Accessing the Financial Accessing the Financial Mainstream: Mainstream:

the role of financial the role of financial services and educationservices and education

Overview of FRS Overview of FRS Community AffairsCommunity Affairs

Overview Overview The Community Affairs Office was established in 1981 at each of The Community Affairs Office was established in 1981 at each of the 12 Reserve Banks as a result of the CRA, to educate financiathe 12 Reserve Banks as a result of the CRA, to educate financial l institutions on community development opportunities.institutions on community development opportunities.

System GoalsSystem GoalsFoster the active engagementFoster the active engagement of depository institutions in of depository institutions in providing credit and other banking services to their entire providing credit and other banking services to their entire communities, including traditionally underserved markets communities, including traditionally underserved markets Encourage cooperationEncourage cooperation among community based among community based organizations, government agencies, financial institutions, organizations, government agencies, financial institutions, developers and other practitioners to their mutual benefitdevelopers and other practitioners to their mutual benefitDevelop greater public awarenessDevelop greater public awareness of the benefits and risks of of the benefits and risks of financial services products and of the rights and responsibilitifinancial services products and of the rights and responsibilities es that derive from community investment and fair lending that derive from community investment and fair lending regulations. regulations. Promote a better understandingPromote a better understanding by policymakers, community by policymakers, community leaders, and privateleaders, and private--sector decisionsector decision--makers of the processes and makers of the processes and resources that support successful community development resources that support successful community development programs and best practices of community development programs and best practices of community development

Moving People into the Moving People into the Financial MainstreamFinancial Mainstream

What is the financial condition of households today?What is the financial condition of households today?Why worry about those outside of the mainstream?Why worry about those outside of the mainstream?Who are the unbanked and the underWho are the unbanked and the under--banked?banked?What are the barriers to using mainstream financial What are the barriers to using mainstream financial services?services?What is being done and what is the role of the Federal What is being done and what is the role of the Federal Reserve Banks?Reserve Banks?What can State leaders do?What can State leaders do?

Snapshot of Household Snapshot of Household Financial HealthFinancial Health

Low savings rate of US householdsLow savings rate of US householdsHousehold spending exceeds household income creating negative saHousehold spending exceeds household income creating negative savings vings rate for first time since Great Depressionrate for first time since Great DepressionRising concern over lack of retirement savingsRising concern over lack of retirement savings

As many as 28 million individuals (14% of U.S. income earners) As many as 28 million individuals (14% of U.S. income earners) no bank accountno bank accountHousehold indebtedness increasingHousehold indebtedness increasing

Borrowing increased at 8.6 % in 2006Borrowing increased at 8.6 % in 2006Ratio of household debt to household assets at peak level Ratio of household debt to household assets at peak level (almost 19%)(almost 19%)Homeowners equity decreasing relative to housing values Homeowners equity decreasing relative to housing values

44thth Q 2006: homeowners equity only 53%; down from 68% in 1980sQ 2006: homeowners equity only 53%; down from 68% in 1980sRising foreclosure rateRising foreclosure rate

Snapshot of Household Snapshot of Household Financial HealthFinancial Health

Particular challenges for low to moderate Particular challenges for low to moderate income householdsincome households

Very low netVery low net--worthworthMore likely to be unbankedMore likely to be unbankedGreater incidence of debt management problems Greater incidence of debt management problems (higher debt(higher debt--toto--income ratios and more pastincome ratios and more past--due due payments)payments)

Why Worry About This?Why Worry About This?

Having a bank account is first step to building financial Having a bank account is first step to building financial identityidentity

Further access to saving, investing, credit & insurance Further access to saving, investing, credit & insurance productsproducts

Helps build credit recordHelps build credit recordAccounts can be money management toolsAccounts can be money management toolsAccess to banking is first step towards achieving Access to banking is first step towards achieving financial stability and building families’ assetsfinancial stability and building families’ assetsFosters community stability and economic Fosters community stability and economic developmentdevelopment

Why Worry About This?Why Worry About This?

