Panel II - Beyond Toasters: Account Incentives That Really Work and Why

We have quite an exciting panel for you, and I want you to really focus. And once again, same cards or just raise your hand, there'll be an opportunity to ask questions.

The person who will be the moderator for this panel has shown over the years that she is capable of doing many things and multi tasking at the same time. I knew her because she was Chairperson of the Board of the Neighborhood Reinvestment Corporation during its growth phase. And at the same time she was doing that, she was the Director of the Office of Thrift Supervision at Treasury and a Director of the FDIC. She's currently the Senior Managing Director of ShoreBank Advisory Services.

In case you haven't read, it's the first and the largest community development bank in the United States of America. Aren't we lucky, and I'm being serious, to have Ellen Seidman. Ellen, welcome.

MS. SEIDMAN: Thank you J Otis, and thank you all for being here. And I want to thank the FDIC for organizing this event, and particularly Chairman Powell for the encouragement he's given his staff to reach out to the banks and to help them bring in the unbanked.

It is actually an incredible change over the last five years. Five years ago, this would not have happened. My last year at OTS, we actually had a conference like this, but we had to hide it under a bushel basket. I mean, we had to call it something totally different. And it is amazing that not only is this conference happening, but the degree of honesty about things like cultural barriers and how bankers don't welcome people in their lobbies, is a huge, huge change. And recognizing the problem is obviously the beginning of solving it.

The title of this panel is "Beyond Toasters: Account Incentives that Really Work and Why." And we're going to go beyond toasters, but I do want to remind everybody that toaster equivalents actually can be pretty effective.

How many of you use Frequent Flyer Miles, you know? And then perhaps more relevantly, employer matches are estimated to increase 401(k) participation by a full 35 percent, and that increase is larger with lower income folks. Those who have studied the poor cite incentives, as well as assets, as being two of four critical institutional factors that result in greater savings.

Now we're going to take off on this panel from where the last panel left off; which is, okay you've got them in the bank. How are you going to keep them there? And I'll be up front about an underlying assumption on my part in this discussion; that the formerly banked will only be desirable long term customers to the banking system if the relationship is an asset building one.

Now my concept of asset building in this respect goes well beyond the traditional obvious reasons banks might like customers with assets, namely deposits. While plenty of community banks still value deposits as a stable, inexpensive source of funds, the combination of alternative funding sources and the usually low initial balances on the new accounts of most of the unbanked make this not the primary reason why most bankers are interested.

And unlike some alternative service providers, banks don't generally view fees, not to mention equity stripping which is, after all, by definition a liquidating relationship, as the reason for being interested in new customers. Rather, to get banks interested and keep them involved new customers must become profitable in the same way old ones are. By selling them a range of products and services including, in particular, loans for an increasing variety of purposes, businesses, autos, homes, and in increasingly greater amounts. And that means that those loans must be used to build equity of all sorts, whether by enabling someone to buy a house, get a better job because they've now got a car, or start a business.

I also believe that much of the current group of unbanked potential customers have another big potential for banks that treat them well, the ability to obtain many more new customers by word of mouth, without expensive advertising, and to retain them.

As part of the National Community Investment Fund's Retail Financial Services Initiative, a group of 12 community oriented banks and credit unions are developing, implementing, and evaluating for profitability, among other things, products and strategies by which to bring the unbanked and under banked into the financial services mainstream, and to get and keep them on an asset building path. So, for example, some of the group have partnerships with check cashers. Some are going to experiment with Stored Value cards as a starter alternative to checking accounts. Several are offering free tax preparation services with the Earned Income Tax Credit and deposit opening to attract first time savers. And some are creating emergency loan programs to enable customers to avoid using payday lenders.

But, and this is crucial, all see these products only as a beginning or temporary part of their relationship with their customers. The ultimate goal for both customer and financial institution is to build assets, to become owners of cars, houses, and businesses, and significantly enhance the quality of life for customer, and often community.

One of the Retail Financial Service's Initiatives first written products, a piece on risk management and account opening is in your conference book, and I hope you read it because it's an interesting commentary on the use of ChexSystems.

