Community Development INVESTMENT CENTER Working Paper From Cashing Checks to Building Assets: A Case Study of the Check Cashing/Credit Union Hybrid Service Model Laura Choi Federal Reserve Bank of San Francisco January 2013 FEDERAL RESERVE BANK OF SAN FRANCISCO Working Paper 2013-01 http://frbsf.org/cdinvestments NTER FO CE R C O S M T N M Federal Reserve Bank of San Francisco E U M N 101 Market Street T I T S San Francisco, California 94105 Y E V D N www.frbsf.org/cdinvestments E I VE T LOPMEN Community Development INVESTMENT CENTER Working Papers Series The Community Development Department of the Federal Reserve Bank of San Francisco created the Center for Community Develop- ment Investments to research and disseminate best practices in providing capital to low- and moderate-income communities. Part of this mission is accomplished by publishing a Working Papers Series. For submission guidelines and themes of upcoming papers, visit our website: www.frbsf.org/cdinvestments. You may also contact David Erickson, Federal Reserve Bank of San Francisco, 101 Market Street, Mailstop 215, San Francisco, California, 94105-1530. (415) 974-3467, [email protected]. Center for Community Development Investments Federal Reserve Bank of San Francisco www.frbsf.org/cdinvestments Center Staff Advisory Committee Joy Hoffmann, FRBSF Group Vice President Frank Altman, Community Reinvestment Fund Scott Turner, Vice President Nancy Andrews, Low Income Investment Fund David Erickson, Center Director Jim Carr, Consultant Laura Choi, Senior Associate Prabal Chakrabarti, Federal Reserve Bank of Boston Naomi Cytron, Senior Associate Catherine Dolan, Opportunity Finance Network Ian Galloway, Senior Associate Andrew Kelman, Bank of America Securities Gabriella Chiarenza, Associate Judd Levy, New York State Housing Finance Agency Kirsten Moy, Aspen Institute Mark Pinsky, Opportunity Finance Network NTER FO CE R C Lisa Richter, GPS Capital Partners, LLC O S M T N Benson Roberts, U.S. Department of the Treasury M E U M Clifford N. Rosenthal, Consumer Financial Protection Bureau N T I T S Y E Ruth Salzman, Russell Berrie Foundation V D N E I Ellen Seidman, Consultant VE T LOPMEN Kerwin Tesdell, Community Development Venture Capital Alliance Betsy Zeidman, Milken Institute From Cashing Checks to Building Assets A Case Study of the Check Cashing/Credit Union Hybrid Service Model By Laura Choi Federal Reserve Bank of San Francisco The views expressed herein are those of its author and do not necessarily reflect those of the Federal Reserve Bank of San Francisco or the Federal Reserve System. This paper is for research purposes only and is not a direct endorsement of the Prospera model or Self‐Help Federal Credit Union. INTRODUCTION Community Trust Prospera (“CT Prospera”) is a hybrid financial service provider that combines the accessible services of a check‐casher with the longer‐term depository and lending relationship opportunities of a mainstream financial institution. CT Prospera is based upon the “micro branch” business model, which Self‐Help Federal Credit Union (FCU) developed to serve the needs of the unbanked and underbanked. In early 2010 a pilot branch was launched as a division of Self‐Help FCU in East San Jose, California in a largely Latino immigrant neighborhood.1 As the business model name implies, a micro branch has a small physical footprint, similar to a check cashing outlet, and is designed to create an inviting, safe, and accessible environment for clients who may not feel comfortable entering a traditional bank branch. The micro branch model aims to meet the immediate financial service needs of unbanked and underbanked individuals by providing the transparent and convenient transactional services they need, such as check cashing, money orders, and remittances. However, unlike a traditional check cashing outlet, CT Prospera is a full‐service credit union and is able to transition these customers into depository and credit accounts, thereby bringing them into the financial mainstream. The Community Development department of the Federal Reserve Bank of San Francisco engaged in this research effort to identify new models for increasing access to financial services and improving household financial stability for low‐ and moderate‐income (LMI) individuals. The recent economic trends of high levels of personal debt, high unemployment, low savings and low wages have created unsustainable financial conditions for many households. Data from CFED suggests that 43.1 percent of American households are in “liquid asset poverty,” meaning they lack sufficient liquid assets to subsist at the poverty level for three months in the absence of income (see Figure 1).2 Given that so many families lack sufficient savings to weather a financial emergency or job loss, it is vital to increase our understanding of how to better reach and serve these households. Figure 1 – Income and Asset Poverty in the 12th District, 2009 Income Poverty Asset Poverty Liquid Asset Poverty Alaska 8.5% 21.7% 38.8% Arizona 14.7% 33.9% 44.4% California 13.8% 30.9% 43.1% Hawaii 11.1% 18.7% 22.8% Idaho 14.9% 24.8% 44.3% Nevada 13.1% 45.2% 52.2% Oregon 14.4% 28.2% 37.6% Utah 12.3% 22.0% 35.0% Washington 11.9% 23.2% 30.7% U.S. 14.0% 27.1% 43.1% Source: CFED Assets and Opportunity Scorecard This report summarizes information gathered from stakeholder interviews and data from CT Prospera’s first two years of operation. While the pilot is still underway and new findings are constantly emerging, this report is intended to capture lessons learned thus far and provide an informational resource for any organizations that are interested in learning from the model. 