FDIC Survey of Banks’ Effortsto Serve the Unbanked  and Underbanked

February 5, 2009

Presented by:

Barbara A. Ryan, Deputy to the Vice Chairman, FDIC

Ed Bachelder, Director, Blueflame Consulting

Professor Michael S. Barr, University of Michigan Law School

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Agenda
        - Background
        - Overview of FDIC Bank and Household Survey Efforts
        - Bank Survey Findings
        - Recommendations and Discussion

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Background
        - Survey required by the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (“Reform Act”).
        - Scope includes unbanked and underbanked.
        - Unbanked: Rarely, if ever, held a checking account, savings account, or other type of transaction or check cashing account at an insured depository institution.
        - Underbanked: Have an account with an insured depository institution but also rely on non-bank alternative financial service providers for transaction services or high-cost credit products.

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FDIC Bank Survey
        - First bank survey was conducted in 2008.
        - Dove Consulting retained to help design and administer the survey.
        - Bank survey goals were designed to address factors identified in statute:
        - Identify the extent to which banks are serving the banking needs of unbanked and underbanked individuals,  
        - Identify challenges affecting the ability of banks to serve unbanked and underbanked individuals, and 
        - Identify innovative efforts banks use to serve unbanked and underbanked individuals. 

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FDIC Household Survey
        - Reform Act also requests a “fair estimate of the size and worth of the ‘unbanked’ market” in the U.S.
        - Addressed by a separate FDIC/Census household survey conducted as a supplement to Census’ Current Population Survey in January 2009.
        - Designed to generate the first reliable national and regional estimates of the number of U.S. unbanked and underbanked households, their demographic characteristics, and factors hindering their use of banks.  
        - Survey results expected to be released later this year. 

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Bank Survey Administration
        - Mail-in survey questionnaires were sent in Spring 2008 to ~1,300 banks and thrifts (54% response rate).
        - Participation was voluntary.
        - 96 percent of top 25 banks (Tier 1) responded.
        - 61 percent of mid-sized banks (Tier 2) responded. 
        - 51 percent of smaller banks (Tier 3) responded.  
        - Case studies were also completed on 16 banks to highlight innovative efforts.

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Bank Survey Questions
        - Education and Outreach 
        - Perception of Market Opportunity
        - Education and Outreach Efforts
        - Perceived Effectiveness of Education and Outreach Efforts
        - Obstacles and Access
        - Perceived challenges to serving unbanked/underbanked
        - Efforts to modify bank branches to increase appeal
        - Services for non-customers who may be unbanked
        - Account opening policies and practices
        - Products and Services
        - Entry-level checking accounts
        - Entry-level savings accounts
        - Services provided to unbanked/underbanked
        - Funds Availability
        - Entry-level credit products

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High-Level Survey Findings 
        - Most banks are aware that significant unbanked and underbanked populations are in their market areas,
        - But relatively few banks have made it a priority to target these market segments. 
        - Many banks offer basic financial education materials,
        - But fewer participate in the types of outreach efforts that are viewed by the industry as most effective to attract and maintain unbanked and underbanked individuals as long-term customers. 
        - Most banks offer basic checking accounts to all customers, 
        - But few offer deposit, payment, credit, and electronically-based products that address the unique needs of unbanked and underbanked customers.  
        - Banks are concerned about the profitability of doing business with unbanked and underbanked individuals as well as perceived regulatory issues related to anti-money laundering laws and regulations

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Case Study Banks are Engaged in Innovative Efforts 
        - Education and Outreach 
        - Amalgamated Bank, New York, NY
        - Citibank, National Association, Las Vegas, NV 
        - The Commerce Bank of Washington, Seattle, WA 
        - Fort Morgan State Bank, Fort Morgan, CO 
        - International Bank of Commerce (IBC), Laredo, TX 
        - Mitchell Bank, Milwaukee, WI 
        - Monroe Bank & Trust, Monroe, MI
        - Obstacles and Access
        - Bangor Savings Bank, Bangor, ME
        - Citizens Union Bank of Shelbyville, Shelbyville, KY
        - Ridgewood Savings Bank, Ridgewood, NY 
        - Second Federal Savings of Chicago, Chicago, IL   
        - Products and Services
        - Artisans’ Bank, Wilmington, DE 
        - BancorpSouth, Tupelo, MS 
        - Carver State Bank, Savannah, GA 
        - Central Bank of Kansas City, Kansas City, MO
        - KeyBank, Cleveland, OH 

Additional details on each case study bank are contained in the FDIC Executive Summary and the detailed report by Dove Consulting

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Survey Findings

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Perception of Market Opportunity
        - The majority of banks (73%) are aware that there are unbanked and/or underbanked individuals in their market areas

Q:	 Does your bank perceive that there are any unbanked or underbanked populations in your market area?