Now with this as background, we're going to talk about a wide range of incentives. And we will talk about toaster equivalents. Dory has promised that we're going to talk about toaster equivalents; things like money bonuses for opening an account. But we're also going to include a more subtle group of incentives that are meant to generate long term changes in the behavior of banks and potential and actual customers.

Michael Barr, currently Assistant Professor of Law at the University of Michigan Law School, but for five critical years, the architect of much of the Clinton Administration's Research and Policy Development with respect to the unbanked, will lead us off. He'll be followed by Evelyn Edwards, Assistant Vice President of Community Reinvestment for BancorpSouth Bank's Mississippi region. Evelyn will tell us about her very practical experience in bringing the unbanked into her bank and keeping them there.

And finally, we'll hear from Dory Rand, who is Supervising Attorney of the Community Investment Unit of the National Center on Poverty Law in Chicago, serves as the coordinator of the statewide Financial Links for Low Income People, FLLIP Coalition. FLLIP sponsors one of the most effective and most fully studied financial literacy programs in the country, in part because of the wide range of incentives it provides those it serves.

I strongly urge you to read the full biographies for each of these panelists in your conference folder, they're very impressive. But now please join me in welcoming Michael Barr, who's going to talk about some very virtual toasters, public policy shifts that can encourage the system to better serve those currently outside it. Michael.

PROF. BARR: Thank you, Ellen, and thank all of you for being here today. I just want to reiterate something Ellen said; which is, when we started at Treasury working on these issues six years ago, seven years ago now, it would have been hard to fill one of these little tables in the front with people interested in talking about it. So it's extraordinarily exciting to see all of you, and to be able to learn from all of you about not only what your thoughts are about the process, but what you're actually doing to make a difference. And so, for me, it's quite exciting to be here.

By now, many of these numbers I'm going to cite are familiar to you, and so I'm going to go quickly through some basic background on the unbanked. About 10 million households were unbanked in 1998. The number has gone down slightly by 2001, and a significant portion of those individuals are working poor and immigrant working poor.

Many individuals who have lacked access to the banking system have lacked it, in their view, because they don't have a lot of money. Most of the reasons cited in most surveys of the unbanked cite low income and associated high costs of accessing banking services.

This doesn't mean that low income people are not getting financial services. They obviously are from alternative financial services providers, as well as from lots of banks. The flip side of 22 percent of low income people being unbanked is that 78 percent of low income people are banked, and banks are serving them. We ought to, I think, be focusing on that part of the statistic, as well.

But in the alternative financial services sector, there's been an explosive growth in check cashing operations in the last decade. And many unbanked people use check cashers, although not all, to cash checks. The services that are provided by check cashers can be quite broad, including ways to receive income and pay bills, two of the three important functions in financial services transactions. You need to receive your income, you need to save it or store it somehow, and you need to pay bills.

The average fees are 2 to 3 percent of a check, but there's a wide range in kinds of fees charged, in part based on the regulatory environment and the level of competition. Most checks cashed by check cashers are payroll checks or government checks, and the reason I point that out is they are checks that are potentially available to the banking sector for direct deposit.

Loss rates are under .25 percent of the face value of the check, which is lower than the general inter bank loss rate. Joe Coleman will tell you that check cashers work very hard at keeping those loss rates quite low.

Another major sector in alternative financial service provision are payday lenders. Obviously, payday lending has been the topic of a great deal of controversy in the last five or six years. Explosive growth in payday lending has resulted in a serious level of volume and revenue, $2 billion in revenue in 2002. And there are two basic things people worry about one is the high annual percentage rate of the loan. The average found by the Consumer Federation of America was 474 percent, and part of that is because payday lenders are making short term, very small loans, and they have high fixed costs of lending part of that is due to other problems in the market that I'll talk a little bit about.

The second major problem is the debt trap problem, the problem of repeated rollovers in a year. And in many ways, this is the more significant of the two problems. A very large percentage of individuals, it varies somewhat state by state, but a lot of people rollover effectively so much that almost half or sometimes more of the year is spent paying these fees for payday loans.

People who use payday lending operations tend to have credit problems or lack credit histories. And one problem in the regulation in this area has been the interaction of federal preemption and the problem of renting charters. And all of the regulatory agencies have issued guidance on this, the OCC, the OTS, the Federal Reserve, and the FDIC.