1 The branch was originally opened under the name “Micro Branch,” but was rebranded to Prospera in December 2012. 2 CFED. Data reflect values for 2009. Retrieved from http://scorecard.assetsandopportunity.org Page | 2 DEVELOPING THE CONCEPT The development of the micro branch concept was one of the earliest activities of Self‐Help’s California operations, which were established in 2006. According to Steve Zuckerman, Managing Director of Self‐Help California, the impetus for the concept was a “recognition that the delivery of financial services was becoming increasingly bifurcated,” with abundant mainstream financial services for higher‐income clients, and rapidly expanding payday lending services targeted at lower‐income clients. Indeed, during the period from 2006 to 2008, the total dollar volume of deferred deposit (payday loan) transactions in California increased over half a billion dollars and the number of transactions grew by over 1.8 million (see Figure 2).3 In addition, data from the 2011 Federal Deposit Insurance Corporation’s (FDIC) National Survey of Unbanked and Underbanked Households shows that unbanked and underbanked households in California are more likely to be black or Hispanic, low‐income, and have limited educational attainment.4 Figure 2 – Payday Lending in California, 2006‐2010 Dollar Amount Transactions Customers $3.2 13 1.7 $3.0 12 1.6 11 $2.8 10 $2.6 1.5 Billions 9 Millions Millions $2.4 8 1.4 $2.2 7 $2.0 6 Source: California Department of Corporations 1.3 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Source: California Department of Corporations In addition to payday lending, low‐income unbanked and underbanked households also tend to rely on check cashing services. These check cashers can charge high fees and often do not offer lower‐cost alternatives. According to the Brookings Institution, a full‐time worker without a checking account could potentially save as much as $40,000 during his or her career by relying on a lower‐cost checking account instead of check‐cashing services.5 In addition, check cashing services are often an inhibitor to savings; an individual leaves the transaction with their entire paycheck in cash, and no place to keep what’s left over after monthly expenses, making it easier to spend the entire amount. Reliance on these types of alternative financial services thus impedes lower‐income households’ ability to save and build assets over time. 3 California Department of Corporations. (2010). 2010 Annual Report, Operation of Deferred Deposit Originators under the California Deferred Deposit Transaction Law. 4 Federal Deposit Insurance Corporation. (2011). National Survey of Unbanked and Underbanked Households. http://www.fdic.gov/householdsurvey/ 5 Fellowes, M. and Mabanta, M. (2008). “Banking on Wealth: America’s New Retail Banking Infrastructure and Its Wealth‐ Building Potential,” Brookings Institution. Page | 3 One prominent model for increasing access to the financial mainstream is the Bank On initiative, which began in San Francisco and has since spread across the country.6 Financial institutions participating in Bank On offer starter accounts with features for unbanked individuals. Research from the New America Foundation identified the importance of meeting the “real needs” of the unbanked individual and recognizing the diverse needs of the unbanked.7 One of the top lessons learned from the Bank On experience was the importance of better understanding how to better reach and serve the target unbanked and underbanked market.8 Haydeé Moreno, CT Prospera Director, explained that Self‐Help saw the need for a new type of model that could bridge the gap between alternative and mainstream financial services. “We know what our target market is doing right now—using check cashers—and we know how they could be better served. We decided to develop a concept that could easily get them from Point A to Point B,” she said. As part of a market research effort to understand their target clientele, Moreno led a series of interviews and focus groups with unbanked and underbanked individuals over the course of a year and a half. As summarized in Figure 3, the interviews provided insight into the challenges and issues facing many unbanked and underbanked individuals and their underlying motivations and reasons for choosing particular financial services.