Real Solutions for Low-Wealth Households

Lois Kitsch, Filene Research Institute
October 18, 2004

Millions of low-wealth Americans rely on alternative financial institutions for their financial transaction needs. With much of the alternative financial sector practicing opportunistic - even predatory - business practices, these 20-30 million, low-wealth Americans are currently underserved by credit unions.

Each year check cashers across the United States cash more than 180 million checks worth $60 billion collectively. In the last six years, the check-cashing industry has doubled, growing to more than 6,000 neighborhood financial service centers. These check cashers often offer other alternative financial services such as bill payments, money orders, payday loans, title loans, small consumer loans, and international remittances to their customers who might not be able to obtain these services from a bank. Some check cashers currently charge fees that might be more cost-effective for these unbanked or underserved consumers.

For other transactions such as small payday loans, interest rates when annualized are often exorbitant. Today there are over 22,000 payday loan locations with estimated loan disbursements of $23 billion each year. Also offering transaction services are Wal Mart, pawn shops, grocery stores, rent-to-own stores, and buy here-pay here auto dealers.

Users of alternative financial services are families with modest incomes, immigrants and new Americans, young adults, and people who have difficulty managing their finances. They may be your family, friends, and neighbors. Underserved consumers tend to be less comfortable with technology, need financial education, need special language and cultural considerations, and often don't have credit histories readily available to financial institutions.

The check-cashing and alternative financial services market offers credit unions three opportunities: 1) The possibility of developing competitively priced transaction services to generate fee income and reduce reliance on interest income, 2) The chance to help unbanked consumers, thereby fulfilling our social mission, and 3) The opportunity to generate new membership and cross-sell products and services to existing members. Additionally, serving households of modest income is a quality example of why credit unions should maintain their tax-free status, while also offering advocacy opportunities for credit union leadership.

Modest-income households benefit greatly from credit union membership. By reaching out to lower-income households, credit unions can introduce individuals to products and services that will help them build financial savings, reduce debt burdens, and repair impaired credit records. Credit unions are well positioned to reach low-income households. Many credit unions already have substantial members of low-income individuals in their fields of membership. Other credit unions may utilize a credit union service organization to reach lower-income households.

Lois Kitsch is director of special projects for Filene Research Institute (www.filene.org) and was a speaker at the 2004 CUNA Operations Sales & Service Council Conference in New Orleans. She has also worked in Afghanistan and the Philippines developing credit unions. Contact her at 608-231-8559 or loiskitsch@filene.org.