With respect to OCC, OTS, and the Federal Reserve, the guidance they've issued and the enforcement actions they've taken I think have resulted in payday lending connections between payday lenders and those depository institutions all having been severed. With respect to the FDIC, that has not yet been the case. And my hunch is, and it's only a hunch, is that once the FDIC spends a little time with the institutions that they are now needing to supervise in some way, they're going to find the same level of problems that the other regulators do, so I would not be surprised to see the FDIC deciding itself to move in the direction that the other regulators I think properly have in the past.

The other kind of alternative service provision I want to mention is with respect to tax preparation services. Tax preparation services are really important in low income communities. They provide an essential service, but aspects of what they do have raised problems, and in particular, refund anticipation loans, I think are a potential source of abuse, or a drain on the community. And the Consumer Federation of America, again, has done some good studies here, as has Alan Berube of the Brookings Institution. And if you just look at the reduction in federal benefit effectively from tax preparation services, it's over 1.75 billion annually in reduction in the value of the Earned Income Tax Credit. This is a major federal program, a major source of federal government policy in encouraging work and in rewarding work. And so I think that's an area that is in serious need of reform.

So let me quickly say something about barriers to account ownership, which we've talked about. And then I want to talk about a few ideas for solutions. What are some of the basic problems? Checking accounts, in my mind, and I think the evidence is pretty good on this, are not well suited to low income people, and so we ought to be moving away from a focus on checking accounts, and I'll talk more about this, towards debit based access electronic accounts.

A number of people have mentioned problems with accounts in the past. I think that is a serious barrier. And again, we need to be looking at designing accounts that make it easier for people who have made mistakes in the past, not to make them in the future, but to still have access to the system.

And a third major barrier I want to talk about is on the distribution system front. This has gotten much better on the electronic side, but it still is not what it should be fewer ATMS per capita in low income neighborhoods, for example, than in middle income neighborhoods I think is a problem as we move to a more electronic system of finance.

Usually when I'm in an academic environment, I have to explain why we should care, but I'm going to skip that slide. So for those of you who do care really, I have to spend most of my time in an academic speech on that slide because people don't understand why we should care. So what could we do? I want to focus on three sets of ideas ideas for federal policy, ideas for state policy, and ideas that the private sector can do if the policy makers even don't help them.

So what are the kinds of things? Well, as you can imagine, I'm kind of partial to Treasury's efforts that Sheila was also very involved in on the electronic transfer account and First Accounts, and I think we ought to be expanding the kind of funding available through those programs for innovation in this area. I think it's going to take an up front commitment of dollars to help the financial sector move in the right direction. And so I'd be for a significant expansion of First Accounts. I have suggested doing that through a tax credit for financial institutions as a way of reaching scale more quickly.

A second thing that the federal government can do is to provide various kinds of incentives to encourage employers to move to direct deposit. I agree with Ms. Board and with Mr. Smith that employers are really, really important participants in bringing people into the banking mainstream, and not enough attention has been focused in the past on employers as I think one of the most critical avenues for banking the unbanked.

Tax reform, both in EITC and IRS efforts with respect to tax refunds. A simple thing that the IRS now has the technical capacity to do but has not, is to permit individuals to split their tax refunds into two separate bank accounts. And if the IRS were to permit that, I think that it would help facilitate breaking down some of the reason for some people taking out refund anticipation loans. That's kind of complicated, but I'll explain it in questions if you'd like.

I've talked a little bit on federal oversight of depositories. I think that is critical in this area, and more could be done. And Mike Stegman, many of you know, has pointed out some of the flaws in the CRA services test which has for too long focused on counting the number of bricks and mortars branches, and not enough on actually serving low income people.

State steps states can move their electronic benefits transfer programs for Welfare to Work from cards to bank accounts. I think that's enormously important. It's possible for states to do so. And many, many states' EBT contracts are up for renewal in the next couple of years, so it's a critical time to get them to switch to using this.

