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Financial institutions target underbanked population
By Dan McCue
Staff Writer
South Carolinians who have are in financial ruin due to mismanagement of their checking and other accounts may soon get a second chance.
Establishing the vehicle for that opportunity is the focus of a 40-member committee representing advocacy organizations and the public and private sector as well as the for-profit and nonprofit communities.
The group, informally known as the “unbanked committee,” is affiliated with the S.C. Council on Economic Education and the University of South Carolina’s Moore School of Business in Columbia.
The unbanked, or those with no banking relationships at all, and the underbanked, or those with limited relationships with financial institutions, represent a significant slice of the U.S. population. In a recent study, global financial services firm JPMorgan found that more than 22 million U.S. households, or 7% of the nation’s overall population, have no bank account at all and another 20 million households, or 6.5%, have only limited relationships with financial institutions in their communities.
Of those households, about two-thirds are black and one-third are Latino or Hispanic.
It is unknown what the exact numbers are in South Carolina, but the committee believes they are comparable in terms of the ratios, given the large number of people who by default have turned to high-cost payday loan and check-cashing institutions across the state.
Meeting since January, the group has established subcommittees to look at different aspects of the underbanked population, including identifying its members, their financial educational needs and the educational and rehabilitation mechanisms available at the state’s banks.
The plan is to roll out a pilot “economic re-entry” program in Richland and Lexington counties later this year and to expand it across the state by late 2009.
“People think of us as a nonprofit business-education partnership that primarily trains teachers of students from kindergarten through 12th grade to educate them about economics and personal finance, but we also do advocacy,” said Helen Meyers, council president.
The Moore School of Business is conducting an analysis of the unbanked and underbanked this spring and summer in an effort to identify them, determine their numbers and learn where they are. At the same time, the Federal Deposit Insurance Corp. is conducting a nationwide survey to assess its member institutions’ efforts to serve unbanked and underbanked individuals and families.
“We know we have a problem, but before devising a strategy to address it, we need to know its scope,” Meyers said.
Justin Strickland, president of Greenville First Bank and its Columbia affiliate Southern First Bank, got involved with the unbanked committee in his role as this year’s chairman of the S.C. Bankers Association.
A discussion with Meyers and Larry Wilson, the chairman of the unbanked committee, convinced Strickland that teaching people to handle their financial affairs with more care would protect banks from losses and would also free people from excessive fees charged in the “alternative” economy and funnel more money back into the community, he said.
“The challenge is finding the appropriate mechanism to get these individuals and families back into our banks,” Strickland said. “Bankers don’t like risk.”
Strickland said anecdotal information suggests that many of those who have turned to check-cashing establishments and payday loan providers have done so after overdrawing traditional checking accounts or after depositing checks that have bounced and left them overdrawn.
In such chronic situations, banks typically make an active, 60-day collection effort, and then report the individual and the losses associated with their accounts to Chex Systems Inc., a national network of financial institutions that contributes information on mishandled checking and savings accounts to a central database. Once that happens, banks won’t offer those individuals their services until their past financial problems are addressed.
“A lot of people open a checking account and don’t understand a thing about how it actually works,” Strickland said.
He said one of the challenges the unbanked committee will face is establishing a mechanism through which the individual’s debt to his or her original bank will be paid off. How this might work has not yet been decided.
South Carolina Community Bank in Columbia has started a similar program, albeit on a smaller scale.
Penny Delaney Cothran, vice president of communications for the S.C. Bankers Association, said that once those who don’t use banks and other mainstream financial institutions are brought back into the fold, it will be easier to sell them other banking services.
“This is a way to give people a renewed chance to pursue the American dream,” Cothran said. “Our focus right now is breaking the cycle of poverty and freeing the little guy from the cycle of debt.”
Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@scbiznews.com.
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