Savings Tools Helping Some Draw Unbanked

Byline: Jeremy Quittner

Low-income customers can be a hard market for banks to crack - acquiring them can be costly and retaining them can be difficult.

Over the last few years, however, some of the largest U.S. banking companies have found that offering individual development accounts can help turn the unbanked or underbanked into customers.

These accounts, modeled on 401(k)s and other defined contribution programs, allow customers to save for a home, education, or to start a small business. An economic development partner organization usually provides matching funds, while banks serve as the fiduciary agents for the accounts and provide basic financial education.

Nearly 13% of U.S. families and about 60% of Americans without a checking account are in the lowest economic bracket, according to a report on IDAs that MasterCard International’s TowerGroup published in March. Bankers say that for the most part IDA programs have been a good way to get members of this group to save money and become prospects for home, education, and small-business loans.

Moreover, the programs help banks meet their Community Reinvestment Act goals.

“This is good for the bank, for the customer, and for the community,” said Lisa Glover, the director of community development and fair lending for U.S. Bancorp. The Minneapolis company’s IDA program is one of the country’s largest, with about 2,000 accounts.

“The benefit for the bank is we create and develop new relationships with nonprofits, and we create relationships and build bridges to help community, and it also helps create a new customer base with a financially educated customer,” Ms. Glover said.

U.S. banks have about 20,000 IDAs, experts said. The programs began in 1997 with a pilot test called the American Dream Demonstration, a partnership between banks, 14 community organizations, and the nonprofit Corporation for Economic Development.

Individual development accounts could get a boost from legislation pending in the House and Senate. The Savings for Working Families Act would pave the way for up to 900,000 IDAs, giving financial institutions that match funds a tax credit of $500 per account.

IDA programs typically pair banks with local nonprofits that team up with low-income families or customers for economic development. Banks hold the accounts, and participants work with the nonprofit to set savings goals, up to $2,000. Either the bank or the partner organization offers matching funds of one-to-one or higher as an incentive to save. As participants accumulate assets, they are required to attend classes on such basics as balancing a checking account, buying a home, and managing credit.

“The idea is to set aside money for a goal and for asset building, leading to more economic opportunity for the household,” said Matt Schott, the research director of TowerGroup’s brokerage and wealth management practice.

Citigroup Inc. participated in the American Dream test in 1997 and today has 2,700 accounts and 50 nonprofit partners.

“We are always interested in improving the financial lives of low- and moderate-income people,” said Ellen Tower, a vice president of community relations and asset-building at Citigroup.

Ms. Tower said Citi’s biggest surge in IDAs was from 1999 to 2003, when the number of accounts grew 15% to 20% a year. The pace is down now, because some program participants have reached their financial goals and others have dropped out, she said.

Some of the participants have become bank customers, Ms. Tower said, though she would not give a figure.

“They are becoming bankable - that is for sure - and some are becoming bank customers,” she said.

Experts say there are technical matters and costs banks should consider.

“There is a challenge scaling these programs from an operations perspective,” Mr. Schott said. IDA statements must be generated for both the participants and the nonprofits involved, and the partner agency must carefully monitor withdrawals to ensure they are used for stated financial goals, he said. If the program entails matching funds, the bank must have knowledge of this. And branch bankers have to be made aware of the programs and how they operate so they can assist participants.

Jeff Zinsmeyer, the executive director of Doorways to Dreams, a nonprofit involved in the development of savings programs and administrative platforms for such programs, agreed.

“All of these programs become labor-intensive,” he said. Besides sending statements to both the savers and the community orga-nization responsible for the program, the bank must hold the money in a “subaccount” resembling an escrow account, so participants cannot simply withdraw money without guidance.

Doorways to Dreams, in Roxbury, Mass., has partnered with Sungard Data Systems Inc. of Wayne, Pa., to modify its OmniPlus platform for use in IDA programs to enable large-scale adoption of such accounts by banks. Financial institutions typically use OmniPlus to administer defined contribution programs.

Brian Stewart, a vice president of community development and a manager in the community and external affairs division at the thrift giant Washington Mutual Inc., which has about 1,000 IDAs, said the accounts can be an administrative burden.

“A lot is involved in implementing a new program, and depending on how large that is, the complexity may vary,” Mr. Stewart said. He said many areas of the company may have to be involved, including the CRA division, product development, marketing personnel, and the information and technology department, which may need to change pre-existing platforms to accommodate the special reports and statements required for the accounts.

Mr. Stewart said the Finance 101 component is equally important. Washington Mutual provides its employees the resources to teach financial literacy classes at partner organizations.

“If we can assist people with financial education, they become better-educated consumers, which will be helpful for all financial institutions,” he said. Those who graduate out of the program “may be coming to the financial institution for additional products and services,” he said.

U.S. Bancorp’s Ms. Glover said that the largest hurdles are for the nonprofits that want to be part of an IDA program. “Our biggest challenge is helping the nonprofit getting into this … [realize] that it will take staffing and people to work with the clients,” Ms. Glover said. U.S. Bancorp, which has been most active with partner organizations in Missouri and Nebraska, often provides them with the curriculum that becomes the basis for their financial literacy programs, she said.

The stronger a bank’s relationship with its partner organizations, she said, the better its ability to create a long-term or cross-sell opportunity with an IDA customer.

Not all banks said their IDA programs were growing. JPMorgan Chase & Co. had one that began in 1999 as a Bank One project to help low- income women in the Chicago area. Forty-one people graduated from the program, said Calmetta Coleman, a spokeswoman for the New York banking company. It provided matching funds for each participant of up to $2,000, she said.

“They could use the money for what they wanted, but usually it was a long-term asset goal - for retirement, for a business, education, or a home,” Ms. Coleman said. Along the way, JPMorgan also offered credit and debt counseling through its nonprofit partners, she said. Lately the company has not received many requests for IDA programs, she said.

Banks whose IDA programs have grown, however, are committed to them. Citigroup’s Ms. Tower said, “While we knew this before, we have helped regulators and the government realize that low-income people can and do save.”

Wamu’s Mr. Stewart said an IDA program “gives us access to people who need banking products, and it is a method for increasing [customer] households. If we get them in and provide them good products and services, hopefully we develop a lifetime customer.”

Mr. Quittner, an American Banker reporter from 1995 to 1997, is a freelance writer in New York.