Now because I'm out of time, I'm going to skip ahead to private sector steps. Three or four basic categories. One I've mentioned employers, employers, employers, and also employers are really important. Direct deposit is a really important avenue to get people into the banking system. Employers can help their employees set up bank accounts, give them financial education. Work based financial education has been critical for moderate and middle income people in the retirement area, and it can be for lower income workers, as well. Payroll cards can be used as a transition into banking accounts, and payroll savings plans can help low income people save in ways that they've not had in the past.

Banks, thrifts, and credit unions the main suggestion is to experiment more with low cost electronic banking accounts, debit based accounts that can't be overdrawn; not checking accounts, debit based accounts. You can receive your money in direct deposit. You can make payments perhaps with automatic money orders or bill payment provided by the financial institution.

Accounts with savings buckets Banco Popular de Puerto Rico has experimented in this area and found wonderful success in providing savings buckets within transaction accounts. This is something that Sheila Bair has worked a lot on, Card based Remittance Accounts, I think are an important new avenue for bringing people into the banking system.

Others can do a lot too. I think, for example, tax preparation services, which have been part of the problem, in my mind, can help be part of the solution. They're right there with EITC recipients in their offices, and they could work with the major financial institutions. Pick three or four of them and offer EITC recipients a real bank account, and deposit it into the bank account. I think that could go a long way.

I also should mention that debit card networks and the ACH system, Automatic Clearinghouse System, are also important to banking the poor with electronic products. And we ought to be working with the Federal Reserve and with the EFT networks on reducing the cost of those networks for the poor.

Lastly, I think there's the opportunity for leapfrogging. In the same way that in the Third World, some countries who have lacked infrastructure for example, for land line for telephones have really galvanized their telephone networks with cell phones. So for low income people, why can't we focus on leapfrogging here? Why aren't low income people with cell phones, which are now ubiquitous, why aren't we focusing on using cell phones as a way of delivering financial services to the poor? What can we do with Internet kiosks and Internet access for the poor?

I think there are ways of driving forward with new technologies that would let us move low income people to the forefront in electronic banking services. And that is all I have time to say.

Let me just suggest that all of this is really still new. We're still very much learning, and I'm still very much learning from all of you. But I do think there are encouraging developments, and I do think that we're seeing that all of us working together can make a difference in bringing more Americans into the financial mainstream. And for me, that is very exciting news.

MS. SEIDMAN: Thank you, Michael, and I assume we will make Michael's slides all available. Right?

PROF. BARR: Yes. Sure.

MS. SEIDMAN: Okay. Evelyn Edwards.

MS. EDWARDS: Good morning. I would like to thank Chairman Donald Powell for the opportunity to be a part of this symposium. It is an honor and a privilege to stand before you today.

A CRA Officer has many challenges. In order for a CRA Officer to pursue and conquer those challenges, the support of his or her bank is vital. Therefore, I would like to thank BancorpSouth for its support of my efforts in the community.

In an article that Chairman Powell contributed to ABA's Fall Newsletter he stated that: "Financial education is essential if we are to create successful banking relationships with emerging markets." BancorpSouth realizes that the unbanked is an emerging market. It must embrace the unbanked population with incentives that truly go beyond toasters. It must be a financial institution that does not neglect our role in encouraging, influencing, and prompting people to better themselves in order to make financial prosperity a reality, instead of a dream.

Financial independence is a goal all Americans share; yet, many Americans do not know how to become wealth accumulators. They never learn the basics of personal finance, the tools necessary to build financial independence for themselves and their families one dollar at a time. They never learn the value of saving and investing, or about the magic of compound interest, and how a little planning early in life can make a huge difference in later years.

Today, I would like to take a moment to speak briefly on how BancorpSouth is empowering the unbanked with knowledge instead of toasters in order to bring them into the banking mainstream, and the initiatives we are utilizing in different markets; in markets such as our future, which are juniors and seniors in high school; our present, which are young families, primarily single parent homes; our lost, which are the homeless; and last but not least, our final life cycle, our senior citizens.

We're going to watch a movie for a minute. Okay? Let's put in "Beyond Toasters", a newly released movie. Now press fast forward. Everybody do this for me, press fast forward. Now stop. Now here we have BancorpSouth looking into the future by initiating the formation of Mississippi Jump Start Coalition. It is an all volunteer 501(C)(3) organization that designed a financial literacy workshop entitled "Money Matters."

