Bringing the benefits of mainstream banking to lower-income renters
by Ben Hecht, President & Chief Operating Officer, One Economy Corporation

Millions of Americans remain disconnected from mainstream financial services. Nowhere is this more evident than in America’s rental housing. More than 25 percent of the nation’s unbanked are renters, and more than 15 million renters are unbanked. The concentration of the unbanked is particularly high among the more than 5.5 million households living in government-supported rental housing.

Telling people that financial services are “good for you” doesn’t move them to act. What’s needed is a multi-faceted approach in which (1) the process of securing and using banking services is demystified by a trusted partner; (2) the services are accessible in a comfortable setting, such as home or work; and (3) the services become so integrated into a person’s life — such as by helping to achieve a much-desired goal — that using them becomes second nature.

One Economy has built its technology-led initiatives to bring the unbanked into the financial mainstream around these principles. We help landlords to demystify the process for tenants; we ensure that low-income and low-literacy renters can access information and learn in the dignity and privacy of their own homes; and we help them acquire a resource — a home computer — that they desperately want for their children’s education.

Incentives for rent payments

Affordable rental housing is typically owned by public housing authorities and by private nonprofit and for-profit organizations (‘housers’). Much of this housing is financed through programs such as the low-income housing tax credit, direct grants from the federal government, and federal operating subsidies to the owners or the low-income tenants. Most housers serving this population want to do all they can to help stabilize renters’ lives and connect them to the social and financial services that can help them become part of the economic mainstream. In many cases, this creates a unique trust relationship between the houser and its tenants — a relationship that is crucial to the success of our approach.

Houser interest in this approach, however, is not driven solely by altruism. Most housers lose up to 10 percent of their potential rental income annually to nonpayment or delayed payment of rents. An approach that promises to reduce these losses, through regular electronic rent payments, can save millions of dollars and free up resources to help renters move further into the financial mainstream.

Our approach features (1) a rent rebate incentive program that gives renters a 3 percent rent rebate annually if they have secured basic banking services that enable them to pay their rent electronically every month; (2) an aggressive marketing and outreach program for housers that describes the program, recruits participants and creates opportunities for housers, other residents, and bank staff to explain the basics of banking services and their value; and (3) close working relationships with a banking partner to create an efficient and scalable mechanism that meets the needs of renters and housers alike.

In 2003, we partnered with U.S. Bank and the Low Income Housing Institute (LIHI), a leading Seattle-based nonprofit housing developer, to test this model with 25 residents. The success of the pilot led the Annie E. Casey Foundation and Citibank to expand its scope in 2004, targeting 100 residents in Miami at properties owned and managed by Greater Miami Neighborhoods (GMN), one of Florida’s leading nonprofit housing developers, and in Chicago at properties newly acquired by Mercy Housing.

The initial rollout in Miami demonstrated how well this approach can work. Citibank made staff available to explain banking basics and the rebate plan. On the first Saturday in April, as residents came into the management office to pay that month’s rent, Citibank and GMN staff were there to help them move from reliance on money orders to debit cards or even regularly scheduled online rent payments. Of the 40 residents who came in, 19 signed up for new accounts on the spot.

Citibank is installing a debit card ‘swipe’ at the office so people can simply bring their debit card in, just as they used to bring their blank money orders on rent payment day. We are demystifying the process, making it easier for people to pay rent and providing a 3 percent bonus to boot. Rent payment is less costly and burdensome for residents, more predictable and consistent for housers — and banks get new customers using cost-effective electronic services.

Computers within reach

No asset is more valued in low-income households than a home computer. Parents see a computer as essential for their children’s advancement, yet fear they can’t afford one. We found that renters would jump at the chance to buy a computer if they could do so for less than $25 per month, so we set out to create a loan product within this affordability range.

In 2003, working with City First Bank, N.A., a community bank in Washington, D.C., we developed a loan guarantee program that required purchasers to make a $100-200 down payment and execute a loan, not to exceed $400, that brought a new computer to their door. Monthly costs were below $25 if the loan was paid back within two years. By the end of the year, 50 loans had been made; 20 have since been paid in full, prior to the end of the loan term, and we have had only one default.

Our early success led to similar arrangements with California Bank and Trust in San Francisco and San Jose; the Water & Power District Credit Union in Los Angeles; and the Kellogg Federal Credit Union in Battle Creek, MI. The credit unions were eager for new customers and required no loan guarantees at all for working families. In many cases, borrowers have expanded their banking relationships after developing a trusting relationship with the lender.

Financial literacy at home

Many of our customers tell us they don’t use mainstream products and services because they don’t understand them, know how to use them, or know anyone who can help. Attacking this “knowledge divide” head-on, we provide self-help-oriented content in English and Spanish on The Beehive (www.thebeehive.org), our consumer Web site, which is geared to lower levels of income and literacy.

Every month, more than a third of The Beehive’s 300,000-plus users go to the Beehive’s Money section for help and guidance. There they learn how to connect to mainstream financial services, manage their money, and build assets. The site covers such topics as checking accounts (why you need one and how to open one); investing (why you should invest your money and how to start); and managing your money (including tips on starting a budget and getting money back in taxes through the earned income tax credit).

Interactive tools — such as a simulated ATM — further help to demystify the financial services system. Another example, developed with the help of the Fannie Mae Foundation, is What You Should Know About 401(k) Plans, an interactive approach to educating the low-income consumer about the importance and benefits of financial planning.

We have recently launched two exciting new tools on The Beehive. One, sponsored by Citibank, is a Guide to Helping You Better Manage Your Cash. The other, sponsored by Key Bank, is a comprehensive, self-directed financial literacy course. The cash management guide focuses on what matters most to people: ease of cashing checks, paying bills, saving money, and wiring money home. For example, it walks people through a side-by-side comparison of their current check-cashing ways and costs compared to the advantages of doing business the mainstream way. We built the financial literacy course for people to complete at their leisure and for financial literacy programs to use to augment their classroom instruction.

Lessons learned

Low-income people are more comfortable with technology than you might think, especially when they have kids at home to help accelerate the process. They are smart consumers, too. If you provide incentives, they’ll act: every computer loan program we have offered has been oversubscribed.

Financial issues are very personal. The more access that people have to technology and information at home, the more they will be engaged and use that technology.

Landlords have strong incentives to bring their residents into mainstream banking. Partnerships between housers and financial institutions make good business sense.

Financial education matters — but what matters even more is linking that education to products and services that people need and want now, whether it is help with paying the rent or ensuring that their children thrive in school.

For more information, contact Ben Hecht at (202) 393-4660 or bhecht@one-economy.com