About one in 12 households across the U.S. don’t have a traditional bank account–about 10 million in all. A further 20% are “under-banked,” meaning they have a checking or savings account, but also rely on predatory services like payday lenders or pawn shops.
While some people obviously choose it that way, access is a big reason for the recent growth of this population. Since the recession, while the number of bank branches as a whole has increased, their presence in lower-income neighborhoods is reduced. Of the 1,800 branches that have closed since the housing crisis, 93% have been in low-income communities.
This creates what financial access advocates call “bank deserts”–places that traditional banks have left behind, and where sky-high-rate operators are the only game in town. “When you see a pull back of traditional depositories, you see a growth in the number of payday lenders into these communities,” says Bill Bynum, who runs the Jackson, Mississippi-baesd Hope Credit Union, which also has branches across low-income areas in the South.
At 16.2%, Mississippi has double the national unbanked rate, according to the FDIC. And the region as a whole is the most under-served in the country. “You can drive around many towns in the Mississippi Delta and see no sign of a traditional bank. But what you do see is row upon row of shopping strips with cashier’s pawn shops charging those who are most vulnerable the highest prices,” Bynum says. “There’s a big donut hole around Mid South in terms of the mega-banks.”
A lack of responsible financial services exacerbates problems already faced by poorer communities. People don’t save regularly. They don’t borrow, so they can start building assets. Negative cycles set in. Parents, for example, don’t pass on good practices to children, because they don’t have good financial education themselves.
Bynum started addressing the problem in the mid-1990s after he moved to Mississippi from North Carolina. A local pastor had been wanting to do something about the payday lenders, and pressed his case to Bynum once he heard he had a background in community finance.
Hope was born, and the credit union has grown steadily ever since. Before Hurricane Katrina, in 2005, it had just 1,000 members. Now, it has more than 29,000 members. In the last two decades, it has issued over 7,200 loans worth a total of more than $260 million. Hope is now also in Louisiana, Tennessee, and Arkansas.
In a perverse way, the big banks’ exit has been good for its business. “We see the other banks running away from these communities. But we think that presents an opportunity for us to go in and increase the number of people that we serve, and help them avoid these other financial services,” Bynum says.
Since the financial crisis, Hope has merged with other credit unions that were struggling, and taken over a BancorpSouth branch in Utica when the bank pulled out this summer. It’s also been opening more branches, often setting up in unexpected locations. The latest is an African American-owned grocery store in New Orleans that closed after Katrina, but has re-opened with Hope’s help.
That it is able to make things work where others have failed Bynum attributes to two main reasons. First, Hope has a different model. It is owned by its members, and profits go into lowering interest rates for loans and increasing them for depositors. (Publicly-traded institutions need to serve shareholders, who expect a slice of the pie). It also keeps loans relatively small–$80,000 is a typical mortgage amount–which reduces the risk. It currently has only a 0.5% loss rate on its portfolio, even though it is targeting people other institutions don’t want, including many first-time buyers. The other reason is just as important. Hope goes out of its way to target the underserved. Traditional banks–well, they don’t go out of their way.
The drawback with the credit union model is that Bynum lacks a lot of spare capital for expansion. He can’t sell stock, so has to rely on slow, organic growth. However, he’s trying to get around that by going direct to high-net-worth individuals and simply appealing to their generosity. Hope now has a “Friends of Hope” campaign, and is trying to raise a minimum of $20 million.
Last November, Bill Bynum accepted the Aspen Institute’s $100,000 John P McNulty Prize, which helped bring publicity. (The elegant video above, which was produced by a group called Micro Documentaries, came as part of the package). Bynum also consults with the Obama Administration on the new Consumer Financial Protection Bureau, giving input on financial access issues.
Though Hope plans to stick to the Mid South region, seeing plenty more gaps to fill, Bynum knows there are other places with financial access problems as well. “We have 28 of the 110 most impoverished counties in the country are in our region. But there are also bank deserts in Chicago, L.A. and other cities. We think our model has applications in those communities too,” he says.