionPapers,


andeveninneighborhoodswherebankbranchesarelocated,AFSPsarestillmoreprevalentandeasilyaccessible,especiallyincensustractsthataredisproportionatelyminorityorpoor.28Thiswouldseemtosuggestthat‘convenience’meansmorethanjustlocationforun‐andunderbankedconsumers,butalsoreferstothelongerhoursthatAFSPstypicallyremainopen,aswellasthearrayofservicestheyoffer,allowingcustomerstheopportunitytotakecareofmostoralloftheirday‐to‐dayhouseholdfinancialbusinessinonelocation.ThisissupportedbyfindingsofaPewHealthGroupstudyoflow‐incomeLosAngeleshouseholds,inwhichmorethanathirdofunderbankedconsumerssurveyedreportusingAFSPsbecausetheseprovidersenablethemtoconductmultipletransactionsatonce.29Moreover,thesamePewstudyfindsliquiditytobeamajorfactorinunderbankedcustomers’continueduseofalternativefinancialservices;nearlyhalfofunderbankedsurveyrespondentsuseAFSbillpaymentservicesbecausetheyareconcernedabouttimingoftransactionpostingandcashliquidity.ThirtypercentsaytheyuseAFSPsbecausetheyneedaccesstotheircashquickly.COMMUNITYDEVELOPMENTMODELSTOPROVIDEALTERNATIVEFINANCIALSERVICES

A. CommunityDevelopmentEngagementinFinancialEducationandAssetBuildingAtitsroot,concernoveruseofalternativefinancialservicesamonglow‐incomecommunitiesisconcernoverthosefamilies’resultinglackofaccesstothefinancialmainstreamandinabilitytobuildassetsandbecomefinanciallystableandself‐sufficient.CommunitydevelopmentorganizationsrecognizethatfamilieswhoutilizeAFSPsarepayingtoomuchfortheirday‐to‐dayfinancialtransactionsandthusstuckinacycleofinabilitytosavefortheirfuture,orevenforunexpectedexpenses.Thisrecognitionhasledtoaplethoraofeffortsoverthepast15yearsorsothatareallcharacterizedasfallingunderthe‘assetbuilding’umbrella.Theseeffortsincludefinancialliteracy/capabilityeducation,creditcounseling,individualdevelopmentaccounts(IDAs),andfreetaxpreparation(VITA),gearedprimarilytowardEarnedIncomeTaxCredit(EITC)outreach.Communitydevelopmentorganizationshavealsopartneredwithfinancialinstitutionsinanefforttoconnectlow‐incomeclientswithbasicbankingaccounts–throughtheFirstAccountsprogramintendedtohelpfederalbenefitsrecipientsjointhebankingsystem,aswellaseffortstoencouragetaxpreparationclientstodirectdepositandsaveaportionoftheirEITCtaxrefund.Inrecentyears,manycommunitydevelopmentagencieshavebecomepartnersinlocal“BankOn”efforts–city‐andregion‐widecollaborativesamonglocalgovernments,financialinstitutions,andnonprofitstoprovidefinancialeducationandconnectlow‐incomeunbankedwithlow‐costbasicbankaccountsthefinancialinstitutionspartnershaveagreedtooffer.

CommunityAffairsDept.http://www.philadelphiafed.org/community‐development/publications/discussion‐papers/(lastaccessedJanuary25,2012)28Sawyer,N.andTemkin,K.(2004).AnalysisofAlternativeFinancialServiceProviders.PreparedfortheFannieMaeFoundationbytheUrbanInstituteMetropolitanHousingandCommunitiesPolicyCenter.www.urban.org/uploadedpdf/410935_altfinservproviders.pdf.(lastaccessedJanuary25,2012)29SlippingBehind:Low‐IncomeLosAngelesHouseholdsDriftFurtherfromtheFinancialMainstream.(2011).PewHealthGroup.www.pewtrusts.org/safebanking(lastaccessedJanuary25,2012)


Communitydevelopmentcreditunionshavesoughttoresponddirectlytotheretailbankingneedsoflow‐incomecustomersinavarietyofways–insomecasescompetingwithAFSPstooffercheckcashingandsmall‐dollarloans),andinothercasespartneringwithcheckcasherstoprovideimprovedaccesstocredituniondepositaccountsandfinancialeducation.Theseeffortsaredetailedbelow.

