At first, John Taylor, education coordinator for Chicago Commons Employment Training Center, had doubts about the idea of partnering with a local bank for a financial education program. The Center’s students are primarily women who are transitioning from welfare to the work force – most of them have not had previous relationships with financial institutions. Once the program with LaSalle Bank was underway, however, he witnessed some exciting transformations.
“This program proved to be a very valuable experience for the students and for me. There is a whole population of people out there who have never interfaced with banks and who have no experience with saving or creating a budget. This program helped the students, whose connection to money was based on spending or making sure not to accumulate too much to avoid welfare penalties, to get money to work for them,” Taylor recalls. Eighty-eight percent of the graduates of Chicago Commons and LaSalle’s partnership opened savings accounts.
A Complex Financial World
Chicago Commons and LaSalle’s partnership was initiated by the Chicago CRA Coalition, a group convened by Woodstock Institute, a 27-year-old nonprofit that does research and advocacy on community reinvestment. In a recent study of financial literacy, Woodstock found that the financial life of the typical American family has become increasingly complex. New products and technologies are fundamentally changing the ways we relate to money. The avalanche of credit card and home equity solicitations that families receive through the mail is just one example of the significant increase in the marketing of financial products. At the same time, the financial world around us is consolidating and restructuring at a breathtaking pace. Financial modernization legislation recently passed by Congress allows banks, insurance companies, and securities firms to merge with and acquire one another for the first time since the Great Depression, dramatically altering most people’s experience of financial services.
For every basic need – food, shelter, medical care, education, and retirement – financial planning has become not just a convenience but an essential survival tool. At the same time, responsibility for financial well-being is increasingly being placed on the shoulders of individuals. Welfare reform has moved millions from government assistance to the ranks of the working poor or permanent job-seekers. Employment-based contribution plans have begun to replace defined benefit programs as the basis for retirement savings, while the future of Social Security has become unclear.
Conservative estimates put the number of “unbanked” households at 10 percent of the U.S. population, or over 12 million people. The poor, young people, seniors, immigrants and minorities are disproportionately represented in the ranks of the unbanked. Families that are unbanked usually pay more for basic financial services, do not have the security of an insured deposit account, and have trouble building a credit history that would enable them to rent an apartment, get a job, or buy a car.
“Financial illiteracy” can compound these problems. Without an appreciation of money concepts and an understanding of financial options, people are likely to pay more than they have to for financial services, fall into debt, damage their credit records, over-invest in life insurance, or declare bankruptcy. Poor financial choices harm both individuals and communities. Families become more vulnerable to sudden economic shocks such as health emergencies or unexpected job loss. Decreased family stability, increased foreclosure risks, and disinvestment in homes and local businesses challenge already disadvantaged lower-income communities. These problems are exacerbated in certain communities by the absence of any truly affordable financial options to choose from.
Financial Education Helps
The good news is there is evidence that financial education can improve financial literacy and, even more importantly, change financial behavior for the better. Financial literacy programs can help families save and build assets and, if done properly and in partnership with financial institutions, can be a direct path to helping families become banked. In fact, financial education is a necessary – though not sufficient – condition for reducing poverty.
Although many major institutions teach personal finance, there is an enormous gap between the amount of training needed and the amount provided. Many states do not have consumer education mandates for schools, and there is a growing trend to “de-mandate” existing requirements. The Cooperative Extension Service and nonprofit consumer credit counseling agencies provide financial literacy training, but their resources and audiences are limited. Employer-based programs are very limited in scope. Finally, large financial institutions provide little financial literacy training, especially for low- and moderate-income people. In fact, institutions with the least resources, such as community development credit unions, often far outshine large, multi-state banks in this area.
This is where the experience of the Chicago CRA Coalition and the role of community groups comes in. Woodstock staff and members of the Coalition have partnered several major local banks with community groups with the goal of seeing more families using traditional financial institutions such as banks and credit unions rather than relying on high-cost check cashers.
Banks have an obligation under the Community Reinvestment Act (CRA) to provide loans, investments and services in all parts of their service areas, including low-income neighborhoods. Community organizations can use CRA as well as the positive experiences that they or other groups have had working with different financial institutions to encourage banks to work with them on financial literacy programs.
Sometimes financial literacy can be a part of a larger campaign to increase lower-income families’ access to basic financial services. For example, the CRA agreement that the Chicago CRA Coalition negotiated with First Chicago NBD/Bank One upon the merger of the banks in 1998 called for the bank to do a feasibility study of a pilot program for lifeline bank accounts. Woodstock staff and members of the Services Task Force of the Coalition met with bank staff on a regular basis for six months to develop account features, create marketing strategies and implement financial literacy programs. The resulting “Alternative Banking Program,” which started in three low- to moderate-income Chicago neighborhoods, has since expanded to six neighborhoods and has resulted in over 1,500 checking and savings accounts, the vast majority of which belong to the previously unbanked. The Coalition continues to meet with Bank One to monitor and evaluate the pilot, which will hopefully be significantly expanded.
The Role of Partners
These types of partnerships work well because both parties bring different areas of expertise to the table. The principal strengths of community groups in offering financial literacy training are their keen understanding of the specific needs of their constituents and their ability to tailor programs to fit those needs. Without partnerships with community groups, many banks are not experienced in dealing with the unbanked population. The CRA Coalition works with branch managers and bank staff from community reinvestment, compliance, retail, risk, and marketing departments to structure accessible trainings, and encourages them to create new low-cost/low-fee products. This learning process can be time-intensive, but is well worth the effort.
Banks, on the other hand, have resources – money, time and staff – that community groups often lack. They can also provide a specific and vital incentive by offering bank accounts to families that previously relied on high-cost check cashers for basic financial services.
That said, nonprofit agencies are increasingly structuring their own financial literacy curricula and courses. A wide variety of social service and community institutions such as homeless shelters, immigrant service organizations, and legal assistance offices are acutely aware that financial problems subvert important goals such as personal development, health, family life, and community stability. Although financial literacy is not their primary mission, these types of organizations are increasingly integrating personal finance education into their programs. Many groups find this integrative approach effective, since the training becomes a part of a program that already has a “captive audience,” such as an English as a Second Language class or a job training program.
Options are the Key
The importance of financial literacy programs can perhaps best be illustrated by the disastrous impacts of the lack of financial options on low-income people. John Taylor of Chicago Commons remembers the plight of one of Chicago Commons’ students who missed the last day of class when the women opened savings accounts. She was in an unstable situation at home, and the father of her child removed all of her savings from under her mattress, leaving her with nothing. “She said that she just really wished she had opened that account,” says Taylor. “I told her there would be another chance, that I would be sure to help her take care of it right away. This has definitely been a learning experience for all of us.”
This article is based on Tools for Survival: An Analysis of Financial Literacy Programs for Lower-Income Families, and Reinvestment Alert 15: Community-Bank Partnerships Creating Opportunities for the Unbanked.