Changing financial marketplace Changing financial marketplace Technological advancesTechnological advancesDemocratization of creditDemocratization of creditIncreased number and complexity of financial productsIncreased number and complexity of financial products

Growth in Alternative Financial Services (AFS) Growth in Alternative Financial Services (AFS) Check cashers, payday lenders, rentCheck cashers, payday lenders, rent--toto--own stores, paid tax own stores, paid tax preparerspreparersHigh fees High fees Lack of regulation and consumer protectionLack of regulation and consumer protectionPotential for predatory practicesPotential for predatory practices

Who Are the Unbanked Who Are the Unbanked and Underand Under--banked?banked?

LowLow--income consumers don’t fit into mutually income consumers don’t fit into mutually exclusive categories of banked and unbankedexclusive categories of banked and unbankedMost lowMost low--income consumers rely on patchwork of income consumers rely on patchwork of financial servicesfinancial servicesUnbanked and underUnbanked and under--banked households are banked households are disproportionately lower income, lower wealth, have disproportionately lower income, lower wealth, have less education, unemployed, younger, have more less education, unemployed, younger, have more children, rent their homes, are racial or ethnic minority, children, rent their homes, are racial or ethnic minority, are immigrantsare immigrantsLow income consumers are not a homogenous group Low income consumers are not a homogenous group and there is no oneand there is no one--sizesize--fitsfits--all strategy for serving the all strategy for serving the needs of all unbanked and underbankedneeds of all unbanked and underbanked

Who Are the Unbanked Who Are the Unbanked and Underand Under--banked?banked?

Unbanked households in the US: estimates range from Unbanked households in the US: estimates range from 10 to 28 million households 10 to 28 million households Millions more households are underMillions more households are under--banked; banked; households have accounts but still use alternative households have accounts but still use alternative financial servicesfinancial services22% of low income families earning less than $25,000 22% of low income families earning less than $25,000 per year do not have checking or saving accountper year do not have checking or saving account83% of unbanked earn less than $25,000 per year83% of unbanked earn less than $25,000 per yearGeographically overGeographically over--represented in the Southrepresented in the South--Atlantic Atlantic (DE to FL) and South Central States ((DE to FL) and South Central States (KY, TN, AL to KY, TN, AL to OK, TX)OK, TX)

What Are the Barriers?What Are the Barriers?

Accounts perceived to be expensive because of fees, Accounts perceived to be expensive because of fees, high minimum balance requirementshigh minimum balance requirementsCredit or checking history problemCredit or checking history problemStandard bank product and services don’t meet needs Standard bank product and services don’t meet needs of unbanked or underof unbanked or under--bankedbankedMarket segments ignored by bankMarket segments ignored by bankBanks not located in community, hours not convenientBanks not located in community, hours not convenientPreference/habit of cashPreference/habit of cashCultural differencesCultural differencesDistrust/perceptions of banksDistrust/perceptions of banksInadequate identificationInadequate identification

What Are the Alternatives?What Are the Alternatives?

The Alternative Financial Services (AFS) SectorThe Alternative Financial Services (AFS) SectorExplosive growthExplosive growthMeets the immediate financial needs of many low income Meets the immediate financial needs of many low income customers (check cashing, shortcustomers (check cashing, short--term loans, money orders and term loans, money orders and wire transfers)wire transfers)Services cost low income customers; estimates that unbanked Services cost low income customers; estimates that unbanked consumers spend at least $11 billion in fees. For example:consumers spend at least $11 billion in fees. For example:

Worker earning $12,000/year would pay $250/year to cash checks Worker earning $12,000/year would pay $250/year to cash checks at check casherat check casherAnnualized rate for payday advance translates into average APR oAnnualized rate for payday advance translates into average APR of f 400%400%Use of paid tax preparer and rapid advance loan can cost taxpayeUse of paid tax preparer and rapid advance loan can cost taxpayer r filing for EITC up to $400filing for EITC up to $400

Providers are not linked to creditProviders are not linked to credit--reporting systemreporting system

What Can Be Done?What Can Be Done?

