This article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation.
Many of us remember the day we opened that first bank account. It was a basic step toward economic self-sufficiency – hopefully opening access to the reasonably priced financial services we eventually would need to pay for education, buy cars and homes, and face family emergencies.
But more than 360,000 Minnesota households lack that basic access because they are“unbanked” or “underbanked,” according to a 2011 survey by the Federal Deposit Insurance Corporation -- an increase of 70,000 from the FDIC’s 2009 survey. In other words, nearly 17 percent of Minnesota households lacked adequate banking connections in 2011.
Connecting those families with safe, affordable and accessible financial services has become an urgent priority for several community support organizations across Minnesota.
Largely poor and members of minority groups, these families rely on often-times costly alternative financial services, paying hefty fees for simply cashing paychecks or sending money to pay bills or to help far-away relatives. They have little choice when a car breaks down or a child falls ill but to turn to high interest loans offered by payday lenders and pawn shops.
These fees and other charges add up, draining money from folks who can ill-afford it. Many of them fall into cycles of debt that become increasingly hard to break.
“These predatory products end up costing individuals and their families significantly, in terms of their whole financial picture,” said Eva Song Margolis, director of the Eastside Financial Center, a division of Lutheran Social Services. Too often, such high-cost products wind up “stripping away the income and savings that people do have,” she said.
Courtesy of Eva Song MargolisEva Song Margolis
Exiting a Payday America in Roseville, Sammy Armon expressed his frustration with the debt cycle he is stuck in. Armon uses payday loans to cover other debts.
"You take one to pay somebody else.... You take from Peter to give to Paul," Armon said.
In response to the growing numbers of unbanked Minnesotans, some non-profits are working to break such cycles through financial counseling and also by offering innovative financial products.
Some are testing products and programs designed to meet the needs of certain racial, ethnic, or cultural groups. Though open to any who walk through their doors, no matter the demographic, such organizations are ideally positioned to address culturally specific barriers to banking.
Building credit with Lending Circles
Immigrant Hispanics and Latinos rely heavily on non-bank check cashing and money transfer services. The pitch to them is easy to see in the signs advertising in both English and Spanish in the Ace Cash Express on Lake Street and the Payday America in Roseville, both in areas with significant Hispanic populations.
Twenty percent of Hispanics nationwide are completely unbanked, according to the FDIC survey.
Many Hispanic immigrants are afraid to open bank accounts, said David Soto, a financial coach at Comunidades Latinas Unidas En Servicio (CLUES), a non-profit organization that provides services to Latinos in the Twin Cities. Some fear unexpected fees, while others fear legal consequences. Some non-citizens do not realize that they could open accounts using their Individual Taxpayer Identification Number rather than a Social Security number, Soto said.
Poor credit scores prevent many from accessing reasonably priced loans -- big and small. Credit scores are the biggest determinant in what interest rate a homebuyer qualifies for, according to Tess Rice, general counsel for the Minnesota Bankers Association.
Even worse than poor credit though is no credit, Soto said. Immigrants who conduct financial transactions solely through alternative financial services have no credit score, and thus little chance of qualifying for a housing or car loan.
CLUES, in conjunction with San Francisco-based Mission Asset Fund, is testing a social lending program designed to improve participants’ credit scores.
The Lending Circles program is an organized version of a traditional lending model known in Spanish as a tanda. As such, the format is already familiar to most participants, Soto said.
Here’s how it works: Participants contribute monthly to a “pot” which is then awarded to each participant in turn. For the first person who receives the “pot,” it serves as the equivalent of an interest-free loan; for the last person, it is like money in a savings account that is available for withdrawal.
What sets Lending Circles apart from the traditional tanda is that, each month, the Mission Asset Fund notifies credit agencies of the payments made as part of the program, thus boosting participants’ credit scores.
“A big, big, big benefit that our Lending Circle offers, is the opportunity for people to repair credit, to slowly fix credit, or to establish credit if they don’t have any,” Soto said.
CLUES currently facilitates six circles, each with four to 12 participants. Several other circles have successfully run their course.
