Banking on America
Authored by Nabeel Gillani
According to a recent story by the AP, nearly 10,000 new bank branches were opened throughout the U.S. in the past five years (1). However, only 1 out of every 10 of these branches was opened in an inner city neighborhood. Instead of focusing on low-income neighborhoods, most banks gravitate towards middle to high-income areas, undoubtedly because they assume the risk of banking to higher income individuals is significantly less. At the same time, when banks do offer their services to lower-income customers, they tend to charge them the most for overdraft and other fees. In fact, in 2008 banks made a record $38.5 billion from overdraft fees, however “the most cash-strapped customers are the hardest hit by such fees, with 90 per cent of overdraft revenues coming from 10 per cent of the 130m checking accounts in the US.” (2) Given a paradigm in which lower-income populations lack access to the benefits of the banking system—and even when they do gain that access, they face high fees—it isn’t surprising that these population mistrust the banking sector. The result is a system that effectively shuts out millions of Americans from accessing mainstream financial services—and inhibits many more from taking the steps they need to raise their standards of living.
Poverty Perpetuation
An absence of banks in America’s poorest neighborhoods often means turning elsewhere in order to access the services banks offer. As we discussed in last week’s blog (link to last week’s post), nearly 30 million people regularly turn to check-cashing businesses in order to cash their checks. The majority of these check-cashers are located in predominately minority, inner-city neighborhoods without a significant commercial banking presence. With only 15% as many check cashing agencies as commercial banks in the U.S., check cashers still handle approximately $80 billion annually, much of this the income of poor households. Moreover, check cashers charge a significant fee for something that is done for free at banks, further reducing the amount of money left in the pocket of the low-income individual without a financially sound alternative.
It’s probably no coincidence that the number of individuals estimated to be below the poverty line—38.8 million—and the number of individuals that regularly access check-cashing services, 30 million, are very similar. A recent Huffington Post article cited the addition of 1.5 million Americans to poverty in 2008 (3). This number, an increase of roughly 13% from previous years, stemmed in large part from economic turbulence and subsequent financial distress due to the recession. It is especially important in difficult economic times for struggling families to save money wherever possible. Without the banks to meet the basic financial needs of many low-income populations, it becomes that much more difficult to realize those essential savings as families turn to payday lenders, check chasers, loan sharks and other expensive fringe and predatory financial service providers.
CGF’s Approach
A major part of creating an inclusive economy is ensuring that it is accessible by all, particularly those who have traditionally been denied participation in it. This inclusion especially means an extension of basic services that meet the fundamental needs of low to moderate-income populations. One of these services is the administration of affordable capital—CGF’s primary goal. By offering small loans at an affordable price to individuals either lacking access to commercial banks or lacking the creditworthiness to receive a loan, CGF bridges the widening gap between a banking sector that is increasingly risk averse and a group of Americans who are increasingly in need of financial support. In addition, CGF’s technical services offered to members of low and moderate-income communities contribute to the growth of a knowledge economy. This prepares otherwise financially disenfranchised populations to not only utilize the services offered by banks, but to do so in a manner that optimizes the benefit to themselves and their families. Banking on America will require a new sector approach, using innovation to help Americans unleash their creative capacity on their way to a better quality of life. In addition, CGF is working to help struggling families save even more money by educating them about free and low-cost methods for lowering energy bills, and working with our business borrowers to incorporate environmentally-friendly products and services that help them attract more customers and revenue. Lastly, through CGF’s partnership with Washington Trust bank, we are able to provide free bank accounts to any borrower that is currently without an account, and we encourage those borrowers that do have accounts to make the most of the services offered to them.
(1) http://hosted.ap.org/dynamic/stories/U/US_BANK_BRANCH_EXPLOSION?SITE=MOSTP&SECTION=HOME&TEMPLATE=DEFAULT
(2) http://www.ft.com/cms/s/0/43d18c68-851d-11de-9a64-00144feabdc0.html
(3) http://www.huffingtonpost.com/2009/08/19/numbers-of-poor-could-inc_n_263443.html
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