Financial Product Innovations & Trends Rural Family Economic Success Institute November 2, 2009

Financial Product Innovations & Trends  Low-income people need financial services! They must be a good market, or the predatory lenders wouldn’t serve them!  Some financial institutions are bringing better products on line to serve the low-income market.

A Sampling: Products to Consider and Promote  Pre-paid cards  Low cost check cashing  Credit builder products  Low cost payday lending  Free tax filing & other options to RALs

Pre-paid Cards  Consumers can load their money on the card at participating banks, check-cashing facilities or credit unions.  Pre-Paid cards can be used to pay bills, mortgages and purchase groceries, or to buy products on line.  No overdrafts are permitted.  Pre-paid cards allow consumers to securely carry on vital financial transactions without an active checking account or a without a credit check  You can monitor your card uses and balances on line.

Pre-paid Cards  Check local banks, credit unions or others to see if they offer them.  Online account provider: netSpend  Local vendor that helps set up prepaid card services: Pemco

Alternatives to Check Cashing  About 106 million Americans do not have bank accounts.  Many are on Chex Systems and cannot obtain an account. Chex Systems: a national reporting system that rates people’s check-writing reliability like a credit report  Check cashing stores used to be their only option…  … but their fees are very high

Alternatives to Check Cashing  Some banks and credit unions are creating lower cost products and services to help these consumers conduct transactions.  Checkless checking accounts offer low-cost check cashing services for second chance customers. They charge lower fees per check, much less than “ traditional ’ check-cashing stores. Customers have the opportunity to open new accounts.

Alternatives to Check Cashing Checkless Checking Example  Key Bank checkless-account.html

Alternatives to Check Cashing  Get Checking A financial education course that “certifies” customers can operate a checking account Used by Consumer Credit Counseling Services Program is designed to help consumers on Chex Systems become eligible for 2 nd chance accounts Six hour seminar Students must settle all existing debts and not have any fraudulent marks on their Chex Systems report before they get certified.

Alternatives to Check Cashing  Get Checking help/get-checking.php help/get-checking.php

Credit Building  Many unbanked and underbanked people have poor credit or no credit at all.  Poor credit is “a gift that keeps on giving” Affects ability to get loans, buy homes, rent apartments, in some cases get jobs  One answer is a credit builder CD No-risk loan (to the lender) that help customers rebuild credit and build assets Customer takes out loan to buy a CD The CD is pledged as collateral to secure the loan Customer pays off the loan – Regular loan payments go on their credit record When paid off customer has both savings (the CD) and a better credit record.

Credit Building  Southern Good Faith Fund  CitiBank etail.do?screenID=940 etail.do?screenID=940

Alternatives to Payday Lending  Payday lending is the practice of making revolving, short-term loans at a high cost -- targeting those who can least afford it.  As of 2005, there were: 23,000 payday loans outlets nationwide Over $40 billion in loan volume Over $6 billion in finance charges.  As of 2008, 717 locations in Washington State (see 2008 Payday Lending Report for more)

Alternatives to Payday Lending  Credit unions are leading the way in providing lower cost alternatives to payday loans.  Typically these programs: Offer credit union membership to borrowers Make loans without reviewing credit score or history Have a moderate maximum loan amount Short term installment loan; max term of 90 days No rollovers and additional loans are permitted May open savings account May offer financial education

Alternatives to Payday Lending  A Better Choice Pennsylvania Credit Union Association Harrisburg, PA  Common Cents Initiative Mountain Association for Community Economic Development Berea, KY  Stretch Loan ASI Federal Credit Union Harahan, Louisiana

Options to Refund Anticipation Loans (RALs)  Millions of Americans look forward to tax season. They are due a refund and have ideas for how they will spend that refund.  Commercial tax preparers capitalize on the desire of customers to receive this money quickly by offering RALs.  These loans have high annual percentage rates (APR).  And if the actual refund is smaller than the anticipated amount, the borrower still must pay the loan in full.

Options to Refund Anticipation Loans  As discussed earlier, free tax preparation services can save a significant amount of money for patient filers.  Other options include: Low-APR RALs offered by some banks and credit unions Electronic filing with direct deposit – almost as fast as a RAL

Useful Resources  Center for Financial Services Innovation  Community Development Banking Listserv with subscribe in the subject line