"Four million Americans would fall below the federal poverty line if the interest they pay on their credit cards and other consumer debt were subtracted from their incomes, say two economics professors who call these people the "debt poor."For people with low-income who have bad credit, it is often more expensive to live as consumers who are in debt as they have to pay higher fees and are subject to services that prey on them. Payday lenders, loan sharks, and even banks charge higher rates to the debt. They can get away with it because it is considered a "high-risk" to lend to these types of consumers.
In truth, it perpetuates poverty because consumers must take out loans to pay off previous ones, therefore falling further and further into debt. It is a cyclical process they cannot escape.
There are initiatives underway to combat this type of consumer abuse. Bank on San Francisco is unique collaborative effort to bring 10,000 of the city’s estimated 50,000 unbanked households into the financial mainstream. The Mayor’s Office and the Treasurer’s Office of the City and County of San Francisco, the Federal Reserve Bank of San Francisco, a local nonprofit EARN (Earned Assets Resource Network), and the city’s financial institutions worked together to:
- Increase the supply of starter account products that work for the low-income unbanked market by developing baseline product criteria that must be offered by all participating financial institutions.
- Raise awareness among unbanked consumers about the benefits of account ownership and spur them to open accounts.
- Clamp down on the proliferation of check cashers and payday lenders.
- Raise city-wide awareness of the unbanked problem and potential solutions.
- Make quality money management education more easily available to low-income San Franciscans.
Banks and credit unions participating in Bank on San Francisco have agreed to:
- Offer a low- or no-cost product with no minimum balance requirement. High minimum balances and fees are a key factor keeping people out of the financial mainstream.
- Adapt internal systems to allow customers with a poor banking history to open “second chance” accounts.
- Accept consular identification cards as primary ID. For many immigrants, the barrier to opening an account is having the proper documentation.
- Waive one set of overdraft fees per client. Banks are often criticized for penalizing clients for mistakes, so this waiver gives everyone a chance to learn account management.
- Improve customer service at the branch level, expand marketing and outreach strategies in targeted, low-income neighborhoods, and increase the visibility of appropriate products in San Francisco.
- Partner with local community based organizations to provide financial management training and transition customers ready to enter the financial mainstream.
One year into the pilot, the collaborative of financial institutions had opened over 11,000 Bank on San Francisco accounts, surpassing the original goal of banking 10,000 of San Francisco’s unbanked. The goal has now doubled to banking 20,000 unbanked individuals in the city by the fall of 2008.
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In Kalamazoo, The Poverty Reduction Initiative in collaboration with city and county officials, the Hispanic Council, Consumers Credit Union, and other affiliates are trying to achieve similar goals. A meeting this July will bring together key leaders to discuss the opening of financial assets to low-income families with debt. Be sure to check out http://www.haltpoverty.org for more updates on the progress.
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