The workshop targets high school juniors and seniors throughout Mississippi, which makes up a large segment of the unbanked population. The workshop is structured in a way that it offers information, yet fun and interactive financial wisdom. The workshop covers topics, such as savings, ways to avoid financial fraud, investing, student loans, dangers of credit cards, and other personal finance subjects.

Now while the students receive training, the teachers receive their own specialized coaching. The teachers are provided free personal finance curriculums and other resources so personal finance instruction can continue in the classroom.

I did not realize the effectiveness until last year at a workshop in Greenville, Mississippi. A 12th grader from Mount Bayou High School approached me to express her thanks for our seminar on Money Matters. She said with tears in her eyes that she wished her mother could have been there for the workshop.

To further encourage our future, BancorpSouth via its partnership with Mississippi Jump Start Coalition, sponsors an art and essay contest for Mississippi students in 9th through 12th grade. The theme for the contest is based on how Chuck Taylor got what he wanted, and how you can too. The top two entries in each category receives a $1,000 savings bond provided by BancorpSouth, and a $1,000 Mississippi prepaid affordable college tuition account, which is provided by the Mississippi State Treasurer's Office.

Okay. Now stop and rewind for an important message about our present. BancorpSouth has partnered with Earned Income Tax Coalitions across our six state assessment area. The Jackson Asset Building Coalition, spearheaded by the Mayor's office in Jackson, has developed six VITA sites where free tax preparation is offered.

BancorpSouth offers financial education workshops that focus on the basics of banking, assets allocation, and homeownership in the month of December prior to tax season. We will also be on site to open up accounts for those that wish to acquire one.

Statistics from one of last year's sites revealed that 196 filers were assisted, 83 percent have bank accounts, 35 percent expressed interest in opening a savings account, and 42 percent expressed interest in purchasing a home, 38 percent save from every check, 43 percent save sometimes, and 19 percent save rarely or never.

Our goal is to move them deeper into the banking mainstream, where they can begin investing and hopefully build more wealth by owning a home. Based on the analysis, those filers are just standing in the doorway and not enjoying the full incentives of where the doorway can lead.

After attending a Jackson Asset Building Coalition meeting in September to discuss the unbanked population, I was scheduled to teach Basics of Banking, which is a session in the Money Matters curriculum that same afternoon to a GED class. There were 39 students in attendance. Of the 39, there were only two with a banking relationship, and 35 of them were single parents.

Okay. We're still watching, now hit the pause button and take a moment to reflect on our lost, which are the homeless. Over the past three years, BancorpSouth has built a relationship with Voice of Calvary Ministries in Jackson. Within the past two months, BancorpSouth submitted an application to the Federal Home Loan Bank of Dallas' Affordable Housing Program on behalf of Voice of Calvary Ministries in order to fund the From Homeless to Homeowner project.

Now this project will work with the homeless population to prepare them for homeownership, as well as to provide post purchase follow up with the new homeowners to reduce the risk of default with this high risk population.

Now the pool of clients will come from a longstanding relationship with a local drug and rehabilitation program, which is called New Day Ministries. As a result of this program, persons with substance abuse problems will receive help with their addiction problems, as well as their financial problems. And we will offer them the opportunity for homeownership to enable them to become productive citizens of the community. The program will also provide a follow up program of regular monitoring of their financial obligations in conjunction with monitoring for their substance issues.

Okay. Now press fast forward. Now you're going to have to go a little faster for me because I'm only 31. Now we're still watching "Beyond Toasters." Now stop and focus on the final life cycle. Over the past three years, BancorpSouth in partnership with the Mississippi Secretary of State Office and the Better Business Bureau have been successful in reaching a vulnerable segment of the unbanked population, the elderly.

We designed an event called "Scam Jam". The event brings together state agencies, city and county government, local, law enforcement agency, postal service, non profit organizations, and financial institutions in order to provide a One Stop shop for enrichment.

The one day event focuses on the following; how to protect yourself against mortgage fraud which is my pet peeve, which is predatory lending. Investment fraud and rip offs, protect yourself from telemarketers, recognizing the latest scams in regards to mail fraud, Internet fraud, identity theft, medical fraud, and credit card fraud. Now some may say that we're instilling fear in our elderly, but I say we're empowering them with knowledge to make them alert and aware at all times.

