A New Way to Curb Poverty

Grant makers focus on problems caused by lack of financial savvy

Cathy Hill lives from paycheck to paycheck. A receptionist at a southwest Baltimore community center, Ms. Hill’s

money management has often led to trouble: hundreds of dollars in bank overdraft charges, stifling balances on retail-store credit accounts, high interest payments on rented furniture, and a never-ending struggle to stay one step ahead of collections agencies.

“I’m one of those spenders,” Ms. Hill says. “I was so far in debt, I was barely living.”

So when a new program that promised credit-union services and classes on budgeting and home buying opened in the building where she works, she was eager to sign up. The program, called Our Money Place, started a year ago and has provided education on day-to-day financial matters to 200 people, most from low-income households. The organization has also linked its clients with lower-cost alternatives to the expensive check-cashing services and lenders charging high interest rates that have become the scourge of many low-income city neighborhoods.

“My co-workers and I couldn’t wait for them to open up,” says Ms. Hill, 46. “Those classes have helped me realize that my wants are not my needs, and that I can start saving to buy my own house. Now, I have money in my wallet today that I had there on Friday.”

Spending andSaving

The financial-education programs at Our Money Place are backed almost entirely by two Baltimore grant makers — the Annie E. Casey Foundation and the Open Society Institute-Baltimore — and are emblematic of other foundation-driven efforts across the country that aim to help low-income workers build financial assets by encouraging good spending habits, offering information on lower-priced financial services, and managing subsidized savings accounts. Many programs encourage people to use banks or other financial institutions that offer services at less-expensive rates; others urge banks to open branches in low-income neighborhoods.

The efforts come after many major national grant makers — including Casey — have spent years putting big chunks of their annual operating budgets into programs that aim to improve neighborhoods, educational institutions, and the availability of child care to poor, working parents. Some have also been pushing governments and employers to offer so-called individual development accounts that offer poor people matching money for their savings. (See article on Page 7.) Now they say they realize that helping the poor requires more, especially as the evidence mounts that many people are being nickeled and dimed by financial-services fees.

Won’t ‘Change Poverty’

Not all nonprofit leaders are sanguine about the potential impact of financial-literacy programs, saying that increasing the salaries of poor people will have a much greater effect on the amounts they save. “All the financial education in the world isn’t going to change poverty for low-wage earners,” warns Lisa Donner, director of the financial-justice center at the Association of Community Organizations for Reform Now, an advocacy group in Washington.

But others say that increasing the knowledge of poor people could increase the heft of their pocketbooks. “If we can cut the amount of fees spent each year at check-cashing services by one quarter, that’s real money — about $2-billion — that would go directly to the consumer,” says Jim Carr, senior vice president at the Fannie Mae Foundation. “There’s an explosion of nonprofit groups that are offering financial education. The best thing they can do is help low-income people connect the dots so they can use federal tax credits and lower-cost services. Then, they can get to the point where they’re saving.”

Some grant makers say it is important not only to concentrate on people already beset by short-term debt, bad credit records, and an almost-addictive reliance on high-fee service providers, but to reach them before they develop money problems.

“If foundations want to make a difference, they can support programs that move financial-literacy programs into public schools,” says Kirsten S. Moy, director of the economic-opportunities program at the Aspen Institute, a research group in Washington.

Some programs have begun to reach young people before they move into adulthood. One program supported by the Charles and Helen Schwab Foundation, in San Mateo, Calif., Annie E. Casey, and others is designed to reach foster children in California before they take up housekeeping on their own. By supporting classes on budgeting and account keeping, grant makers hope to keep children from reliving the poverty of their parents’ generation.

“The idea is for them to have a foundation in financial literacy that will help keep them off of a treadmill that too often can include homelessness and substance abuse,” says Rick R. Williams, national programs director at Schwab.

High Fees for the Poor

Confronted with a growing body of research that shows that people in teetering neighborhoods frequently pay more than necessary for loans and check-cashing services, some grant makers are expanding their efforts to help the poor by supporting programs that stress financial literacy and availability of cheaper financial services.

Research shows that:

• An estimated 22 million households — made up of 56 million people — do not use banks. A disproportionate number of the households are headed by blacks or Hispanics. The heavy use of financial-service companies means that poor people often end up paying such high fees that they can’t save much, says a recent report from the Fannie Mae Foundation, a Washington grant maker that works to increase the savings of moderate-income people so they can buy houses.
• Payday lenders — storefront operations in mostly poor neighborhoods that give short-term loans of several hundred dollars each — made $4.3-billion in fees on as much as $27-billion in loans in 2002. Payday lenders typically charge from 400 to 475 percent in annual interest charges and usually cater to young, low-income women, according to estimates by the Consumer Federation of America, in Washington.
• Check-cashing services make nearly $8-billion annually in fees for services that most banks provide free to account holders. The Fannie Mae Foundation study estimates that an average household with $20,000 in annual income spends $86 to $500 to pay check-cashing companies, many of which also offer bill-paying services. The same services at a bank would cost the household $30 to $60 per year.
• Tax-preparation companies frequently offer loans on amounts individuals can expect to receive from state and federal government tax-refund checks. The annual interest rate on such loans is 180 percent, according to a study by the Consumer Federation of America and the National Consumer Law Center, a Washington advocacy group. Half of those who obtain such loans are low-income people who take advantage of federal tax credits. Interest costs and fees totaled $1-billion on such loans in 2002. Some advocacy organizations, such as the Association of Community Organizations for Reform Now, have formed protests against companies and have begun free tax-preparation assistance programs to steer consumers clear of companies that give high-priced loans.
• Immigrants and others who send money to relatives in their country of origin pay high fees to do so, typically 10 to 20 percent of the total value of the money being sent. In 2000, more than $20-billion was transferred from the United States to other countries, one-third of it going to Mexico. Although some banks have recently decided to handle these transfers, only 10 percent of Mexicans have bank accounts.