B. CommunityDevelopmentCheckCashingModelsCommunityDevelopmentFinance(CDF)launchedCommunityCheckCashing,thefirstnon‐profit,full‐servicecheck‐cashingstoreinthenation,intheFruitvalesectionofOakland,California,in2009.Thestoreoffersfinancialservicesatlowercostthantraditionalcheckcashingoutlets,includingcheckcashing(with1%fee),billpayment,moneyorders,moneytransfers,anddebitcards.In2010,CDFrolledoutanalternativepaydayloanproductthatcosts$5‐$7.50per$100borrowed(assuming14‐dayloanperiod),comparedtomarketrateof$15/$100borrowed.Thestorealsooffersasmall‐dollarcreditrepairloanthatcosts$3.75/$100borrowed.CDFtriestomitigatedefaultriskbyusingmorecarefulscreeningandapplicationprocessesthanpaydaylenders.Inaddition,CDFofferslow‐costfinancialcoachingandtrainingforhouseholdsaswellassupportforsmallbusinesses,socialservicesreferrals,andcreationofcheckingandsavingsaccountsthroughbankandcreditunionpartners.30AsimilarmodelisSelf‐Help’sMicroBranch,apartnershipbetweentheCenterforCommunitySelf‐Help(oneoftheoldestandmostreputablecommunitydevelopmentfinancialinstitutionsinthecountry)andCitiCommunityDevelopment,whichprovided$200,000incapitaltostarttheMicroBranch.ThefirstMicroBranchopenedinEastSanJose,California,in2010.TheMicroBranch,likeCommunityCheckCashing,isasortofcheckcasher‐creditunionhybrid,whichprovidestheservicesandoperatinghoursofacheckcashingoutlet,butalsooffers‘in‐linefinancialeducation’bytellersspeciallytrainedtoprovidebite‐sizedpiecesoffinancialmanagementconceptsintendedtoencouragecustomerstoconsideropeningcheckingorsavingsaccounts,oraccessingresponsibleloanproducts.31

C. CommunityDevelopmentCreditUnion–CheckCasherPartnershipsRatherthancompetewithcheckcashers,BethexFederalCreditUnionintheBronxestablishedapartnershiptoleveragetheirmultiplelocationsinlow‐incomeneighborhoodstocreateanunprecedentedandotherwiseunaffordablenetworkofbranchesforacommunitydevelopmentcreditunion.Beginningin2001,BethexandRiteCheck,acheckcashingcompanyoperating11storesinNewYork,launchedacooperativearrangementthatallowedBethexmemberstoconductdepositsandwithdrawalsatthecheckcasher’soutletsthroughpoint‐of‐banking(POB)terminalsfornofee.BethexmemberswerealsoabletocashBethex‐issuedchecksforfree(Bethexabsorbedthiscost)undertheoriginalagreement.Today,thenetworkofparticipatingcheckcashershasexpandedto130outletsthroughoutNewYorkCity,andBethexmembersnowpayadiscounted1.1%checkcashingfeeatparticipatingstores.32Bethexalsoconductedmarketingoutreachtoopennewaccountsbysettingupa

30Leibsohn,D.(2011).CommunityPerspectives:CommunityCheckCashing.CommunityInvestments(FederalReserveBankofSanFrancisco)23:1(Spring):9‐11.http://www.frbsf.org/publications/community/investments/1104/index.html(lastaccessedJanuary26,2012)31CitiandSelf‐HelpExpandMicroBranchModeltoMovePeopleAwayfromAlternativeandOftenCostlyFinancialServices.(2011).BusinessWire15August.http://www.businesswire.com/news/home/20110815005979/en/Citi‐Self‐Help‐Expand‐Micro‐Branch‐Model‐Move(lastaccessedJanuary25,2012)32InformationfromBethexFederalCreditUnionwebsite:www.bethexfcu.org.(lastaccessedJanuary25,2012)