Now as you have heard, BancorpSouth is about the business of providing services, investing in and lending to the entire community. We believe that our efforts to educate the unbanked will have a positive impact on the bank's growth and recognition in the community that expands far beyond toasters. Again, I extend my gratitude for the opportunity to be here today.

MS. SEIDMAN: Thanks very much, Evelyn. And now, Dory Rand.

MS. RAND: Good morning. I'd like to thank everyone at the FDIC for inviting me to participate in this event, especially Glenn Brewer, who I know from Chicago's FDIC branch, who worked very hard on this. And also, thanks to Ellen for the kind opening remarks. We're ready to go.

I just want to give you a little background on how I approach these issues. I used to be a Legal Services lawyer in the Uptown neighborhood that Yman Vien talked about in Chicago, representing welfare clients and low income workers. And it was from that experience that I got interested in financial services, because our former welfare clients were starting to get their benefits electronically, and the option opened up that they could have benefits transferred directly into bank accounts. But I noticed that only about 5 percent of our cash assistance recipients in Illinois were taking advantage of that, so working through a number of different groups, including the Chicago CRA Coalition, the Illinois Department of Human Services, a committee to work on electronic benefit transfer, we started working on helping our Welfare to Work population get into mainstream financial services.

One outgrowth of that is something called FLLIP, Financial Links for Low Income People, sort of an unfortunate choice of a name, but it was before I knew much about predatory lending. Anyway, FLLIP it is, and it's a wonderful diverse coalition in Illinois that includes non profits like National Center on Poverty Law, representatives from all the federal banking regulators, including our friend, Harry Pestine, who's here from the Federal Reserve, Michael Frias and Glenn from FDIC in Chicago, and other representatives. And together, we decided to do a pilot project with the Illinois Department of Human Services to do financial education for welfare recipients and low income workers, and also, to do an Individual Development Account program. And you have the list of the funders there.

And we were fortunate not only to have the Department of Human Services funding and the Foundation funding, but also contributions from over a dozen financial institutions. So we did the financial education program in partnership with community groups. We trained the instructors, and then they provide the training at the local level to people in the community. And this is the way that we try to overcome that distrust we keep hearing about, and try and bridge that gap between people who have never had a bank account or walked into a bank lobby before.

And then those local partners develop relationships with the financial institutions in their area. And many times, the bankers come to do some presentations or to offer a tour, or to provide some toaster like incentives to encourage people to take what they've learned from the class and open accounts, and start a real banking relationship.

Our target audience is both the working poor that Joe mentioned earlier, but not just the working poor. I think it's appropriate, as some of the other speakers have mentioned, to start even at the pre work stage, or the welfare recipient stage, because they're going to need to know how to make choices among job offers, and about job benefits, and what to do with their paycheck and so on, so I don't think we should wait until people are already working to do these programs.

So here's the toaster equivalents. And I want to let you know that this is not just a wish list that I made up. These are all real examples that banks are doing. Almost everybody knows about free checking, but the fee waivers is an interesting one. Charter One Bank is in Chicago, and they are offering to their new account holders waiver of the first three NSF fees, overdraft charges. And they use it as an opportunity to educate their customers and learn how not to do it again, and warn them that if they get passed three, these big fees will come down. But for the first three, they help get them through that initial process.

Bill payment options some of the banks, like First Bank of the Americas and other groups, will offer the same services that the check cashers offer, but at a lower price and in a bank setting to help make that transition.

Initial deposits some of the partners near our financial ed sites would put in the first $5 into a savings account if someone came with their certificate of completion of the program. Another bank, Harris Bank, does matching funds. The students at the YWCA in Waukegan pay $20 up front before they start the class, and at the end of the class if they've completed it, the bank will match another $20, so they'll have $40 in their savings account.

No credit checks very few banks do that. TCF bank is one of them that doesn't use ChexSystems. Sometimes the customers end up getting it on the fee end, but at least it's one way that if you can't open up an account based on ChexSystems, you can start fresh there and build up again.

