From Fringe Banking to the Financial Mainstream

1
The Center for
Community Capitalism
A Personal Perspective on the Recapitalization of
Communities Prepared for presentation at 2004
Community Development Policy Summit Federal
Reserve Bank of Cleveland Columbus, Ohio May 14,
2004 by Dr. Michael A. Stegman Center for
Community Capitalism University of North Carolina
at Chapel Hill
2
Six Policy Challenges

• Attracting into the financial mainstream millions
  of households with no banking relationship
• Finding creative ways of helping millions of
  underbanked households who operate at the
  fringes of our banking system who have become
  chronically dependent upon high cost credit
• Homeownership remains a primary route to wealth
  creation
• Unlocking Latino demand for mortgage loans a key
• While encouraging strategies to help low-income
  families build wealth, help protect the assets of
  those who have managed to buy homes
• Private equity suppliers are beginning to target
  underserved markets in low-income communitieshow
  to capitalize on these unsubsidized ventures.

3
Why policymakers should care whether people are
banked

• U.S. policy moving toward asset-based social
  policiesrewarding work, incentives for taking
  more responsibility for financial future
  retirement security
• People with bank accounts are more than twice as
  likely to hold savings, as are people who are
  unbanked, and are more likely to add to their
  savings on at least a monthly basis.
• Wealth disparities are greater than income
  disparities growing
• The bottom 90 percent of Americans earn 60
  percent of all income,
• but own less than 30 percent of all net worth
• and less than 20 percent of total financial
  assets.

4
Along with deregulation, integration of capital
marketstechnology is a driving force in banking
revolution

• full service branch transaction 1.07
• telephone transaction 0.54
• ATM transaction 0.27
• on-line transaction 0 1.5

5
The role of ATMs in increasing access to
mainstream financial services 100 Largest
Central Cities by Neighborhood Location
Racial Composition, 2002 (ATM addresses per
10,000 people)
6
Same technology driving banking is driving
changes in social safety net delivery system

• A Revolution in delivery of means tested benefits
• EFT99 --Beginning 1999, federal benefit
  recipients start receiving benefits by direct
  depositoriginally mandatory, now voluntary
• By end of 2002, food stamps had to be delivered
  electronically
• More than 35 states have added distribution of
  welfare benefits to the magnetic swipe card used
  to distribute food benefits.
• Treasurys First Accounts initiative
• On May 2, 2002,Treasury awarded 15 grants
  totaling 8 million to financial institutions to
  assist 35,500 unbanked low- and moderate-income
  individuals open accounts.
• 15 Awards to nonprofits, insured depositories,
  CDFIs, faith-based organizations, and local
  governments to aggregate unbanked market through
  employers, schools, tax preparation services, day
  care services.
• FDIC Money Smart financial education system

7
Electronic delivery of government benefits has
hidden policy potential

• EFT could soon result in millions of Americans
  being brought into the banking system for the
  first time, and it will change dramatically the
  way in which they handle money.
• Treasury Secretary, Robert E. Rubin

8
Stegmans Flawed Vision?EFT Can Do for
Affordable Financial Services What CRA Has Done
for Affordable Mortgage Credit.

• Technology makes EFT cost-effective
• EFT encourages industry to apply technology to
  un-served people and communities
• Regulators strengthen CRA service test
• Use EFT to expand economic literacy--a foundation
  of community development
• Link EFT mandate to a national asset-building
  initiative for lower income, low-wealth working
  Americans.

9
Why banks should care about increasing financial
access

• Strong link between account ownership and use of
  bank credit. Lower-income families with
  checking, savings, or money market accounts are
  six times as likely as to have credit cards and
  are more than twice as likely to have a mortgage.
  
• Nearly 60 percent of all first-time buyers
  between now and 2010 will be young minority
  immigrant families.
• In practical terms, big part of this growing
  market segment are not part of the financial
  mainstream--more than 40 percent of low- and
  moderate-income African American and Hispanic
  renters are unbanked..

10
A Two-Edged SwordThe growth of fee-based
banking has potential to convert unbanked into
profitable customers

• No longer do banks make most of their money from
  the interest spread.
• Non-interest revenues, particularly fee income,
  is driving bank income.
• Bank fees in U.S. accounted for 44 of net
  operating revenues for commercial banks in 1999
• Remittances sent home by Mexicans living abroad
  totaled 13.3billion in 2003, a 35.1 increase
  compared to the previous year
• Overdraft protection fees
• ATM surcharges generate 2 billion in revenues
• Bounced check fees generated 6 billion profits.
• Payroll Cards growing new business line

11
Origination and appreciated equity by household
incomeSelf-Help/Fannie Mae loans, for homes
purchased 1998-2002Value as of September 2003
12
A big chunk of the Latino market is not
accessible without systemic change

• Latino purchasing power more than doubled from
  1990 to 2001, from 207.5 billion, to 452
  billion, 118 percent
• Big segment of this market is undocumented, and
  cant open bank accounts or qualify for a
  mortgage
• Some 150 banks, including at least 19 major banks
  such as Bank of America, now permit illegal
  immigrants to use the matricula to open accounts.
  Wells Fargo is setting up 23,000 new matricula
  accounts a month nationwide.
• Tapping Latino mortgage market ado requires
  providing mortgage loans to individuals without
  Social Security numbers, using individual tax
  identification numbers (ITIN) instead

13
The growing challenge of the underbankedThe
dual financial services system in North Carolina
14
You cant build wealth through payday lenders

• Payday lending is 8-14 billion/year business
  between 26 47 million loans per year Generates
  about 2.5 billion in loan fees per year
• Between 2000 and 2003, the number of outlets
  offering payday loans more than doubled to
  20,000not counting the many Web sites such as
  sonicpaydayland.com, mycashnow.com, and so forth
  that give high-interest quickie loans. 
• Ohio-based Check 'n Go opened 100 new stores last
  year and anticipates opening another 100 this
  year. Advance America, a company that only
  started in 1997, already has more than 2,000
  stores.

15
Fringe banking profits tied to chronic dependency

• Most important contribution to revenues is of
  customers
• 2nd most important variable is percentage of
  chronic borrowersrollovers is key to
  profitability
• Average payday customer in NC took out 7
  loans/year 27 of borrowers took out 13 loans
  per year.

16
NC predatory lending law works Example
subprime refis with 110 LTVs down in NC up
in neighboring states( change post-NC law vs.
pre-NC law)
17
Recapitalizing low income communities cant occur
without growing businesses

• Perhaps, the most important development on the
  non-residential side of the recapitalization
  process is the growing role of private equity
  suppliers in helping to grow minority- and
  women-owned businesses in low-income communities
• One example is the Banc of America 195 million
  California Community Development Venture Fund

18
For more information

• Center for Community Capitalism web site
  www.ccc.unc.edu.
• Call at 919-962-6849