tableinthelobbyofthecheckcashingoutletsforafewweeksatatime,andbytrainingcheckcashingtellerstoprovideinformationaboutBethexaccountstocustomers.33,34InfluencedbytheBethex‐RiteCheckmodel,BonSecoursMarylandFoundationandOperationReachOutSouthWest(OROSW),bothcommunitydevelopmentorganizationsworkinginBaltimore,createdOurMoneyPlaceFinancialServicesCenterin2003.ThefinancialservicescenterisanonprofitcollaborationofBonSecoursandOROSWwiththeSocialSecurityAdministration(SSA)BaltimoreFederalCreditUnion(nowSecurityPlusFCU)andA&BCheckCashing.(Thecheck‐cashingpartnerisnowQuickCash.35)OurMoneyPlacewasanewretailoperation,housedinaformerbankbranchinabusyshoppingcenterinsouthwestBaltimore.Thefacilityoffersamixofcheckcasherandcreditunionservices;onecredituniontellerisonsite30hours/weektoopenaccounts,takedeposits,andprocessloanapplications.ThecreditunionalsooperatesanATMonsiteandsharestherevenueswiththeOurMoneyPlacenonprofit.Twoothertellerwindowsareoccupiedbycheckcashingemployeeswhoprovidethetraditionalarrayoffinancialservices.Creditunionmembersreceivea50%discountoncashingofficialchecksandchecksdrawnontheSSAcreditunionforthefirstmonthoftheirmembership;regularfeesapplyafterthat.Inadditiontocreditunionandcheckcasherservices,theOurMoneyPlacenonprofitpartnersemployafull‐timefinancialservices‘recruiter’,whose‘office’isinthelobbyofthecenterandtalkswithcustomerstomakethemawareoffinancialeducationandcounseling,freetaxpreparation,andcareerdevelopmentservicesavailableattheBonSecoursFamilySupportCentercloseby.36PROCESS:EXPLORINGALTERNATIVEFINANCIALSERVICESENGAGEMENTA. DueDiligence/MarketResearch

1. ExistingAlternativeFinancialServicesTounderstandthelocalmarketforalternativefinancialservices,communitydevelopmentorganizationsmustbethoroughlyawareoftheexistingretailfinancialserviceswithintheirtargetcommunities,bothaspossiblecompetitionandaspotentialpartnersinanefforttoservelow‐incomefamiliesinamoreaffordableandresponsibleway.CDOsshoulddoanexhaustiveinventoryofcheckcashingandotherAFSPs,aswellasexistingbankandcreditunionbrancheswithintheirfootprint.Thiswillincludeunderstandingtheservicesandfeesofferedbyeachofthesekindsofbusinesses.Forcheckcashers,CDOswillwanttofullyunderstandservicesoffered,fees,hours,andoperatingmethods.Itisimportanttobefullyawareofthecheckingandsavingsaccountoptionsofferedbylocalbanksandcreditunions,andtheiraccessibilityandfeasibilitytoservealow‐incomeclientbase.Furthermore,thisinventorywillneedtoincludetheavailabilityandratestructureofsmall‐dollarloansaswellascheckcashingand

33BethexFederalCreditUnionandRiteCheckPartnership.(2003.)Partofaseries:InnovationsinPersonalFinancefortheUnbanked:EmergingPracticesfromtheField.FannieMaeFoundation.www.knowledgeplex.org/download‐doc.html?id=5622(lastaccessedJanuary25,2012)34Stegman,M.,andLobenhofer,J.(2002).BringingMoreAffordableFinancialServicestotheInnerCity:TheBethexFederalCreditUnion/RiteCheckCashing.Inc.Partnership.BuildingBlocks.FannieMaeFoundation3:3(Winter).http://www.ccc.unc.edu/publications.php#financial.(lastaccessedJanuary25,2012)35InformationfromBonSecoursofMarylandFoundationwebsite:http://www.bonsecoursmaryland.org/our_money_place.html(lastaccessedJanuary26,2012)36UsingFringeProductsasaDoorwaytotheMainstream:BuildingCheck‐CashingPartnerships.(2005).CenterforFinancialServicesInnovation.http://cfsinnovation.com/node/440390(lastaccessedJanuary26,2012)


otherfee‐basedservicesofferedbythefinancialinstitutions.Forcreditunionsinparticular(especiallygeographically‐definedcommunitydevelopmentcreditunions),itisadvisabletodoanassessmentofcapacitytoadequatelyservetheCDO’sexistingclientcommunity.