We've heard a lot about convenience, having ATMs and financial institutions in under served areas. We think it's very important because we know that sometimes the reason people use the check cashers is simply because they're there on the corner in their neighborhood and the banks aren't. So more and more of the banks are seeing the importance of brick and mortar. We've heard about a lot of expansion now, and we want to work with our bank partners to make sure they're in those neighborhoods that don't have banks and ATMs. Obviously, we want them to hire from the local community, speak the language, know the population's needs and make them feel comfortable.

Several banks now are accepting the matricula consular cards in cooperation with the Mexican Consulate. I think we have 40 or 50 now in the Chicago or Illinois area alone, and that's thanks in large part to Michael Frias' work, and the Mexican Consulate there. And now that Treasury has come down with the final rule under the Patriot Act, there's no reason why any bank and credit union shouldn't accept these cards and help more people into the mainstream system.

We heard a lot about free tax counseling sites. ShoreBank and others pioneered that. Other banks have participated in this kind of outreach, and it's a perfect opportunity to get people to open accounts because they've got a chunk of money. The average return I think is about $1,400. And especially as Michael Barr suggested, if people could easily split that to put some of it into savings and maybe use another part for more immediate needs, we could get more people into banking that way, as well.

Get Checking is a program that you may have heard of. University of Wisconsin Extension developed this specifically to get around ChexSystems. And by having people take a short course and pass a test on how to balance a checkbook and maintain a checking account responsibly, with the agreement of the bank and eFunds that runs ChexSystems, they can erase that black mark on ChexSystems. I know the people at Wisconsin who do this. If you're interested in that, I could get you information on it.

Let's see. There's also a couple of things I didn't put on there free wire transfers. Charter One Bank does a free transfer. There might be a fee at the other end. Also, another thing Charter One does is a $100 deposit if you sign up for direct deposit of your paycheck, so that's a major toaster there.

There are some other incentives that have worked for our clients. Individual Development Accounts, as you probably know, are matched savings accounts where a low income working person agrees to save a little bit each month towards a particular asset goal, like buying a home, starting a business, going to college. And then from public or private resources or both, those savings are matched to help them reach their goal more quickly.

For people who are receiving cash assistance through the Temporary Assistance for Needy Families program, the welfare program, there are additional incentives, such as counting participation in financial education classes as a work activity. We do that in Illinois. Delaware has picked that up. There's no reason other state agencies couldn't do that. IDHS has also provided funding for us to reimburse participants for their child care and transportation in order to attend the classes.

Finally, being allowed to exempt the money in the IDAs from the income and asset test for Means tested programs is very important, and something that we need to do more work at the federal level and the state level, because we shouldn't be penalizing people who are doing good things like saving in a bank account, and having a long term vision.

I want to brag a little bit about our evaluation results. As Ellen mentioned, I think we have one of the best studied financial education programs in the country so far. Professor Steve Anderson at University of Illinois is working with us over a period of two years, and we're doing two different kinds of evaluation.

The first one is to use a pre test/post test approach so that the people taking the financial ed course answer a series of about 40 questions tied to the curriculum. And then they answer the same set of questions after completing the curriculum so we can measure how much they're learning. And I'm happy to say that overall, our participants are making significant knowledge gains, improving their scores by up to 20 percent, so it shows us that financial education really does work.

The other part is, we're doing follow up interviews by telephone six to twelve months after people complete the course. And it's the same curriculum in both the financial ed classes and the Individual Development Account Program. And we're seeing these results, that 74 percent increased savings, 25 percent opened new accounts, and other really positive behavior, like tracking their expenses, doing household budgets, changing the way they pay bills. And also, applying for and receiving government benefits. There are things like food stamps, and cash assistance, and medical coverage that can really help working families that often aren't taken advantage of, so I think it's a good thing to include in financial education programs, and something for banks to be aware of, that there are other sources of money and support for families that will free up their other money so that they can save more. Also, many started taking advantage of job benefits like a 401(k) plan, or other savings plans.

So on the policy level, I have a number of suggestions. One is to provide adequate funding in the government programs, like TANF, the Earned Income Tax Credit, Free Tax Counseling Programs, and also, continued funding for Individual Development Accounts. Many people have talked about the need to start early with financial education. I agree with that completely. I'd like to see it in K 12. Schools are huge bureaucracies to deal with, so I don't expect to see that overnight, but I think we need to keep working on that. And not to do it as sort of an unfunded mandate, the way the No Child Left Behind Act has put a lot of pressure on teachers and schools without giving enough resources to do what they're being asked to do.