Culturally responsive loans
Among Minnesota’s African immigrants, distrust of mainstream banking runs especially high. Often it is based on immigrants’ experiences with corrupt or dysfunctional financial systems in their former homelands.
“The way we use banking in Minnesota is a new concept to them,” said Hussein Samatar, director of the African Development Center (ADC). “Especially if they are from war torn countries, they may not even see for a lifetime a functioning financial institution such as the banking system.”
Federal Deposit Insurance Corporation
Located in Minneapolis’ Cedar-Riverside neighborhood, home to much of Minnesota’s largely Muslim Somali community, the ADC promotes financial well-being through education and counseling. In addition, it has developed a micro-lending system that does not violate the Islamic prohibition on charging interest.
These micro-loans, offered as part of the ADC’s business development program, are structured to technically avoid charging interest. Instead of providing an individual with a monetary loan, the ADC purchases whatever the client needs -- high-tech kitchen equipment for a restaurant, for example -- and then raises the price marginally and sells the purchased item to the client over an agreed upon period.
This strategy allows many in Minnesota’s growing Muslim community to obtain the capital they need to finance small-business ventures without compromising religious values.
The micro-lending program has been thriving, Samatar said. He characterized the program as “the alternative for people who do not want to or cannot go to the bank.”
The ADC also provides regular loans with interest.
Remote: unbanked on a reservation
Of the American Indians employed by the Leech Lake Band of Ojibwe, about 5 percent receive paychecks by direct deposit, said Robert Aitken, who directs financial services. While that does not mean that all other tribal employees necessarily lack bank accounts, it does suggest a lack of banking connections.
Approximately 15 percent of American Indians are unbanked nationally, according to the FDIC survey. That makes American Indians about three-and-a-half times more likely to be unbanked than whites.
The primary reasons for this disparity are geographical and cultural, said Shawn Spruce, programs consultant at the First Nations Development Institute, a national advocacy organization.
Some reservations are remotely located, with no banks or credit unions nearby. In addition, many Native people, especially elders, are uncomfortable with the formalized setting and procedures of banks, Spruce said. Pawn shops, on the other hand, are more familiar.
Unbanked: No checking or savings account.
Underbanked: Has an account, but continues to rely on alternative financial services, like check-cashing services, payday loans, rent-to-own agreements or pawn shops.
Source: Bank On
“That goes back to years and years ago when Native American families would come to border towns and they would barter for goods and services,” Spruce said. “People just got into the habit of using pawn shops to get loans and credit…and what we’ve found is that that’s just continued into the 20th and 21st centuries.”
Don Josefson owns Better Days Pawn in Bemidji. Positioned near three large reservations -- Leech Lake, Red Lake and White Earth -- Josefson’s estimates his customer base as about 70 percent Native American.
Like other pawn shops, Josefson’s rates are steep -- usually around 25 percent -- but he said that he is not getting rich.
“In one sense I feel I run the most honest banking business in America,” he said. “You come in, you’ve got a TV set, we decide it’s worth 150 bucks, I give you 80 bucks…. I’m giving you what I can honestly give you, and [still] try to make a dollar selling your item if you don’t come back.”
Aitken, at Leech Lake, doesn’t consider pawn shops a problem for band members. He worries more that the lack of bank accounts makes it difficult or impossible for tribal members to buy homes -- a key step in asset-building -- and to obtain decent loans for business enterprises.
Aitken is working to change that last bit. The Leech Lake Band has received a federal grant to start a Community Development Financial Institution, a program designed to provide financial services in low-income communities. Aitken hopes to see that program up and running later this year.
Bank On Twin Cities?
While many organizations try to assist specific groups, others are taking a broad approach. One is Bank On, which works with mainstream financial institutions, city governments and local community organizations to remove barriers to banking.
The first Bank On was launched in San Francisco in 2006. A year later, the organization had achieved its initial goal of connecting more than 10,000 residents to participating banks and credit unions. That success quickly led other cities nationwide to follow suit.
