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| 2Q '09 | 1Q '09 | |
| # of CUs | 7,982 | 7,998 |
| Members (millions) | 91.9 | 91.7 |
| Total Assets ($ billions) | 871.8 | 867.4 |
| Total Savings ($ billions) | 741.8 | 737.2 |
| Net Cap. /Assets | 9.6% | 9.6% |
| Loans to Savings | 78.5% | 78.8% |
| Loan Delinq. | 1.60% | 1.54% |
CUs and Banks Reaching Out to LMI Markets
Difficulties persist, but potential customers—and modest profits—beckon in new markets
While credit unions pride themselves on their historical outreach to low- and moderate-income (LMI) markets, bankers also are taking a fresh look at these segments.
Banks looking for new customers and more deposits might be able to find them in low-income neighborhoods mostly served by check cashers, payday lenders, and other fringe financial institutions, says a recent article in American Banker.
The article references a study by the Chicago-based National Community Investment Fund (NCIF), which presents case studies on how banks and credit unions recruited LMI consumers as customers or members.
Lisa Richter, NCIF fund adviser, said the study shows there is potential in markets besides the upper-income neighborhoods that most banks prefer for branch openings. "What I seem to hear is a lot of people feel serving somewhat more affluent customers is a saturated market," Richter said. "There's a lot of room to develop long-term relationships with customers" in low-income areas.
Some bankers are reported to be skeptical about courting LMI customers. Many of them have had accounts closed in the past for bouncing checks and thus are not good depositors, and they tend to have too little income to be worth the credit risk, these bankers say.
The banks and credit unions cited in the NCIF study concede that these customers are not profitable when they first open accounts. But with a little extra attention, LMI consumers move up the financial ladder and have the potential to make progressively larger deposits and take out larger loans.
Legacy Bancorp Inc. of Milwaukee has tried to develop long-term relationships with unbanked customers since it opened in 1999. It has taught financial management classes and been flexible about opening accounts with low minimum balances and for people who have a history of bouncing checks. A spokesperson for the $113 million-asset bank said, "There's nothing new about what we're doing here at Legacy--this is just good, old-fashioned community banking."
In 2002, Legacy received a grant of over $300,000 from the U.S. Treasury Department to launch a program that targets the unbanked. It has opened 1,800 accounts through the program, and through the third quarter of 2005, more than 1,000 were still open. The accounts have an average balance of more than $300, and about 60 of these customers have $5,000 or more in a savings account or certificate of deposit.
The $49 million-asset Alternatives Federal Credit Union of Ithaca, N.Y., has also been able to turn underserved individuals into borrowers by giving them added attention. It provides free tax preparation services for low-income people in its market and offers to open accounts when it fills out returns, so filers' tax refunds can be deposited directly into their accounts.
Amy Audetat, the coordinator of the credit union's Volunteer Income Tax Assistance program, said that in 2004, when the credit union followed up on members it gained during the 2002 and 2003 tax seasons, it found that it had 225 new members. It also had made $122,000 of loans, including one mortgage, five car loans, and various personal loans.
Tax sites are a good way for banks and credit unions to pick up new depositors at a time when they have some extra money to open an account and think about savings, said Audetat.
Despite these successes, helping low-income people is not always easy. The $9.1 million-asset North Side Community Federal Credit Union of Chicago started making short-term consumer loans in 2002 as an alternative to high-interest payday loans. Though it has gotten about 1,100 new members through the program, CEO Ed Jacob said it is difficult to change borrowers' financial behavior.
"They're holding accounts, but they're not growing balances," Jacob said. "They aren't thinking long-term--two or three years out."
He said he thinks the problem may be that by the time people come to the credit union for a short-term loan, their income goes to covering existing debt and expenses. "I'm really worried about the negative-net-worth position of not just low-income people but moderate-income people."
Even moderate-income people, he said, have trouble because they do things like borrow against their home equity as soon as they build it, and this means they're not building any assets, he said.
Christopher Tan, a senior analyst with the Center for Financial Services Innovation, a division of the $1.8 billion-asset ShoreBank Corp. of Chicago, and one of the NCIF study's authors, said of low-income customers that "one of the remaining challenges for us is, you have got them into the bank, now what do you do with them. Once you get them in, how do you move them to other products and get them to keep using them?"
| Results of NCIF Initiative Available
The Retail Financial Services Initiative (RFSI) is a three-year project organized by NCIF that seeks to increase the quantity and quality of financial services for unbanked and LMI consumers. Starting in 2003, a group of banks and credit unions developed, tested, and implemented sustainable strategies for bringing these consumers into the financial mainstream and helping them get on an asset-building track. The lessons learned by these banks and credit unions are documented in From the Margins to the Mainstream: A Guide to Building Products and Strategies for Underbanked Markets, available from NCIF. Topics covered in the guide include:
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