JIM BLAKE
Developing new product

They’re low-income, but they’re working. They are more likely to reside in urban areas. Most of them are young, and many are immigrants – a group seen as key to Massachusetts’ future economic success. Many also fit another demographic: They have no relationship with a bank or credit union.

Anywhere from 10 percent to 25 percent of U.S. households are either “unbanked” or simply underserved by the vast array of mainstream financial institutions available to them, according to the Federal Reserve Bank of Boston. For members of such households, whose other options include buying money orders or using check-cashing services – which may charge fees of up to 10 percent of the face value of checks – the lack of a basic banking arrangement can be costly.

People who don’t use banks also often have trouble building a credit history, which hurts not only on loan decisions but when they apply for jobs or seek housing.

But bankers say their business is not unwelcome. Banks and credit unions benefit financially from new deposit accounts and fulfill the regulatory mandates of the Community Reinvestment Act when they meet the needs of lower-income customers.

Although experts say many low-income, minority and immigrant Americans would benefit from basic banking services and bankers are actively seeking their business, solution to the problem remain elusive. That’s something bankers, economic equality advocates and elected officials increasingly are working to change.

All have been taking steps to bring more people into the mainstream financial fold.

“We are diving headlong into this issue,” said Jim Blake, president and chief executive officer of HarborOne Credit Union in Brockton. The $1.3 billion-asset credit union is developing a program aimed at wooing customers who have never had a prior relationship with a financial institution.

HarborOne also has conducted financial literacy programs for Brockton’s Cape Verdean and Haitan communities, and its employees teach bilingual financial literacy classes at Brockton High School, where the credit union has a branch that uses student interpreters.

Meanwhile, Pedro Arce, a Lawrence native whose plan to open de novo Veritas Bank in his home community recently was approved by the state Division of Banks, says he intends to reach out to that city’s unbanked population through a Financial Literacy Institute and specialized products, such as a secure automated teller machine card that customers can send to relatives for use overseas.

Reaching out to people without basic banking services will be “part of [Veritas Bank’s] mission,” said Arce, who is raising capital for an anticipated Oct. 1 opening. “If things go well, we plan to go into another market.”

But, Arce said, while outreach will help, a small number of people may never take advantage of traditional bank products. Chief among those who may never want to open a bank account are illegal immigrants who don’t want to create a paper trail.

“There are underground economies everywhere – there always have been, and there always will be,” added David Floreen, senior vice president for government affairs at the Massachusetts Bankers Association. “They prefer to be paid in cash for a whole lot of reasons. But individuals that go outside the banking system usually end up paying quite a bit more money to do so.”

Second Chances
But for most of the unbanked population, experts say, the reasons they have no banking relationship are more likely to be cultural or educational.

Arce said first- and even some second-generation immigrants in Lawrence, which has a large Latino population, might not use banks because they never learned to work within a banking system and never taught their children how to do so.

“There are still adults that will go to a store and get a money order to pay off their bills,” he said.

Some are simply intimidated by the banking culture, said Arce, who emigrated from Ecuador with his parents as a child and is now a U.S. citizen.

“I think historically [immigrants] haven’t been treated very well,” he said, suggesting that many banks have done little to accommodate cultural differences and create a welcoming environment.

Arce has experience as a banker in Lawrence. From the mid-1990s to 2000, he worked there with a mortgage lending team from Bank of Boston. They oversaw a “huge increase” in both deposits and lending activity, he said, simply by “handholding a little” and introducing financial literacy events to the community.

Veritas Bank will be the only locally based bank in Lawrence when it opens, according to Arce’s business partner, Jeff Gibbons, who worked with him in the 1990s. Gibbons said being based in – and becoming part of – the community will be an important factor in gaining the trust of people who might not have ever used a bank before.

Enterprise Bank, a commercial bank based in Lowell, has taken that lesson to heart.

Lowell has large populations from the Dominican Republic, Puerto Rico, Brazil and the Azores, in addition to a growing Cambodian community, according to Chet Szablak, a senior vice president and chief sales officer in charge of Enterprise’s business banking outreach efforts.

Szablak said when the bank noted a growing number of Lowell business owners came from Southeast Asia, it began hiring well-educated, young people from that region of the world.

“They teach us about the community,” he said, and have helped Enterprise add new lending relationships.

Business customers aren’t necessarily unbanked and most already have a retail bank or credit union relationship before seeking a business loan, Szablak said, but the concept of reaching across cultural divides to create trust and establish a level of comfort in a banking relationship works in both business and retail banking.

Reaching out to the unbanked often requires banks not only to hire multilingual employees, but also to create products and services that compete with the speed and convenience of non-mainstream financial service providers while bettering the price.

The products often must be designed to offer second chances to those who have made financial mistakes in the past.

“I think the biggest [way to get more people to open accounts] is second-chance bank accounts,” said Milicent Johnson, a program coordinator and financial literacy trainer with the Boston-based Organization for a New Equality.

Invited by Boston City Councilor Michael Flaherty to address the city’s Ways and Means Committee May 11 on the topic of unbanked city residents, she said that people not educated about finances can easily make mistakes by spending too much on easy-to-obtain credit cards, overdrawing accounts or bouncing checks.

When a bank or credit union account holder does this, their name gets added to Chex Systems, E-Funds or a similar, national database of people who have made banking errors, Johnson said. The databases, which many institutions use when deciding whether to open new customer accounts, go back five years.

Many of the 1,400 people Johnson has trained in Boston, Worcester and Springfield are unable to open a bank account because of past problems, she said.

Blake said that at HarborOne, which uses E-Funds, bank employees will talk with a potential customer whose name comes up on the system, seeking to address any specific problems. If the applicant is able to resolve the issue, he said, HarborOne will open an account for them.

HarborOne is willing to work with anyone to open a new account, as long as the person wasn’t involved in fraudulent activity in the past, Blake said.

According to Floreen of the Massachusetts Bankers Association, some banks worry about inconsistent regulatory policies. Regulators encourage banks to establish relationships with residents outside the financial mainstream, but during exams may question compliance with the Patriot Act’s Section 326, which requires banks to verify that an account applicant does not appear on any list of known or suspected terrorist organizations.

“The banks – and rightfully so – are a little bit uneasy about reaching out to communities where legitimate identification may be a little problematic,” he said.

Cynthia Merkle, a senior vice president at Eastern Bank and chairman of the Massachusetts Community and Banking Council, which was formed in 1990 to encourage banks to invest in low- and moderate-income and minority neighborhoods, said more banks and credit unions across the state are offering proven products and services that allow them to compete with less-mainstream providers. These include participation in the MCBC-sponsored Basic Banking for Massachusetts programs, which is offered in cooperation with the state Division of Banks and the Massachusetts Bankers Association.

“The products are out there,” Merkle said, “but financial literacy is the key.”