Financial Product Innovations & Trends

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

2. 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.

3. 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

4. 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.

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

6. 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

7. 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.

8. Alternatives to Check Cashing Checkless Checking Example • Key Bank https://www.key.com/html/direct-deposit-checkless-account.html

9. 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 2nd 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.

10. Alternatives to Check Cashing • Get Checking http://www.creditservicer.com/pages/chexsystems-help/get-checking.php

11. 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.

12. Credit Building • Southern Good Faith Fund www.southergoodfaith.org • CitiBank https://www.citicards.com/cards/wv/cardDetail.do?screenID=940

13. 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)

14. 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

15. Alternatives to Payday Lending • A Better Choice Pennsylvania Credit Union Association Harrisburg, PA www.PaCreditUnions.com • Common Cents Initiative Mountain Association for Community Economic Development Berea, KY www.maced.org • Stretch Loan ASI Federal Credit Union Harahan, Louisiana http://www.asifcu.org/personal/loans.aspx

16. 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.

17. 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

18. Useful Resources • Center for Financial Services Innovation • http://www.cfsinnovation.com/ • Community Development Banking Listserv • E-mail communitydevelopmentbanking-l@cornell.edu with subscribe in the subject line