2. MarketDemandforAlternativeFinancialServices

Itwillalsobeessentialtohaveathoroughknowledgeoftheunbankedandunderbankedpopulationwithinthetargetcommunity–theirnumber,householdcharacteristics,andfinancialservicesbehaviors,preferences,andneeds.Asmentionedearlierinthistoolkit,theFDICfindingsontherateofun‐underbankedconsumersareavailableatthecitylevelthroughtheBankOnnetworkwebsite(linkavailableinthe‘Resources’sectionattheendofthisdocument).TheFDICalsoprovidesspecificdataontheoveralluseofalternativefinancialservicesproductsbydemographiccharacteristicsatstatelevel,aswellasuseofparticularAFSproducts(notdemographicallydisaggregated)atthestatelevelinanaddendumtothe2009reportavailableontheagency’swebsite.CDOsmayalsowishtoobtainamorenuancedunderstandingofthefinancialservicesneedsandpreferencesoftheirparticularclientcommunitiesbyconductingsurveysorfocusgroups,and/orbycommunicationwithotheragenciesworkinginthesamearearegardingtheobservedneedsforfinancialserviceswithinthecommunity.Thisexaminationshouldattempttoestimatethecurrentcoststothetargetclientpopulationforconductingtheirbasichouseholdfinancialbusiness.

3. Gap/OpportunityAnalysis:

Duediligenceultimatelymeansthattheorganizationmustconsiderwhere,withinthemarketassessedabove,itmightbepositionedandabletoofferaservicethatwillprovidelower‐costfinancialservicesorserveasanintermediarytoconnectclientswithavailablelower‐costfinancialservicesthatwillhelptokeepmoreincome,enterfinancialmainstream,andbuildassets.B. OrganizationalConsiderations–QuestionstoAsk

1. Doesprogramworkinalternativefinancialservicesfitwiththeorganization’sexistingmissionandorganizationalculture?

• Isengaginginprovidingalternativefinancialservices(orconnectingclientstotheminsome

way)consistentwiththeorganization’smissionandcorevalues?

• Isanalternativefinancialservicesfocusappropriatefortheorganization’stargetclientbase?Willitexpandtheorganization’sclientbase,ormightitshiftfocustoadifferentclientbase?

• Wouldanalternativefinancialservicefocussupportandenhance,ordetractfromtheorganization’soverallcommunityeconomicdevelopmentapproachandstrategy?


2. Whatisthe“valueadded”forthisorganizationtoengageinofferingalternativefinancialservices?

• Howcanorganizationbuildonitsexistinganduniqueassets(knowledgeoforaccessto

specificneighborhoodorclientbase,etc.)tocapitalizeonunmetdemandforfinancialservicesasidentifiedinopportunityanalysis?

• Does/hastheorganizationengagedinotherasset‐buildingeffortssuchasfinancialeducation/counseling,taxpreparation,IDAs,etc.?Howmightexpandingthisworkorintegratingitwithotherassetbuildingorfinancialserviceseffortscreatemorevaluefortheclientsserved?

3. Whatistheorganization’scapacitytoengageinanalternativefinancialservicesprogramor

project?

• Doestheorganizationhaveanybackgroundinorunderstandingofprovidingfinancialservices?

• Doesit/hasiteveroperatedasaretailorwalk‐indemandservice?Isthatinkeepingwithitsbusinessapproach?

• Doesithavefacilitiesortechnology(oraccesstotheseelements)toofferretailfinancialservices?

• DoestheorganizationhaveCDFIorotherfinancialservicescertification?Isitinterestedinpursuingcertification?

• Doestheorganizationhaveanypartnershipswithfinancialinstitutionsitcanleveragetoofferfinancialservices?

• Doesorganizationhavecapacitytoprovideeducation?• Couldorganizationeffectivelyserveasconduitconnectingexistingclientstoimproved

financialeducationandservices?• Howdoesorganizationworkcollaborativelywithpartnersandstakeholderorganizations?

C. SelectinganApproachAsdetailedinsectionIIIofthisguide,thereareavarietyofexistingeffortstoimprovethequalityandaffordabilityoffinancialservicesavailabletolow‐incomecommunities,andacoreofCDFIsalreadyactiveinandknowledgeableofthemarket,availabletechnology,andpromisingtrends.Giventhis,communitydevelopmentorganizationsarestronglyencouragedtoexplorepartnershipswithexistingCDFIswithintheirservicearea,and/ortotapintoregionalorbroadereffortstoservetheunbanked/underbankedmarket.Possibleapproachesareoutlinedbelow.Notethattheoptionspresentedfallalongacontinuumfromarelativelysimpleandlogicalextensionofservicesofferedtomoresignificantandchallenging.Organizationsmovingintotheareaoftargetingtheneedsoftheun‐andunderbankedareurgedtoconsiderpursuingaprogressivepaththroughtheseoptions.