Courtesy of Cassaundra AdlerCassaundra Adler
Minneapolis-based financial consultant Cassaundra Adler is working to start a Bank On Twin Cities or a similar organization. A former public policy fellow at the University of Minnesota’s Humphrey Institute, Adler has been a passionate advocate for underserved populations for years.
Growing up in a poor neighborhood in Chicago’s west end, Adler learned what it is like to lack financial security. It was normal for women to keep money in their bras rather than in a bank, she said.
Security is one of many reasons people need banks. The unbanked are more likely to be crime victims because they often carry cash or keep money hidden at home. They also are more likely to lose money during a disaster.
Adler came away from her upbringing with a desire to understand money. And now she does. But she also remembers that rules and fees associated with bank accounts can be confusing.
“There’s all sorts of little disclosures and things that people get caught up on, that they don’t know about, so it’s easier for them to live on a cash basis,” Adler said. “When you walk into a check cashing place it’s very clear…or they go to Walmart, and it’s four dollars to cash a check, no matter how much it is. And it’s like, it’s so simple. And that appeals to people.”
Indeed, it appealed to Shannon Phillips, 31, North St. Paul, who formerly cashed checks at The Unbank just down the street from her home.
“It was convenient…. I could just walk right over there and cash my check,” Phillips said.
The many reasons people are “unbanked”
Some people believe they don’t have enough money to deal with a bank, and they fear hidden fees such as monthly service charges.
Banks often aren’t conveniently located in low-income neighborhoods.
Deposited checks can take several days to clear, so the money isn’t immediately available,
Some people simply lack knowledge of the often complicated mainstream financial system.
People without U.S.-issued driver’s licenses believe they lack needed identification.
Some are barred from opening accounts because they have bounced too many checks or made other banking mistakes in the past.
Some low-income people simply don’t trust banks. Or they hold culturally-instilled beliefs that banks are not for them.
Source: Bank On
But now, Phillips has an account at a Wells Fargo bank, and she is relieved to be saving the check-cashing fees. That’s money she could use to realize her dream of opening a hair salon.
“I’m not exactly where I need to be financially yet, but I’m getting there,” Phillips said.
If Adler has her way, more people will save such fees, and others will come to understand the scope of the problems created when so many Twin Cities residents lack adequate banking connections.
Her crusade is gathering public and private support in Minnesota. Among other collaborators, the Northwest Area Foundation conducted a preliminary review to assess the interest in a program serving the Twin Cities.
It found “widespread interests in many sectors to address issues of ensuring better access to financial products and services that meet the needs of low-income people,” Gary Cunningham, NWAF’s vice president of Programs-Chief Program Officer, said in an email response to MinnPost’s query.
(While MinnPost’s Lending Trap series is supported by a grant from the NWAF, the foundation played no role in the conception or execution of this report other than to respond to a reporter’s questions; its connection with this issue came up during routine and independent reporting.)
The NWAF review also revealed interest in moving beyond Bank On’s traditional starter bank accounts toward a more comprehensive system “to ensure access and financial capability for low-income working people,” Cunningham said. Call it “Bank On 3.0.”
Now, Adler is part of the leadership group that is considering the most effective approach. Cunningham said that bankers, state and local officials, and community advocates have expressed interest in “working together to create a better system so that low income people can fully participate in our financial systems.”
During the recent housing crisis, much attention was focused on struggling homeowners -- and understandably so. Not as much attention was paid to those without homes, struggling just to get by. Now, though, the housing “triage” has ended, Adler said, and she sees an opportunity to address the needs of the unbanked.
“It seems like the time is now. People are focusing on this now, people are having an understanding of the predatory stuff now -- now that the housing market isn’t eclipsing everything,” Adler said.
Adler isn’t seeking to supplant the work that organizations like Eastside are doing. Just the opposite. She wants to build on the strong community connections they already have.
“That’s exactly what I want to tap into,” she said. “Let’s take all of this expertise and pool it together.… Together we are much more powerful.”
Samantha LaBrasca contributed to this article.