Expand market research on financial services needs of low Expand market research on financial services needs of low income consumersincome consumersNew bank products and delivery channels to meet needs of New bank products and delivery channels to meet needs of unbanked and underbankedunbanked and underbankedLeverage technological innovations to reduce costs for Leverage technological innovations to reduce costs for basic financial transactionsbasic financial transactionsEmployerEmployer--based/workplace strategies to reach lowbased/workplace strategies to reach low--income income or unbanked employeesor unbanked employeesBank/nonbank partnershipsBank/nonbank partnershipsPublic subsidies to encourage financial institutions to Public subsidies to encourage financial institutions to develop products and services needed to reach unbanked develop products and services needed to reach unbanked and underand under--bankedbanked

What Can Be Done?What Can Be Done?

Financial EducationFinancial EducationBasic money management, credit counseling, homebuyer educationBasic money management, credit counseling, homebuyer education“Re“Re--norming” the consumer culturenorming” the consumer cultureExpanded delivery system (schools, communityExpanded delivery system (schools, community--based organizations, based organizations, employers) and mechanisms (oneemployers) and mechanisms (one--onon--one counseling, group classes, onone counseling, group classes, on--line)line)

Research indicates positive impact of financial education:Research indicates positive impact of financial education:Helps consumers make informed decisions about available productsHelps consumers make informed decisions about available products and and servicesservicesImproves credit management skills and reduces risk of delinquentImproves credit management skills and reduces risk of delinquentpaymentspaymentsEncourages consumers to begin saving and building longEncourages consumers to begin saving and building long--term assetsterm assetsInformed consumers will most likely be economically better off tInformed consumers will most likely be economically better off than han those lacking vital financial skillsthose lacking vital financial skills

What is the Role of the What is the Role of the Federal Reserve?Federal Reserve?

Increasing access to information about financial Increasing access to information about financial products and servicesproducts and servicesPromoting awareness of the importance of Promoting awareness of the importance of financial educationfinancial educationCollaborating with educational and community Collaborating with educational and community organizations at national, state and local levelsorganizations at national, state and local levelsSupporting research and identifying best Supporting research and identifying best practicespracticesProviding financial education to employeesProviding financial education to employees

Suggestions for StatesSuggestions for States

Financial EducationFinancial EducationSupport opportunities to expand financial education through KSupport opportunities to expand financial education through K--12 12 schools, employers and communityschools, employers and community--based programsbased programsConduct statewide public awareness campaign to promote benefits Conduct statewide public awareness campaign to promote benefits of of financial education and available resourcesfinancial education and available resources

Access to lowAccess to low--cost mainstream financial servicescost mainstream financial servicesSupport development of affordable alternatives to highSupport development of affordable alternatives to high--cost alternative cost alternative financial servicesfinancial servicesCreate incentives for financial institutions to serve unbanked aCreate incentives for financial institutions to serve unbanked and undernd under--banked consumersbanked consumers

PartnershipsPartnershipsPromote collaboration between different state agencies (for examPromote collaboration between different state agencies (for example: ple: banking, education, human services and economic development)banking, education, human services and economic development)

Questions / DiscussionQuestions / Discussion

Jessica LeVeen FarrJessica LeVeen FarrRegional Community Development ManagerRegional Community Development ManagerFederal Reserve Bank of Atlanta, Nashville BranchFederal Reserve Bank of Atlanta, Nashville Branch615615--251251--73607360jessica.leveen@atl.frb.orgjessica.leveen@atl.frb.org

www.frbatlanta.orgwww.frbatlanta.orgwww.federalreserve.govwww.federalreserve.govwww.federalreserveeducation.orgwww.federalreserveeducation.org