Courting Banks

Concerned that too few banks operate branches in neighborhoods where poor people live, some grant makers have spearheaded efforts to woo large banks — and the lower-cost services they offer — to inner-city areas. Such efforts have been controversial, because large banks have yet to figure out how to serve low-income people, some say.

In Los Angeles, a consortium of grant makers helped lay the groundwork for the opening last year of a Wells Fargo & Company bank branch in Pacoima, a neighborhood of 90,000 predominantly Latino residents that had not had a bank in 17 years.

Los Angeles Urban Funders, a coalition of 18 foundations that was formed after the 1992 Los Angeles riots and includes the philanthropies of three major banks, pumped $30-million into three low-income Los Angeles neighborhoods. In Pacoima, part of that foundation money — about $150,000 — was used to perform market research on the neighborhood, start financial-literacy classes, and create relationships between Wells Fargo employees and residents.

“People had literally been keeping their money in their mattresses,” says Elwood Hopkins, former executive director of Los Angeles Urban Funders and now a consultant who tries to link grant makers with financial institutions that seek to make a profit in low-income neighborhoods. He says that after residents who were not U.S. citizens complained that credit and immigration issues prevented them from opening an account, Wells Fargo provided money to start a credit union to serve people who lacked social-security cards or legal immigration status.

Mr. Hopkins says the consortium’s success in Los Angeles may not be all that easy to copy elsewhere. “It’s hard to do this, except on a local level,” says Mr. Hopkins. “There’s a lot of relationship-building that needs to happen before banks feel comfortable enough to open in some of these neighborhoods. That takes time and work.”

Large financial institutions have yet to jump into such neighborhoods with both feet, says Jennifer Tescher, director of the Center for Financial Services Innovation at ShoreBank Advisory Services, the research and consulting arm of Chicago’s ShoreBank Corporation, the largest community-development bank in the United States.

Although one recent survey found that major financial institutions are making more loans each year in poor areas — most of it spurred on by the federal Community Reinvestment Act, which requires institutions to put money into lower-income areas — as well as introducing more financial-literacy classes, most banks aren’t looking to poor neighborhoods for expansion.

“They have immediate pressure for return on their investment,” says Ms. Tescher.

Mr. Hopkins says foundations should step up grant-making efforts to persuade banks to operate in low-income neighborhoods. He says that if grant makers “understand that their investments can address the market imperfections that keep capital from flowing to low-income neighborhoods, they will eventually do more to create social change than anything they do in the areas of health, education, or poverty reduction.”

Making Services Fit

But some warn that supporting programs that lead to new bank branches in poor neighborhoods may not be enough.

A Fannie Mae Foundation-financed study released in January found that many banks already operate in poor areas, but that many people avoid them. The report said that is due to a low level of financial literacy, coupled with a lack of outreach by banks.

“We found that many alternative financial-service companies are actually located near banks,” says Stacey D. Stewart, president of the Fannie Mae Foundation. “But people still lack some comfort using banks and alternative institutions offer them services that are attractive to them.”

If banks are to be part of the solution to high-fee financial services, they will have to make a concerted effort to give low-income customers what they want, says Ms. Moy, of the Aspen Institute. By offering credit-repair programs, low-fee check cashing, bill-paying assistance, and quick availability of small loans of $50 to $300, banks might prove to be viable in many inner-city areas.

“The problem is bankers won’t usually see things that way,” says Ms. Moy. “They believe in relationships in which people use many banking products — savings accounts, a bank credit card, a mortgage. For low-income people, those often aren’t options.”

Reaching the Poor

Banks have made some strides in finding new ways to help immigrants send money home and in offering education for low-wage consumers, Ms. Tescher says. Last week, Citigroup announced a $200-million, 10-year plan to support financial-education programs in 100 countries.

The next step for banks is to find the best ways for them to operate in poor neighborhoods while making a profit, Ms. Tescher says. Toward that end, ShoreBank Advisory Services, with support from the Ford Foundation, recently started conducting research on banking methods that work best in serving low-income customers. But dealing with banks only supplies half of the equation, Ms. Tescher says.

“Sometimes, banks aren’t the answer in these areas. Part of the answer is to get people to the level where they become long-term customers. It’s hard. We need to understand this group of consumers and what they’re looking for.”

A roundtable discussion held by the Fannie Mae Foundation in November that included bank leaders and the heads of check-cashing and high-rate lending companies might also have helped banks and grant makers better understand how to reach low-wage customers, Ms. Tescher adds.

“Some banks and credit unions have gone into partnerships with check-cashing companies to create services for low-income people,” she says. “Check-cashing companies have these huge distribution networks that might prove useful to banks.”

While foundations might not always be the best institutions to change the behavior of financial corporations — “This involves influencing the private sector, which foundations haven’t always been great at,” says Ms. Tescher — some hold out hope that banks might respond to a carrot approach.

Robin Chesgreen, program director at the East Baltimore Asset Development Center, says groups should do more than use the Community Reinvestment Act as a stick to get banks to become more involved in poor neighborhoods.

“It might be better if we approached them saying we can bring them more customers,” she says. That approach would work best if it were led by a group of educated consumers who would ask for specific services, Ms. Chesgreen adds. “You can send more people toward banks, but banks have to have the right products. It’s hard for groups like ours to make banks understand that. That’s up to the consumers. Middle-class customers have applied that kind of pressure. Lower-income people can as well.”