Yet less than 18% of banks have identified expanding services to these groups as a priority in their business strategy

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Most Effective Outreach Methods
        - Banks identified “Providing financial education sessions,”  “Participating in other organizations,” and “Outreach visits” as the three most effective forms of education and outreach.

Q:	 What are the three most effective types of financial education and marketing programs that your bank has used to help establish account relationships with unbanked and/or underbanked individuals?
| Ranking | Programs                               |
|---------|----------------------------------------|
| 1       | Providing Financial Education Sessions |
| 2       | Participation in Other Organizations   |
| 3       | Outreach Visits                        |
| 4       | Financial Education Materials          |
| 5       | Targeted Marketing                     |
| 6       | Other                                  |

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Provision of Education and Outreach
        - Most banks (63%) provide financial education materials but fewer provide the forms of education and outreach viewed as most effective by the industry.

Does your bank teach financial literacy and education sessions?

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Perceived Challenges to Serving Unbanked/Underbanked
        - When asked to rank order challenges serving unbanked and/or underbanked individuals, banks identified “profitability” first, followed by “Regulatory barriers”, and “Fraud concerns.”

Regulatory issues were perceived by 40% of banks as impeding their ability to serve this market. 
| Ranking | Challenges                                     |
|---------|------------------------------------------------|
| 1       | Profitability Issues                           |
| 2       | Regulatory Barriers                            |
| 3       | Fraud Concerns                                 |
| 4       | High Cost of Customer Acquisition              |
| 5       | Competition from Alternative Service Providers |
| 6       | Unfamiliarity with this Regulation             |
| 7       | Internal Challenges                            |
| 8       | Other Challenges                               |

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Efforts to Modify Bank Branches to Increase Appeal
        - Most banks (64%) report that they have modified their retail branches to make them more welcoming and/or convenient to unbanked and/or underbanked.

Most banks (73%) report that have done this by offering Internet or mobile banking – fewer have added non-traditional locations or branches in LMI areas. 

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Services for Non-Customers Who May be Unbanked
        - Services provided are typically limited to cashing checks drawn on the bank itself.
        - 37% of banks offer bank checks or money orders.
        - 6% of banks offer international remittances.
        - Identification can be a challenge: most banks will accept a drivers license (92%) or state-issued photo ID (86%); 20% of banks accept Matricular Consular cards and 38% accept ITINs. 
        - Many banks indicated regulatory concerns about providing payment services to non-customers. 

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Account Opening Policies and Practices
        - Account opening requirements can present significant obstacles to the development of banking relationships with unbanked individuals.
        - Unbanked and/or underbanked individuals with blemished credit histories likely face challenges to account opening since most banks (87%) require a third-party credit check or new account risk management screen such as ChexSystems. 
        - Most banks require either a driver’s license (99%) or passport (92%) to open an account and Matricula Consular cards are accepted by less than one-third (27%).

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Entry-Level Checking Accounts
        - Most banks offer basic deposit accounts that do not require a minimum balance (62%) and free check writing in their most basic transaction account (90%). 

But 38% of banks require a minimum balance on their most basic deposit/checking account and 99% charge a per-item overdraft fee on their most basic transaction account.

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Entry-Level Savings Accounts
        - Most banks offer basic savings accounts and money market accounts, but few offer savings products designed to help unbanked and/or underbanked individuals. 

Less than 10% of banks offer IDAs, Workplace-based savings accounts, and/or VITA programs and only 25% of banks offer “second-chance” accounts.  

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Services Provided to Unbanked/Underbanked
        - About half of banks offer check cashing; fewer offer money orders, bill payment, prepaid cards, check cashing kiosks.

Q: Indicate efforts your bank makes as part of its branch strategy to serve un/underbanked in your market areas. 

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Funds Availability
        - Funds availability for checks, while in compliance with federal regulations, is slow relative to non-bank check cashing services. 

Many banks (36%) require at least a one day wait for an established customer to access funds from a personal or business check drawn on the same bank and a longer wait for government or payroll checks and checks drawn on another bank. 

Q: How soon are funds ordinarily available for an established customer who presents the following items?

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Entry-Level Credit Products 
        - Banks offer few advance or credit products tailored to LMI and/or unbanked and underbanked individuals.
        - Less than 6% of banks provide an advance on funds due to arrive by direct deposit or check.
        - Over two-thirds (69%) offer closed-end unsecured personal loans for amounts up to $5,000, but bank loan eligibility requirements (credit history, proof of income, and credit score) may hinder unbanked and/or underbanked customer access to these and other alternatives to costly payday loans. 

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FDIC Recommendations
        - Consider defining a national shared government-industry goal to lower the number of unbanked and/or underbanked individuals and households in the U.S. 
        - This could include creating a national task force to provide oversight and guidance for the achievement of the shared goal.
        - Goal would best be based on reliable and regularly reported statistics on the number of unbanked and/or underbanked households in the U.S.

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Discussion

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