Financial Product Innovations & Trends

Rural Family Economic Success InstituteNovember 2, 2009

Financial Product Innovations & Trends

Low-income people need financial services! They must be a good market, or the

predatory lenders wouldn’t serve them!

Some financial institutions are bringing better products on line to serve the low-income market.

A Sampling:Products to Consider and Promote

Pre-paid cards

Low cost check cashing

Credit builder products

Low cost payday lending

Free tax filing & other options to RALs

Pre-paid Cards

Consumers can load their money on the card at participating banks, check-cashing facilities or credit unions.

Pre-Paid cards can be used to pay bills, mortgages and purchase groceries, or to buy products on line.

No overdrafts are permitted.

Pre-paid cards allow consumers to securely carry on vital financial transactions without an active checking account or a without a credit check

You can monitor your card uses and balances on line.

Pre-paid Cards

Check local banks, credit unions or others to see if they offer them.

Online account provider: netSpend www.netspend.com

Local vendor that helps set up prepaid card services: Pemco www.pemcotech.com

Alternatives to Check Cashing

About 106 million Americans do not have bank accounts.

Many are on Chex Systems and cannot obtain an account. Chex Systems: a national reporting system

that rates people’s check-writing reliability like a credit report

Check cashing stores used to be their only option…

… but their fees are very high

Alternatives to Check Cashing

Some banks and credit unions are creating lower cost products and services to help these consumers conduct transactions.

Checkless checking accounts offer low-cost check cashing services for second chance customers. They charge lower fees per check, much less

than “traditional’ check-cashing stores.

Customers have the opportunity to open new accounts.

Alternatives to Check Cashing

Checkless Checking Example

Key Bank https://www.key.com/html/direct-deposit-checkless-account.html

Alternatives to Check Cashing Get Checking

A financial education course that “certifies” customers can operate a checking account

Used by Consumer Credit Counseling Services

Program is designed to help consumers on Chex Systems become eligible for 2nd chance accounts

Six hour seminar

Students must settle all existing debts and not have any fraudulent marks on their Chex Systems report before they get certified.

Alternatives to Check Cashing

Get Checking http://www.creditservicer.com/pages/chexsystems-help/get-checking.php

Credit Building Many unbanked and underbanked people have poor

credit or no credit at all.

Poor credit is “a gift that keeps on giving” Affects ability to get loans, buy homes, rent apartments, in

some cases get jobs

One answer is a credit builder CD No-risk loan (to the lender) that help customers rebuild

credit and build assets Customer takes out loan to buy a CD The CD is pledged as collateral to secure the loan Customer pays off the loan – Regular loan payments go on

their credit record When paid off customer has both savings (the CD) and a

better credit record.

Credit Building

Southern Good Faith Fund www.southergoodfaith.org

CitiBank https://www.citicards.com/cards/wv/cardDetail.do?screenID=940

Alternatives to Payday Lending

Payday lending is the practice of making revolving, short-term loans at a high cost -- targeting those who can least afford it.

As of 2005, there were: 23,000 payday loans outlets nationwide Over $40 billion in loan volume Over $6 billion in finance charges.

As of 2008, 717 locations in Washington State (see 2008 Payday Lending Report for more)

Alternatives to Payday Lending

Credit unions are leading the way in providing lower cost alternatives to payday loans.

Typically these programs: Offer credit union membership to borrowers Make loans without reviewing credit score or history Have a moderate maximum loan amount Short term installment loan; max term of 90 days No rollovers and additional loans are permitted May open savings account May offer financial education

Alternatives to Payday Lending

A Better ChoiceA Better ChoicePennsylvania Credit Union Association Pennsylvania Credit Union Association Harrisburg, PAHarrisburg, PAwww.PaCreditUnions.com

Common Cents InitiativeCommon Cents InitiativeMountain Association for Community Economic DevelopmentMountain Association for Community Economic DevelopmentBerea, KYBerea, KYwww.maced.orgwww.maced.org

Stretch LoanStretch LoanASI Federal Credit UnionASI Federal Credit UnionHarahan, LouisianaHarahan, Louisianahttp://www.asifcu.org/personal/loans.aspxhttp://www.asifcu.org/personal/loans.aspx

Options to Refund Anticipation Loans (RALs)

Millions of Americans look forward to tax season. They are due a refund and have ideas for how they will spend that refund.

Commercial tax preparers capitalize on the desire of customers to receive this money quickly by offering RALs.

These loans have high annual percentage rates (APR).

And if the actual refund is smaller than the anticipated amount, the borrower still must pay the loan in full.

Options to Refund Anticipation Loans

As discussed earlier, free tax preparation services can save a significant amount of money for patient filers.

Other options include: Low-APR RALs offered by some banks

and credit unions Electronic filing with direct deposit –

almost as fast as a RAL

Useful Resources

Center for Financial Services Innovation http://www.cfsinnovation.com/

Community Development Banking Listserv

E-mail communitydevelopmentbanking-l@cornell.edu with subscribe in the subject line