To: Steven Banks, Commissioner, NYC HRA-DSS

POLICY MEMORANDUM

To: Steven Banks, Commissioner, NYC HRA-DSS

From: Neil Hendelman, Program Officer, NYC HRA-DSS

Re: New York City’s Unbanked and Underbanked

Date: April 20, 2014

EXECUTIVE SUMMARY

Millions of adult residents of New York City either do not maintain commercial bank accounts or rely on alternative financial services - financial services provided outside traditional banking institutions - to obtain credit, pay bills or transfer money. The FDIC estimated that an unbanked or underbanked family can spend approximately $2,400 per year on fees and interest charges. There is a correlation between income and banking status – the lower a household’s income the more likely it is unbanked or underbanked. Most of the HRA-DSS’ clients are low income and are least able to afford hundreds or thousands of dollars in financial fees and interest charges. This memorandum outlines why people are unbanked or underbanked and explains how the NYC HRA-DSS can collaborate with other organizations and use education to introduce more residents of New York City into the commercial banking system

PROBLEM

Many New York City residents do not hold bank accounts and wastehundreds or even thousands of dollars each year on avoidableservicefees and interest charges. In a January 2014 white paper, the Office of the Inspector General for the U.S. Post Office stated that in 2012, Americans spent more than $89 billion on interest and fees for alternative financial services (AFS)– financial services provided outside traditional banking institutions– which is approximately $2,400 per underserved family (OIG USPS, 2014). AFS include payday loans, rent-to-own agreements, refund anticipation loans, car title loans and non-bank check cashing, money orders and money transfers

According to the FDIC’s 2011 National Survey of Unbanked and Underbanked Households, there is a correlation between income and banking status – the lower a household’s income the more likely it is unbanked, meaning it does not have either a checking or savings account (FDIC, 2014). For example, more than 28% of American families earning less than $15,000 are unbanked, and approximately 12% of American families earning between $15,000 and $30,000 are unbanked (FDIC, 2014).

The New York City Department of Consumer Affairs commissioned a 2008 study that found that more than 825,000 adult residents of New York City do not have bank accounts (NYC DCA-OFE, 2010). Additionally, according to the FDIC, 19.4% of New York State’s households are underbanked, meaning they hold a bank account but also rely on AFS providers (FDIC 2014).AFS providers charge high fees and interest rates to their customers. For example, according to Time magazine, a 30-day auto-title loan from an AFS provider charges interest equivalent to an annual rate of 50% to 100%,andcheck-cashing services in New York State are permitted to charge 1.91% per check (Sivy, 2012). Meanwhile, banks cash checks for free and offer loans at far superior rates.

The proportion of unbanked households varies by race. Approximately 55% of black householdsin the United States are either unbanked or underbanked, and 49% of Hispanic households are either unbankedor underbanked (FDIC, 2014). Using New York City population figures from the 2010 census (Census, 2010) we can extrapolate that there are more than 2.1 million black and Hispanic residents of New York City who are either unbanked or underbanked. These individuals, along with the unbanked and underbanked in other groups, would financially benefit from being integrated into the banking system. Getting more New Yorkers – especially lower income New Yorkers- comfortable with using banks for financial transactions will increase the disposable income of our low income clients without imposing a significant burden on the budgets of New York City.

Lower income individuals are financially harmed when they remain unbanked or when they use AFS providers in lieu of banks. For example, fees charged by AFS providers for transactions, transferring money and loans are almost always significantly higher than bank fees. Additionally, unbanked individuals expose themselves to thefts of cash or prepaid debit cards. Moreover, a 2009 study conducted by researchers at the University of Pennsylvania and Vanderbilt Universitynoted a strong correlation between approvals for payday loans and bankruptcy filings (Skiba & Tobacman, 2009) – the implication is that high interest payday loans may lead to bankruptcies. Furthermore, there are opportunity costs to using AFS providers. For example, the banking system offers consumer protections that AFS providers do not offer. Bank customers who report unauthorized charges in a timely manner are not liable for those charges. Lastly, people who bypass the banking industry do not build a banking record.

The FDIC interviewed unbanked individuals in order to determine why they did not maintain a checking or savings account. Almost 33% of people who have never had a bank account stated that they did not have a bank account because they believed they did not have enough money to open an account (FDIC, 2014). 26% of the populationsaid they did not need or want bank accounts (FDIC, 2014). Approximately 8% of respondents said they could not open an account because their credit, identification or banking history was an issue (FDIC, 2014). 7% of respondents said they did not trust banks (FDIC, 2014). Other lesser reported causes included: high fees, minimum balance requirements, lack of banking knowledge, inconvenient branch locations and/or hours and prior unsolicited bank account closings (FDIC, 2014).Approximately 11% of respondents cited an “other” reason for not maintaining a bank account. Social workers often report that their clients are afraid that they will lose benefits if they maintain assets in bank accounts. This is partially correct with regard to TANF but is incorrect with regard to SNAP.

