Banking On the American Dream

Banking on the American Dream

The Problem:

“Pulling oneself up by the bootstraps” is a fundamental value of American culture. However, an examination of statistics on income and wealth would show that tens of millions of Americans are failing at this task. The economic realities are that just over 12% of the nation lives below the official poverty and another 30 to 40% of American families live above the poverty line but do not earn enough to be economically self-sufficient (California Budget Project, 2005; Lopez & Moller, 2000; Pearce & Cassidy, 2003). Together, these numbers indicate that close to half of American families are not succeeding at “pulling themselves up by their bootstraps.” The data on these families are clear. The failure to “pull oneself up” is not for lack of trying it is lack of bootstraps. You can’t pull yourself up by your bootstraps if you don’t have any bootstraps.

If we examine poverty beyond the view provided by the official poverty line, it becomes clear that it is more pervasive than is generally known. Data show that, while a relatively small percentage of the population lives below the poverty line at any one point in time, poverty is experienced by large numbers of people. We know that:

· Over 45% of people living in the United states will experience poverty within a ten year period (Buck, 2003)
· 60% of European Americans and 90% of African Americans will experience poverty sometime in their life between the ages of 19 and 65 (Rank and Hirschl, 2001).
· 37% of all people living in the United states are classified as living in poverty at least two months out of the year (U.S. Census Bureau, 2004)
· One third of the children born in the United States will spend a significant portion of their lives in poverty (Children’s Defense Fund, 2004)

We also know that poverty is highly dynamic. If one were to make a list of everyone living below the official poverty line today and compare it with a list of everyone living in poverty a month earlier, we would see that over two-thirds of the names on the list had changed as the vast majority people move in and out of poverty on a regular basis. Further, we know that over half of the people who lift themselves above the official poverty line will drop below that line again within a five-year period (Rank, Yoon, & Hirschl, 2003). Less than two percent of U.S. population lives below the poverty line for more than five years at a time (Buck, 2003).

There are two important elements that dictate one’s financial situation, i.e., income and assets. While income or lack thereof is generally the cause for people living in poverty at any one point in time, it is the lack of assets that traps them there. Assets play an important role in a family’s life as they provide protection against the ups and downs of the economy. Statistics show that while the 20% wealthiest families could survive on their assets alone for 113 years without drawing an income while the bottom 40% could survive on their assets for less than three months. In fact, the poorest 20% of families in the United States have zero or negative assets.

The conclusion to be drawn from these numbers is that the ability to develop assets is the “bootstraps” people need to “pull themselves up” and the first step in creating this ability is having access to mainstream banking. Data on such access is rather bleak as estimates of the number of “unbanked” ranges upwards to 22 million, including 45% of all African Americans and a third or all Latinos [1](Hogarth & Angelov, 2003; Sharpiro, Wolff, & Edward, 2001; Stuhldreher, 2005).


Creating “Bootstraps”

In creating the pathway to economic stability, it is important to understand why so many people are not connected to the banking system. All too often the assumption is made that the 22 million unbanked remain so out of ignorance. However, research on this population tells a different story. A survey of over 1,500 low and moderate income families in Chicago, Los Angeles, and Washington, D.C. conducted by Harvard’s Joint Center on Housing (Berry, 2004) concluded, “The picture that emerges here is not one of uninformed consumers being exploited by predatory fringe financial institutions, although that does occur. . . Rather, unbanked consumers are generally well informed about the relative costs of CCOs and banks. . .” The results of their survey showed:

Half of the unbanked respondents are actually formerly banked having previously held bank accounts
That almost 62% of the unbanked did not have checking accounts because of the cost of banking (47%) or because of “hard” barriers[2] (15%)
That 82% of the unbanked did not have savings accounts because of the cost (72%) or because of “hard barriers (10%)
That 9% did not have a checking account and 5% did not have savings accounts because of “soft” barriers[3]
Only 12% did not having a checking account and 1% did not have a savings account because of an inability to manage an account, not knowing how to open an account or that the fee structure was too confusing

Other critical findings from the survey showed that:

· Reliance on CCOs is not limited to the unbanked as a substantial number of households with checking accounts use other financial institutions for check cashing and the purchase of money orders. Of respondents with bank accounts 48%used non-bank institutions. Purchase of money orders is the most prevalent use as many people dealing with low-income households do not accept checks as a form of payment.[4]

· There is an inverse relationship between household income and the cost of banking. Examining the cost of financial transactions over a twelve month period showed that the cost of using non-bank institutions was less costly for those at the lowest levels of income and that the cost of banking relative to income dropped as one’s income rose.

· Low-income households create a patchwork of financial services to meet their needs. Only 40% of the respondents without accounts used CCOs to cash their checks. The remaining 60% use supermarkets, liquor stores, banks, etc.

The results of this survey reveal that, while lack of financial literacy may be a barrier for some people, this number is relatively small (12% of those surveyed). Financial education is necessary but not sufficient for bringing the unbanked into mainstream banking. The real key to engaging people in mainstream banking is creating and marketing products that meet the needs of low-income households.

What is proposed here is the development of a three-tiered set of products that move people into mainstream banking and create a pathway for increased access to financial services. The table below lays out the three levels of account and the financial education that would accompany each level.

