Community Reinvestment Act: How Banks are Serving the Under and Unbanked Steven Sallander

The Community Reinvestment Act (CRA) was enacted in 1977 by Congress. The intentions of the CRA are to encourage depository institution to help meet the credit needs of the communities in which they operate (FFIEC Community Reinvestment Act, 1).The ways in which banks go about capturing and serving the 43 million underbanked and 9 million unbanked Americans (Beard, 1) are reflected in their depository products, credit cards, auxiliary products, and under which conditions they are offered, as well as which products and services they choose to advertise. For this project we were to choose one bank from each of the three asset classes, interview them, analyze them, and determine their efforts to serve the under and unbanked demographic. We chose to focus our interview questions on three major categories of services. The first category is the depository products each bank offered, focusing specifically on entry-level products. Second, the credit card services each bank offered. Third, the auxiliary products each bank offered. I will key in on these three major services offered by each of the three different asset classes of banks to determine if they are meeting the needs of the under and unbanked population and what they can do to improve their services for this demographic. Banks rely heavily on deposits as they are generally the largest liability for banks. The depository services offered at banks come in the form of checking and savings accounts. In todays economy, with banks still recovering from the great recession of 2008, banks are in a constant struggle for any excess deposits to recover their bad loans and other losses from the recession. Some banks offer and advertise free checking and savings accounts. But, are they really free? After talking to personal bankers at each of the three banks, I received different answers about their entry-level depository services. In order to analyze the depository services offered at each of these three banks, we need to break down the characteristics of each account by the initial and minimum requirements, fees, and penalties associated with each account. For the purpose of this report I will focus only on the entry-level depository accounts. The small institution we decided to interview was a Chicago based bank called North Community Bank (NCB). NCB has assets totaling $952.1 million. They offer an entry-level checking account which they call the Free Checking Account. The account opening considerations for the entry-level checking account requires an initial deposit of $100 and proper identification, which can be non-traditional. There is no monthly maintenance fees associated with the checking account and the penalties for overdraft are $32 per transaction. The auxiliary services associated with the checking account consist of free online banking, bill pay, debit card, and direct deposit. To open a savings account at North Community Bank one would need an initial deposit of $100, also accepting non-traditional forms of identification. The monthly maintenance fees for the savings account are $3.00. However, this fee will be waived if the account holds a minimum balance of $200, to go in effect after a 90 day waiting period. The midsize institution we decided to interview was TCF Bank, which is primarily located in the Midwest. TCF Bank has assets totaling $18.2 billion. TCF offers an entry-level checking account called TCF Free Checking. The account opening considerations for the entry-level checking account requires an initial deposit of $25. There is no monthly maintenance fee associated with the checking account under any condition. The penalty for overdraft is $27 per transaction. The auxiliary services associated with the checking account are free online banking, bill pay, mobile banking, direct deposit and free card access. To open a savings account at TCF Bank one would need a $25 initial deposit. Thereafter the savings account must maintain a minimum monthly balance of $100, or a $4.00 fee will be applied. The large institution we decided to interview was J.P. Morgan Chase Bank. J.P. Morgan Chase Bank has assets totaling $2.359 trillion. The lowest level checking account that Chase Bank offers is not like the others previously mentioned. They do not advertise a free checking account. The account requirements, fees and penalties are a lot higher. Their lowest level checking account requires an initial deposit of $25. The account contains a monthly maintenance fee of $12.00 per month. This fee can be waived by one of the following; monthly direct deposit totaling $500 or more, $1,500 minimum daily

balance in the account, average minimum balance of $5,000 in any combination of qualifying linked deposits or investments, or by paying $25 or more in check-related services or fees. The overdraft penalties associated with the checking account are $34 per transaction. The auxiliary services associated with the lower level checking account are free online banking, bill pay, mobile banking, 18,000 ATM access, and card access. To open a Chase savings account one would need an initial deposit of $25. The account contains a $4.00 monthly service fee. This fee can be waived with a minimum daily balance of $300, at least one repeating account transfer of $25 from your checking account each month, or if your savings account is linked to one of the higher-level checking accounts. Based on our findings at the various banks we chose to interview, we have concluded ways in which the banks do and do not meet the needs of the under and unbanked. I also offer possible solutions to this problem. When comparing the depository accounts at each of the three banks it is important to note that only two of the three were advertising a free checking account. TCF and North Community Bank had a totally free checking account, with no hidden fees or minimum requirements. The entry-level depository services at each of the two banks with free checking were ideal for the under and unbanked population because it will alleviate the burden of having to go through secondary financial institutions for their banking needs. Instead, they will be able to bank free of charge without worry of unexpected penalties and fees. Its hard to imagine that a checking account with the limitations imposed by Chase is meant to cater to the under and unbanked population. Considering the under and unbanked might not have a steady income, large investments, or a substantial daily balance, they would end up paying a hefty $12.00 a month just to keep their money in the bank. One way in which all three banks are serving the under and unbanked population is by allowing someone who doesnt have a traditional form of identification to open an account. Traditional forms of identification include a Social Security Number, drivers license or government issued I.D. Card. When asked, all three banks noted that they would allow non-traditional forms of identification when opening an account. The non-traditional forms of identification include an ITIN (Individual Taxpayer ID Number) or any type of documentation showing proof of address to open a checking or savings account. It is important when serving the under and unbanked population to allow non-traditional forms of identification because, 22.2% of all foreign-born non-citizens of the U.S. are unbanked and 28.9% are underbanked (2011 FDIC National Survey of Unbanked and Underbanked Households, 5).This is very important because many immigrants will have trouble producing a traditional form of identification because they are either non-citizens or illegal aliens. Although these banks are allowing non-traditional forms of identification to open an account they do not advertise this. One way in which they could reach out to the underbanked demographic and capture a chunk of their deposits is to advertise this service when they advertise their free checking and savings accounts. Another way banks can appeal to the non-citizens, which make up a large portion of the under and unbanked population is to offer bilingual services and be in a geographic area that allows for the ease of transport for those who do not have a means of transportation. The location of TCF Bank served the under and unbanked population adequately, specifically the Hispanic population. All of the banks advertisements were in both English and Spanish. They also had at least one, if not multiple, employees that were Spanish speaking. It was evident that they were appealing to the Hispanic community, and it is evident that they were succeeding at capturing this demographic of under and unbanked because those who were standing in line with us were of Hispanic descent and communicating with the tellers in Spanish. Bilingual services are very important because 20.1% of the unbanked population is Hispanic and 28.6% of the underbanked population is Hispanic (2011 FDIC National Survey of Unbanked and Underbanked Households, 5).The geographic location of TCF Banks also shows that they are trying to appeal to the low income customer. They are located in every Jewel-Osco, a relatively low cost grocery store. A lot of foot traffic walks by the TCF advertisements and the branch itself which generates a lot of interest, especially when advertising their services in Spanish. Hispanics who are under and unbanked