The NYC HRA-DSS services more than three million New Yorkers through our programs and many of our clients are low income and either unbanked or underbanked. Our clients are least able to afford the hundreds or thousands of dollars of fees and interest charges levied by AFS providers. Many of our clients may hold inaccurate beliefs about the assets required to open a bank account or they may not understand the benefits they would receive by being a part of the banking system.

OPTIONS

The NYC HRA-DSS has numerous options at its disposal to help ameliorate the issue of unbanked and underbanked residents of New York City. The options fall into the following three categories: (a.) improving education; (b.) collaborating with other organizations, and; (c.) supporting Postal Service banking.

Improving Education

One of the most effective ways to reduce the number of unbanked and underbanked residents of New York City is through education. As previously discussed, approximately 59% of people who do not maintain bank accounts either falsely believe they do not have enough money to open a bank account or feel they do not need a bank account (FDIC, 2014). However, it is likely that if these unbanked individuals learned about the benefits of banking (e.g. security, lower fees, less interest) they would be willing to open commercial bank accounts. In 2006, San Francisco launched Bank on San Francisco with the goal of educating the unbanked and underbanked and encouraging them to open bank accounts (Bradley, 2013). The program was successful – according to NextCity.org “[i]n its first two years, the program got 10,000 people to join banks. More than 70,000 accounts were open and active within the first five years” (Bradley, 2013).Other cities are followed San Francisco’s program and reported similar results (Loceff, 2013).

There are several internal and external options available for us to educate our unbanked and underbanked clients regarding the advantages of opening bank accounts and conducting financial transactions via commercial banks. For example, we can create brochures to distribute to our clients. These brochures can outline the advantages of opening commercial bank accounts and conducting transactions via the bank account. The brochure should also contain an e-mail address and phone number for anHRA-DSS case worker as well as a link to our Website – which can contain a PDF version of the brochure and links to other Websites that provide financial literacy. Additionally, we can instruct our case workers to discuss the issue of banking when clients come to the HRA-DSSfor services. Although our case workers may not be experts on financial counseling, we can encourage them to take an undergraduate financial counseling class offered at the City University of New York or a master’s level course offered by Columbia University’s School of Social Work. According to a November 2013 press release from the Office of the Mayor of New York, the undergraduate course will impart social workers with an “understanding of the fundamentals of managing personal finances and how to impart this financial education…to their clients.” The graduate course “will equip social workers to integrate financial counseling and education into their practice” (Office of the Mayor of New York, 2013).

There are external mechanisms available to educate unbanked and underbanked residents of New York City regarding the advantages of commercial banking. For example, we can purchase MTA advertisements – in English and Spanish – promoting the benefits of opening and using commercial bank accounts. A less expensive method of educating the unbanked and underbanked involves collaboration with the Board of Education and Teachers College (Columbia University) in order to introduce financial literacy to New York’s high school students. Recently, Teachers College developed a financial literacy program with a goal of strengthening“personal finance learning where it is most needed: in urban high school classrooms that serve students from immigrant and working-class families.” (Marri, 2013). According to Dr. Anand Marri: “Developed especially for social studies teachers, and in partnership with Working in Support of Education…our initiative combines intensive professional development with the opportunity to create lessons that can be easily integrated into history and economics classes. Much of any existing curriculum is set by state and local requirements. Teachers will learn how to work inside these existing course contexts by using self-contained lessons -- lessons that can be dropped into these courses at multiple points…The project's curriculum and professional development program will focus on helping teachers learn the principles of financial literacy (money, budgeting, cost of money, banking, credit, insurance, investing, financial planning and regulation) and how to teach these principles dynamically through a case study method” (Marri, 2013). The program is currently being piloted in New York City. The HRA-DSS should monitor the status of the program. If the results are favorable, we can lend our support to the program with the goal of improving financial literacy among New York City high school students. It is possible that some of these students will educate their parents regarding the value of banking and this could lower the number of unbanked and underbanked residents of New York City.