Three Tiers to Mainstream Banking
Account
Account Parameters
Education
Essential Direct Deposit
· Direct deposit
· $0 to open $0 to keep open
· Low or no monthly fee
· 3 low cost-no cost money orders per month
· ATM card only – no checks

Basic education on how an account works; holds on checks; how to avoid overdraft and NSF funds; how ATM cards works; risks benefits of ATM & Debit cards, how to keep track of balance
Starter Account
· Direct deposit
· $0 to open $0 to keep open
· Low or no cost monthly fee
· Access to checks
· Debit card
· Linked savings account (with the option of opening a “restricted” account)

Review basic education; how checks are processed; how to balance your account; different types of savings accounts; how interest rates work
Full Service Account
· Direct deposit
· $0 to open $0 to keep open
· Low or no cost monthly fee
· Access to checks
· Debit card
· Linked savings account (with the option of opening a “restricted” account)
Short term consumer loan product at reasonable interest rate (18-22%)
Review past education; costs of borrowing money; different ways of borrowing money (good and bad); how credit history is scored and how it is used in setting interest rates in borrowing and in other areas (access to insurance, impact on job applications, etc.); savings and investment strategies for building assets; etc.
Vehicle

The proposal presented here calls for the development of the Banking on the American Dream Consortium consisting of banks, nonprofit agencies engaged in Voluntary Income Tax Assistance (VITA), financial education, and grassroots organizations and coalitions. As a consortium it would work in a coordinated fashion to increase the number of individuals with basic banking services. The goals of this consortium would be to:

1. Work with banks to develop the set of tiered products identified above

2. Provide a range of financial education that starts with basic training on how such products work and what their benefits are to the account holder and increases in sophistication as the account holder moves up through each of the tiers

3. Develop and implement a coordinated strategy for marketing these accounts and recruiting account holders

The Consortium (see diagram on last page), convened and coordinated by the City-County Reinvestment Task Force (CCRTF), would coordinate recruitment and training efforts as well as monitor the accounts that exist in order to evaluate their effectiveness. Banks would provide technical assistance as well as financial and material support to the Consortium.

Projected Outcomes:

While there are several efforts to assist low-income families by recruiting them for the existing accounts, doing income tax assistance to facilitate receipt of the Earned Income Tax Credit, and providing financial education, these efforts are largely uncoordinated and have little direct connection to banks beyond individual agency-bank relationships. This consortium would bring all partners together for development of strategies, coordination, planning and implementation.

Through these coordinated efforts it would be expected that there would be an increase in the number of low-income families with bank banking services. These services would result in:

· An increase in the number of TANF and other public assistance checks to be directly deposited
· Enhance the ability of families receiving EITC checks to develop savings (IRS estimates that over 66% of EITC checks are cashed at Check Cashing establishments).
· Decrease the dependence of low-income families on asset stripping institutions such as payday lenders; check cashers, liquor stores, etc.
· Increase the access of low-income families to both basic and advanced financial education.

REFERENCES

Berry, C. (2004). To bank or not to bank? A survey of low-income households. Harvard
University Joint Center for Housing, Report # BABC 04-3

Bowles, S., Edwards, R. & Roosevelt, F. (2005). Understanding capitalism: Competition,
command, and change (3rd ed), NY: Oxford University Press.
Buck, (2003). The causes of poverty. Unpublished Manuscript

California Budget Project, (2005). Making ends meet: How much does it cost to raise a
family in California? Sacramento, CA, the California Budget Project (www.cbp.org)

Children’s Defense Fund, 2004

Hogarth, Jeanne M., Angelov, Chris E. (2003). How much can the poor save?
Consumer Interests Annual, 49.

Lopez & Moller, (2003). The distribution of wealth in California 2000. California
Research Bureau CRB 03-010.

Pearce, D & Cassidy, R. (2003) Overlooked & undercounted: A new perspective on the
struggle to make ends meet in California. Wider Opportunities for Women & Califonians for Family Economic Self-Sufficiency (National Economic Development and Law Center).

Rank and Hirschl, (2001). Rags or riches? Estimating the probabilities of poverty and
affluence across the adult American life span. Social Science Quarterly, 82(4), 651-669.

Rank, Yoon, & Hirschl, (2003). American povety as a structural failing: Evidence and
arguments. Journal of Sociology and Social Welfare, 30(4), 3-29.
Sharpiro, Thomas M. & Wolff, Edward N. (eds). (2001). Assets for the poor: The benefits
of spreading asset ownership. NY: Russell Sage Foundation.

Stuhldreher, Anne (2005). Breaking the savings barrier: How the federal government
can build an inclusive financial system. Asset Building Program New America Foundation, Washington, D.C

U.S. Census Bureau, (2005). A profile of the working poor, Report 983



SPIN
CSA
VITA Agencies
Financial Ed
HHS
Other

COMMUNITY
BANKING ON THE AMERICAN DREAM CONSORTIUM

Convened & Coordinated by:
City-County Reinvestment Task Force
Recruitment & Training
Resources
Banks & Credit Unions
San Diego Foundation
Resources
Bank Customers
Bank Customers
[1] An interesting finding was that, while African Americans and Latinos are less like than European Americans to have checking accounts, they are more likely to have savings accounts
[2] “Hard” barriers were defined as credit problems, not allowed to have an account, lack of proper ID or social security number.
[3] “Soft” barriers were defined as not liking to deal with banks, did not feel welcomed or respected by banks, language barriers
[4] The unbanked respondents purchased an average of 2.7 money orders per month while the banked respondents purchased an average of 2 money orders per month