Finding a Place for the Unbanked

Community Banker
By Sam Quinones

November 2002

Neither Matthew Brophy nor Tony Robinson knew much about banking a few years ago. But today they both work for banks, and that is a sign of how the industry is changing.

Brophy is a bilingual former Catholic priest who, before leaving the priesthood to start a family, was the beloved pastor of one of the largest Mexican parishes in Chicago. Now he is community development manager for Second Federal Savings, a $250 million asset institution, in the suburb of Cicero, where virtually all his clients are Mexican.

"I'm out there on evenings, weekends," said Robinson. "Whoever makes this change in these people's lives, their children's children will be banking with you for life."

Brophy and Robinson belong to a swelling movement of banks and mortgage companies now foraging for millions of potential customers that once largely ignored: the unbanked. This group of customers includes welfare and Social Security recipients, and immigrants from around the world who have never had bank accounts despite years in the United States.

To attract these customers, banks find they must fundamentally change the way they do business. One change necessary to reach these communities is hiring people like Brophy and Robinson, whose main qualifications initially were not their banking experience, but their ability to talk to their communities. "(The unbanked) have been attractive as customers forever. But because (banks) have focused on the sort of Donna Reed customers, they have overlooked these people," said Andrew Erlich, president of Erlich Transcultural Consultants, a minority-marketing consultant in Woodland Hills, Calif. "(Bankers) have started to wake up to the fact that they've been blinded to these communities. You can't be a player and survive, if you're not sensitive to this."

No one knows how many unbanked exist. The FDIC estimates the unbanked represent 10 to 13 percent of all U.S. households. The Federal Reserve estimates that up to 10 million beneficiaries of Social Security are unbanked. There also are uncounted millions of immigrants.

"(Still), so many banks are getting in to the game. Why? They see the dollar signs," said Elizabeth Handlin, director of he Federal Reserve Bank of Chicago's division of research. "The banks see a business there."

The financial potential of the unbanked market is clear. Latinos alone have an estimated $600 billion in purchasing power, according to the FDIC. Last year, Mexican immigrants alone sent home more than $9 billion, mostly using costly wire transfers and money orders. Moreover, the 2000 US Census showed that immigrants and minorities are a larger part of the workforce than ever before. In the last 20 years, millions of Mexicans, for example, have moved from farm work to more stable urban jobs, poised to be someone's promising customer.

Once banked, the unbanked, and immigrants especially, often maintain big account balances and low defaults of loans. "(The unbanked) really are the business of the future," said Robert Byrne, Wells Fargo's director of diverse growth segments, a division formed a year ago to focus on black, Asian and Latino customers. Wells Fargo has experienced a dramatic rate of growth in this sector since the program's inception.

Today, though, unbanked customers remain on the outskirts of the US economy, often distrusting banks or unaware of their benefits. "It's hard to get inside the head of someone who rents his TV," said Robert Howe, president of Directo, a direct-deposit ATM company in Atlanta. "They're prepaying phone cards. They pay insurance on a monthly basis. But without this group, nothing happens in our country." In response to the pay-as-you-go tradition of many recent immigrants, companies such as Western Union have created stored-value cards that allow families to create portable bank accounts stored on a credit card-size piece of plastic.

Many immigrants come from countries like Mexico that are famous for currency devaluations and bank failures. They Vietnamese left war and political tumult. "They buy gold jewelry," said Hai Tran, a loan officer at Seattle Mortgage Co., hired to reach out to Vietnamese homebuyers. "So when they're in danger, they can take the gold and jewelry and run with it." Some immigrants come from cultures that are uncomfortable sharing their personal financial information with strangers. From focus groups, Directo has learned that Latino men like carrying around large sums of cash, Howe said.

But this is America. Those who want to build wealth need what banks offer: credit cards, savings and checking accounts, and above all, a credit history and loans.

To attract the unbanked may require checking accounts with minuscule minimum, or redoing how credit worthiness is measured. It's not even enough to have signs in the window in Spanish or Chinese, or ads in the appropriate ethnic paper. Banks must send people out to educate the unbanked, Erlich said. Those people must have the trust of the unbanked, speak the language that each unbanked population understands, and speak to them at the times they find convenient: nights and weekends. All this is costly and labor intensive, but nothing less will get the job done, say bankers and consultants.

"Banks have wanted to back away from person-to-person service," said Erlich. "They've looked at online banking, mechanization as the solution to everything. We're saying these customers are requiring even more attention. It requires getting out of your comfort zone. On the flip side, when you do that it opens up all kinds of creativity." Indeed, across America many banks are getting innovative.

Seattle Mortgage formed an entire international division two years ago to attract local residents from other countries. It now has loan officers from Cuba, Bosnia, Vietnam, and the Philippines.

Around Los Angeles, Wells Fargo has decorated branches in Mexican themes and colors. The interiors of many branches have also been redesigned, with more chairs for the families of customers. Bankers in California's Central Valley have gone to the fields to convince farmworkers of the benefits of bank accounts.

Harris Bank in Chicago, in branches in Mexican neighborhoods, now cashes paychecks for non-customers, and allows them to pay bills and send wire transfers, all in the hopes they'll also sign up for a bank account.

Few of the new customers it acquired proved eligible for loans under traditional credit assessments. So Harris tinkered with the way it measured credit risk. In April, its First-Time Borrowers program began loaning up to $10,000 to customers with no formal credit history, but who, say, never missed a utility-bill payment.

A few banks have changed personalities entirely. Second Federal Savings, on Chicago's south side, was started by Polish and Czech businessmen, and for decades served Eastern European immigrants. But as the neighborhood became Mexican, Second Federal did, too.

The bank now actively seeks only Mexican clients. All Second Federal tellers are fluent in Spanish. Health fairs and Mexican fraternal clubs use the bank parking lot. Second Federal offers wire transfers and bill payment services to non-customers.

Perhaps Second Federal is an extreme case. But many in the industry say the search for the unbanked requires this kind of creativity and willingness to change. In other words, the behemoths must become more like Second Federal or Wainwright Bank, rather than the other way around.

"Our typical client will come in with a payroll check and their gas bill or telephone bill and will deduct that from their payroll check and it doesn't cost them anything," said Mark Doyle, Second Federal's president. "Not many banks do that. It's very labor intensive. We have 18 teller windows. Our cost of operation is probably twice or three times more than any other institutions because of the labor. The flip side is that we are trying to grow in this market. It's paid off."

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