An additional mechanism for transmitting banking education to our clients is through a partnership with DoSomething.org. According to its Website, “DoSomething.org is the country's largest not-for-profit for young people and social change. [The organization has] 2,439,780 members…who [work] on causes they care about…DoSomething.org spearheads national campaigns so 13- to 25-year-olds can make an impact - without ever needing money, an adult, or a car. Over 2.4 million people took action through DoSomething.org in 2012” (DoSomething.org: About Us, n.d.). DoSomething.org offers a program for youngsters to educate their peers about financial literacy. The volunteer obtains permission from their principal to host a financial literacy workshop in which a local expert teaches others about banking, budgeting, money management, debt and investing. The HRA-DSS could partner with DoSomething.org (and its partners) and encourage their volunteers to offer the financial education workshops at HRA-DSS facilities throughout the city, at no cost to the HRA-DSS.

Collaboration with Other Organizations

The HRA-DSS can also partner with organizations, foundations, agencies and/or non-profits that are already tackling the issue of unbanked and underbanked residents of New York City. For example, the New York City Department of Consumer Affairs established an Office of Financial Empowerment (“OFE”) in 2006. The OFE “provides access to free or low-cost financial education classes, workshops, hotlines, and one-on-one counseling services in New York City” (NYC Department of Consumer Affairs: About the Office of Financial Empowerment, n.d.). The OFE maintains a robust Internet presence and provides education on earning, managing and protecting money as well as banking basics. HRA-DSS counselors and social workers can refer their clients to Financial Empowerment Centers in order to learn about the benefits of banking. Additionally, the Department of Consumer Affairs can send a representative to our office to educate our staff on the NYC SafeStart Bank Account. New York City partnered with seven banks and four credit unions to offer a bank account that carries a low minimum balance requirement and is free of overdraft and monthly fees (NYC Department of Consumer Affairs: NYC SafeStart Account, n.d.). Once educated, our staff can recommend that our unbaked and underbanked clients consider the NYC SafeStart Bank Account.

Support Postal Service Banking

The NYC HRA-DSS can also join U.S. Senator Elizabeth Warren and express our support for the U.S. Postal Service’s proposal to expand its presence in the financial services market. In January 2014, the U.S. Postal Service’s Office of the Inspector General issued a white paper proposal to provide non-bank financial services for the underserved (OIG USPS, 2014). The proposal would spread benefits between the unbanked, underbanked, Postal Service, partner banks and merchants. One of the biggest benefits postal banking would offer to the unbanked and underbanked is the abundance of post office locations. According to the Office of the Inspector General of the United States Post Office, 59% of post offices are located in zip codes that lack bank branches (OIG USPS, 2014). Additionally, the Wall Street Journal reported that although the population of the United States is rising, online banking is causing a net reduction of bank branches in the United States (Sidel, 2013). This reduction of branches hurts rural and poor neighborhoods the hardest. According to Bloomberg, since 2008, 93% of bank closings were in postal codes where the household income is below the national median (Bass, 2013). In many urban and rural areas of the country you are much likelier to see a post office than a commercial bank. Expanding financial services to post office locations will give the unbanked and underbanked more locations to conduct financial transactions.

Postal banking also offers the potential of attracting unbanked and underbanked individuals who do not find commercial banks trustworthy. According to the 2011 FDIC National Survey of Unbanked and Underbanked Households, approximately 7% of respondents said they did not trust banks (FDIC, 2014). Additionally, only 26% of Americans have “confidence” in commercial banks (Jacobe, 2013). On the other hand, according to an April 2012 United States Postal Service Brand Survey, 68%of respondents agreed that the Postal Service was reliable and trustworthy (Aytm, 2012). Additionally, the Postal Service is consistently ranked as the most trusted federal entity, and was recently identified as the fourth most trusted company in the United States (Ponemon Institute, 2013). Confidence in the Postal Service should lure some of the unbanked and underbanked away from AFS.

The Postal Service is not obligated to generate a profit for shareholders, so it should be able to provide financial services to the unbanked and underbanked at significantly lower cost to consumers. The white paper used a payday loan as an example. A typical AFS provider charges a customer an effective annual interest rate of 391% while the Postal Service would charge less than 90% of that (OIG USPS, 2014). This would result in more than $400 in savings to a customer who wishes to receive a $375 loan. Additionally, the Postal Service, as a government agency, is in a unique position in that it could link the loans to tax returns, which would ensure that unpaid loans would be offset against tax credits. This loan backstopping is another reason why the Postal Service could offer loans at a fraction of the rate charged by AFS.

RECOMMENDATIONS

I propose that the NYC HRA-DSS use a combination of education and collaboration with external organizations in order to bring more New Yorkers into the commercial banking system. The popular Bank on San Franciscoprogram – as well as similar initiatives carried out by other cities - showed that when people were educated regarding the commercial banking system a not insignificant number of residents decided to open bank accounts. There are numerous methods for us to educate our clients without significantly increasing our budget.