will gravitate towards a bank that they feel welcome at as well as a bank that they feel is not taking advantage of them. A reason that many people stay under and unbanked is to avoid hidden fees and high account requirements associated with the bank accounts. One way that banks could reduce the cost of banking for their customers is to offer an electronic card based depository account. The difference between what already exists and what I am proposing is the electronic card based depository account will not include check writing privileges. Check writing can end up costing someone in excess of $30 per transaction in overdraft and non-sufficient funds fees if they write a bad check. This account will not allow customers to spend more than they have. If they attempt to withdrawal or spend more money than they have in their account their debit card will be rejected, thus, avoiding all overdraft and non-sufficient funds fees. As recently as July 2010 legislation was enacted to decrease the amount of overdraft fees and non-sufficient funds charged to customers, banks will no longer be able to automatically enroll customers into their standard overdraft protection programs (ODP) (Steiner, 1). The standard ODP plan for Chase is to allow a transaction to go through on an account that has insufficient funds, therefore charging the customer $34 per transaction in fees. With the new legislation customers would have to opt in to the standard ODP service, otherwise their transaction will be rejected. This can greatly reduce the cost of banking for the under and unbanked. According to the FDIC, the average overdraft fee and non-sufficient funds fee for banks regardless of their asset class is $26.45 and $26.58 respectively (2011 FDIC Survey of Banks Efforts to Serve the Unbanked and Underbanked, 16). These fees are costly, especially for those who may only carry a minimum balance and they turn customers off when looking into banking services. The only bank to offer a prepaid service that we interviewed was J.P. Morgan Chase. They offered a reloadable debit card called the Chase Liquid card. This card allows customers to deposit their paycheck or cash free of charge onto a reloadable debit card. The Chase Liquid card has no overdraft fees, even if your account goes negative. This debit card does contain a fee of $4.95 per month. Despite the monthly service fee this is still more beneficial than cashing a paycheck at a bank, as a non-account holder, or at an alternative banking institution like a currency exchange. However, not a beneficial as opening up a free checking account at another bank. The under and unbanked demographic spent an average of $6.25 to cash their payroll checks at various banks in 2011 (2011 FDIC Survey of Banks Efforts to Serve the Unbanked and Underbanked, 20). With two payroll checks per month an underbanked person would spend over $12.00 just to cash their checks. By providing reloadable debit cards like the Chase Liquid, the underbanked can save on some of the fees associated with check cashing, leaving them only with one flat fee of $4.95. This is still not the most ideal option for the under and unbanked but it is a step in the right direction, especially for those who may have had a bad relationship with banks in the past and cannot open a checking account. After conducting interviews, comparing, and analyzing different banks from different asset classes we have concluded that there are fundamental differences in the banks, specifically between asset classes. In terms of offering entry-level checking and savings accounts for the under and unbanked J.P. Morgan Chase, and other large institutions, dont match up to the smaller and midsize institutions. Chase has much more hidden fees and complex terms and conditions that a person with novice financial knowledge would not be able to understand, therefore catering away from the under and unbanked demographic. Chase may advertise to the under and unbanked but the cost of the services offered dont match up to the smaller banks. TCF and North Community Bank on the other hand offered low-cost services, advertised them in English and Spanish, and had simple handouts that everyone could understand. Since smaller banks dont have the money to spend on big advertising and dont have as many deposits to work with, they are constantly trying to do whatever they can to capture new customers, in this case it is the under and unbanked demographic that may end up flocking to the smaller banks.

Works Cited "2011 FDIC National Survey of Unbanked and Underbanked Households." FDIC.gov. Federal Deposit Insurance Corporation, Sept. 2012. Web. 05 Mar. 2013. "2011 FDIC Survey of Banks Efforts to Serve the Unbanked and Underbanked." FDIC.gov. Federal Deposit Insurance Corporation, Dec. 2012. Web. 05 Mar. 2013. Beard, Martha Perine. "Publications." Reaching the Unbanked and Underbanked. Federal Reserve Bank of St. Louis, Winter 2010. Web. 07 Mar. 2013. "FFIEC Community Reinvestment Act." FFIEC Community Reinvestment Act. Federal Financial Institutions Examination Council's, n.d. Web. 05 Mar. 2013. <http://www.ffiec.gov/cra/default.htm>. Steiner, Sheyna. "Have Banks Killed Free Checking?" Have Banks Killed Free Checking? Bank Rate, 18 June 2010. Web. 07 Mar. 2013.