According to a study from the FDIC, 24.8 million households in the U.S. (20.0%) were underbanked. Additionally, another 9.6 million households (7.7%) were considered unbanked. Global accounting firm KPMG says these 88 million consumers represent nearly $1.3 trillion in wages. This constitutes a significant segment of the market, but is it economically viable? Many credit unions think serving un- and underbanked consumers is more than just financially sustainable, they believe it’s core to their mission as not-for-profit, member-owned financial cooperatives serving local communities.
One such credit union dedicated serving the underserved is Comunidad Latina Federal Credit Union in Santa Ana, California. Even though the credit union only has around $20 million in assets, it is one of the fastest growing in California.
Erick Orellana, the President and CEO of the Comunidad Latina FCU, says his credit union has opened its doors to immigrants who have been issued an Individual Tax Identification Number (ITIN) by the IRS. An ITIN enables immigrants without green cards and Social Security numbers to pay taxes, and is generally accepted by banks and credit unions if an individual wants to open a checking or savings account.
Low-Interest Alternatives to Payday Loans
Orellana says that most institutions aren’t likely to accept ITINs for loans or credit cards. As some CFOs might argue, the financial risk increases if the borrower’s immigration status is uncertain.
Comunidad Latina FCU is different, however. Orellana says his credit union does indeed accept ITIN documentation from its members for securing loans, which accounts for the majority of both its personal and auto lending activity. The largest percentage of Comunidad Latina FCU’s lending portfolio is for auto loans, which he said are based on the borrower’s FICO score. Rates are competitive with other credit unions.
“We treat members the same as any other credit union regardless of their status,” said Orellana. He’s proud to point out that the losses of his loan portfolio are 0.19% — considerably lower than comparably sized financial institutions which averaged a rate of 0.43% in March 2015.
Because Comunidad Latina FCU serves what Orellana describes as the “poorest of the poor,” with 40% of average annual household incomes below $25,000, his credit union also makes what he terms “micro loans” of $300 to $400, commonly for things like school supplies, clothes and other personal items that their paychecks simply cannot cover.
Frequently used by lower income workers as a sort of “bridge loan,” a regular payday loan can have an effectual APR topping 300%. These loans are often made to someone who may need immediate cash for rent or even food and promises to repay the loan with his or her next pay check, hence “payday loan.” But Orellana’s Comunidad Latina FCU has launched a new loan product that is similar to these so-called “payday loans,” however they tout a lower interest rate that caps out at 18%.
According to Orellana, Comunidad Latina FCU’s new loan product emulates the ease and simplicity of a payday loan without the exorbitant interest and the possibility of even greater financial burden if the loan is not repaid on time.
“We know our members and we feel confident that they will honor their repayment obligation,” said Orellana. “My members greatly appreciate the services that we provide and are vigilant about making their loan payments and staying on top of their accounts.”
People Helping People: Part of Credit Unions’ DNA
In Bend, Oregon, Mid Oregon Credit Union has implemented several programs to reach out to its underserved populations. These include providing ATM service on the nearby Warm Springs Indian Reservation, where Kyle Frick, VP/Marketing at Mid Oregon, says access to financial services are scarce.
“Helping people access financial services has been part of our DNA since Mid Oregon CU was founded in 1957 by eight educators to better serve the needs of school district employees,” said Frick, those credit union now has 24,524 members.
Realizing the difficulties faced by the Warm Springs Tribe population in accessing financial services, in 2010 Mid Oregon CU placed a CO-OP ATM in the tribal office on the reservation. Now local residents no longer need to drive 30 miles just to deposit a check.
Another move that Mid Oregon CU has made to reach potential new un- and underbanked members is to open a full-service branch in La Pine, a small, rustic town of about 1,700 residents 30 miles south of Bend. Frick says that until Mid Oregon CU opened its satellite branch in La Pine in 2013, the community had limited access to financial services. The new, full-service branch will open by summer 2016.
“Our first office gave local residents access to many forms of consumer lending that were not available to them before we opened the satellite,” said Frick. “Establishing a presence in La Pine furthers our mission to reach out to potential news members who we believe will value our financial services.”
Mid Oregon also believes that providing member education can help the credit union maintain a solid financial footing. They offer a series of workshops designed to improve understanding about personal finances and also cover such helpful topics as guarding against computer attacks and identity theft. Senior citizen members can learn how to maximize their Social Security benefits and the ABCs of Medicare.
Mid Oregon CU sees opportunity for growth by connecting with young people through financial education at local schools with the goal of providing tools that can help them successfully launch financially independent lives.
Serving the Underserved Secures CDFI Grant
Peninsula Credit Union recently announced that it had been awarded a $2 million Community Development Financial Institutions (CDFI) grant to help underbanked and distressed communities in its field of membership. The CDFI was established by the U.S. Department of the Treasury specifically to promote economic revitalization in low-income communities.
Peninsula, which serves 17,500 members on the western side of Puget Sound across from Seattle, is the only financial institution in Washington, Oregon and Idaho to receive a CDFI grant in 2015, and one of only 31 credit unions nationwide to receive the award.
“The grant comes at a critical time due to continued high unemployment, plant closures and a growing sense of financial insecurity in our area,” said Jim Morrell, President and CEO of Peninsula. About 12.6% of the regional population lives in poverty, according to the U.S. Census Bureau, and the FDIC reports that in 2013 about 50,000 households were considered unbanked.
“The grant will enable us to provide more affordable loans to lower income families,” said Morrell. “In the next five years, we plan to provide an additional $42 million in loans to people who today may not be able to borrow even at reasonable interest rates, if at all. By helping to bring affordable loans to families in need, we hope to help revitalize the local economy at the same time.”
Peninsula has previously introduced innovative programs to serve the region’s lower income and underbanked/unbanked populations. The programs include such products as “Borrow & Save,” which can help members extricate themselves from the sky high interest of payday check cashing; and “Save to Win,” a prize-linked program to promote the value of savings.
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Community Tellers Improve Access
Across the Puget Sound in Seattle, Express Credit Union also recognizes the need for programs to reach out to the underbanked segments which, according to Chief Financial Officer Paul Baudin, account for up to 30% of the city’s population.
Express CU conducts a Community Tellers program that works with local non-profits throughout King County to offer improved access to financial services. Via the credit union’s mobile service, traveling tellers assist visitors to the non-profits with opening accounts, depositing checks, applying for loans and discussing financial matters. The representatives also provide basic financial education and referrals to financial programs offered through the non-profit organizations.
Cash transactions, however, are not supported at these non-profit locations. The solution is Express CU’s partnership with CO-OP Financial Services. Express CU participates in the CO-OP ATM and CO-OP Shared Branch networks, ensuring that all members have convenient, fee-free access to their accounts. CO-OP ATM has 30,000 ATMs nationwide, including more than 1,200 in Washington State; and CO-OP Shared Branch offers 5,200 branch locations across the country, including more than 200 in the state. With shared branching, multiple credit unions collaborate, allowing members to complete financial transactions as if they were in their own dedicated branch.
Baudin could speak for all four credit unions — and hundreds more across the country — when he says, “Our mission is to pave pathways in the community for financial progress with a special outreach initiative designed to keep residents out of what we term the cycle of poverty.”