While private databases like ChexSystems and Early Warning might be in the news now for having shut out low-income consumers, many community banks and credit unions have quietly gone about their own efforts to educate and work with potential customers who might otherwise be denied bank accounts.
A recent New York Times story shone a spotlight on a tool that banks have used for years when opening accounts for new customers. When Joe Average walks into his local bank to open an account, his name is first run through a private database like ChexSystems or Early Warning, which tells the bank whether he’s bounced checks or overdrafted previous accounts. Subscribers to ChexSystems, the largest such database, report those transgressions to be held on file for future reference by other banks.
Consumer advocates charge that this practice, originally intended to avoid signing up fraudsters, keeps millions of low-income people out of the mainstream financial system for minor past transgressions and further, that banks just don’t care because those customers aren’t profitable anyway.
But bankers contend the use of these types of tools is a matter of responsible business practice.
“As a regulated business, we have to be prudent in the way we manage deposits and accounts,” said Leo MacNeil, senior vice president of community development at HarborOne Bank. Like many community banks, HarborOne can exercise a little discretion and look at each would-be customer individually, rather than issuing an outright denial based on a single, four year-old overdraft.
A Scarlet Letter
“There’s a question of ‘want to’ that really comes into play,” said Justin King, federal policy director of the Asset Building Program at the New America Foundation. “The number of folks who are actually fraudsters is infinitesimal. The vast majority are just folks who made a mistake and now carry this scarlet letter around with them.”
Many banks, he said, take a short-term view of the relationship with a potential customer whose name sends up a red flag or two when run through ChexSystems.
But far from demonizing the banking industry as a whole, King also added, “You see a lot of credit unions and community-based financial institutions doing a good job here because they’re thinking about the customer in the long term.”
More generally, King and other consumer advocates would like to see all consumers at least have access to safe, low-cost, transactional accounts, whether or not they choose to use them.
Underserved demographics do have money, after all. Alternative financial services – an umbrella term that covers everything from storefront check cashers to rent-to-own businesses to Internet-based payday lenders – comprise a multi-billion dollar industry.
“Folks can and do run up extraordinary amounts of fees performing basic financial transactions that would be free to them at a bank,” King adds. “So for fear of having an overdraft fee, people are paying fees to cash a check, to take money out, to get a question answered or get a balance statement … What’s really troubling is when somebody moves out of using a standard checking and savings account that can be wealth building and starts to use products that are wealth stripping.”
Educating Customers
Of course, it’s not for lack of trying on the part of banks and credit unions.
For example, when a potential customer’s name turns up a past replete with bad financial habits, MacNeil said, HarborOne will offer that customer its free personal finance course. The bank offers that six-week program, which is based on the FDIC’s Money Smart curriculum, free of charge in a variety of venues, including its Multi-Cultural Banking Center in downtown Brockton.
Graduates of the program are offered a HarborOne checking account and a $500 line of credit upon completion, and if they manage those responsibly over the next year, they can have that line of credit bumped up to $1,000, MacNeil said.
King also points to the nationwide “Bank On” program, which has yet to catch hold in Massachusetts. That program, which was launched in San Francisco in 2006, partners municipalities with local nonprofits and community financial institutions to raise awareness, reach out to unbanked populations and increase financial literacy.
The FDIC has also modeled a “Safe Accounts” pilot in an effort to encourage more banks to offer low-cost transactional accounts that meet the needs of underserved populations. The results of that experiment were encouraging: banks that participated reported that the “Safe Accounts” were not more costly and generally performed on par with, and sometimes better than, other transactional accounts the banks offered.
While HarborOne and other community banks and credit unions are more than willing to meet those underserved customers halfway, that message has yet to trickle up to some of the bigger banks.
“There’s an untapped opportunity here,” King remarked. “Some of these folks five or ten years from now are probably going to have very different financial lives. If you’re turning them away because they don’t have a lot of money right now, you really don’t know what you’re costing yourself in the future.”
Email: lalix@thewarrengroup.com