1. Providefinancialeducationandlinklow‐incomeclientstoappropriate,non‐predatoryfinancialservices.

Engagewithexistingcommunity/regional“BankOn”orothercollaborativeefforttobanktheunbanked/underbankedbyprovidingeducationregardingfinancialchoices,andlinkagetoaffordableandviablefinancialservicesproducts.Ifonedoesnotexist,organizationsmayseekto


conveneorganizationswithsimilarinterestsinordertoinitiatesuchaneffort.Iftheorganizationhasnotpreviouslybeenengagedinassetbuildingservices,theireffortislikelytobeginwithfinancialeducationand/orfreetaxpreparationsites/EITCoutreachinordertoestablishabaselineconnectiontoclientsandtheirneeds.

2. Collaboratewithfinancialinstitutionpartnertotargetproducts/servicestolow‐incomeclient

community.

Utilizefinancialeducationasagatewaytomainstream/affordablefinancialservices;anduseaccesstofinancialservicesasanincentivetocompletefinancialeducation/counseling/coaching.Connectclientbasedirectlywithinnovative,affordablefinancialproductsofferedbyCDCUorbankpartner;possiblyworkwithfinancialinstitutionpartner(s)tooffernewproducts,services,orapproachtobetterservelow‐incomefamiliesintargetcommunity.Thisapproachwouldalsoincludeimprovingtheaccessibilityofaffordablefinancialservicesforthetargetneighborhoodorcommunity.Encouragingabankorcredituniontoestablishanewpresencewithinthecommunityandco‐marketingitslocationandproductsmightachievethis.Alternatively,CDOofficesorservicefacilitiesmightserveasafull‐orpart‐time‘micro‐branch’whereclientscanconductsomebasicbankingtransactions.3. Createahybridcheckcasher‐creditunionpartnership.ThemodelsprovidedbyBethexandOurMoneyCenterdemonstratethatusingexistingalternativefinancialserviceproviderinfrastructureandtechnologymayprovideaneffectivewaytodrawconsumerswhotypicallyutilizecheckcashingservicesintofinancialeducationandmoretraditionalbankingrelationshipsbymeetingthemwheretheyare.Here,anonprofitCDOmightserveasbrokertoidentifyappropriatefinancialinstitutionandprivatesectorcheckcashingpartners,establishthetermsofasharedfacilityandservicesagreement,andprovideconnectionstoappropriatefinancialeducationandproductsforcustomers.

4. Independentlyofferalternativefinancialservices.

Organizationsworkinginisolatedorveryunderservedareasmaychoosetoestablisharetailfinancialservicespresencesuchasanonprofitcheckcashingoutlet,basedonthelessonsandbestpracticesofexistingnetworkoforganizationsengaginginfinancialservicesinnovation.However,thestartupburdenforthisapproachisextremelyhigh,andagenciesshouldconsideritonlyifnootherfeasibleoptionsforpartnershiporleveragingotherresourcesexist.Moreover,inordertoprovideeffectiveassetbuildingopportunities,organizationswillstillneedtoestablishfinancialinstitutionpartnershipsinordertohavebothdepositandlonger‐termlendingoptionstowhichtoconnectclients.Alternatively,organizationsmayseektoacquireCDFIstatusthemselvesinordertoofferacomprehensivearrayofbankingproducts,butthisoptionisalsoextremelycumbersomeandrecommendedonlyasalastresort.


ResourcesCenterforFinancialServicesInnovation‐www.cfsinnovation.comProvidesresearch,bestpracticesonfullrangeofeffortstodrawlow‐incomeandunderbankedintothefinancialmainstreamandbuildassets.Servesasthemajornetwork/intermediaryforCDFIs(primarily)engagedinalternativefinancialservices.FDIC–www.fdic.govHasconductedthemostdetailedresearchandanalysisunbanked/underbankedconsumersnationwideandtheiruseofalternativefinancialservices,aswellasdocumentedbanks’effortstoserveunderbanked.BankOn–www.joinbankon.orgNationalnetworkoflocalandregionaleffortstoconnectlow‐incomecommunitiestofinancialmainstream;alsoofferssearchablecommunity‐leveldatabaseofFDICunbankedsurveydata.

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