I agree with Michael Barr about the importance of using direct deposit in a lot of different circumstances, for government benefits, for paychecks, for direct deposit of tax refunds. That can make it easier for people to get into the system. There's some pending bills that would along these lines. In H.R. 7, the Charitable Giving Bill, it currently doesn't include as passed the Savings for Working Families Act, which would provide a federal tax credit for financial institutions that contribute to IDA programs. The Senate version, CARE Act, included that, so now when it goes to the Conference Report, it would be nice to see that federal tax credit for IDAs included.

And finally, other people have mentioned the CRA Service Test. I agree with Michael Stegman and the other researchers who have encouraged our regulator friends to put more emphasis on the service test, because having that basic bank account is the first step towards asset building, and there's just not enough emphasis on that, and on having banks and ATMs in the under served areas.

Related to this, I think that we would like to see the examiners and the regulators give a negative mark to the banks that are cooperating with payday lenders. I think it's contrary to the goal of this symposium, and all of these good ideas for building assets and getting people into the financial mainstream. If we get them into a checking account and then they turn around and go to a payday lender and sink deeper into debt, we're really not accomplishing much. And Jean Ann Fox is here from the Consumer Federation of America, who I'm sure could fill you in on a lot more details about that, but I really hope that we'll continue in the direction of helping low income workers, welfare recipients, all the unbanked people move into real bank accounts and move up the economic ladder. Thank you.

Q&A FOR PANEL II

DR. SMITH: I know you haven't suddenly gotten shy. Would you start.

MS. RICHTER: Thank you. I'm Lisa Richter, National Community Investment Fund. And Ellen talked briefly about the Retail Financial Services Initiative, which is trying to find market driven ways that insured depositories can serve the unbanked market. And I think that's really key because we're hearing a lot about the labor intensity today, but there's enough ingenuity in this room and in the depository sector to figure out how to make this work on a profitable basis for banks. And I just wanted to give one example briefly, that Alternatives Federal Credit Union in Ithaca, New York, in addition to doing a bang up initial Earned Income Tax Credit Program last year, provided their own refund anticipation loans, and had great success with them. And if any were interested in getting some information about that product, we could provide it.

And I also wanted to echo several of the commentors about employer based financial services. One of the other FDIC projects underway is under the leadership of Chairman Powell because he really got this moving, is to look at how we can best leverage the workplace to reach the unbanked population. And there are a series of forums that are going to be taking place in Chicago, that focus exclusively on that issue, and that will particularly look also at making the business case for why employers should take on various levels of involvement in helping their employees to be better served financially. And we would love to keep all of you abreast of that. I'm sure that you could probably share your card with Michael Frias over there, or Glenn Brewer, or even me, and we'll try to keep you in the loop.

MS. FOX: I'm Jean Ann Fox from Consumer Federation of America. And since you all have already made my points on payday lending and refund anticipation loans, I want to ask you about one other feature. We're concerned that a growing number of banks are starting to market something called "Courtesy Overdraft", or "Bounce Protection", where they encourage consumers who may have come into the banking system on free checking because they don't have a lot of money to put in deposit, to overdraw their bank account and then charge them the penalty rate, rather than giving them the contractual overdraft protection at a fair price, with a fair repayment term, and that's a real problem.

You mentioned NSF and overdraft fees as being part of the barrier. What do you think the solution is here on backing up overdraft fees?

MS. SEIDMAN: Let me just start, and I know there are going to be other people on the panel who want to talk about that. I think there are a bunch of solutions and a bunch of strategies.

The first thing I think is, it's really important for advocates working with banks who are doing this to get into the bank in a way to make the bank understand what they've just done, because in at least some portion of these institutions, the retail people, the people who are working with the customers, think they're providing an accommodation product. The people who are in charge of profit centers see a glorious profit center. And trying to make the bank at the highest levels understand that they are essentially doing this, that they are going in two totally different directions at once, is extremely important.

In terms of products that can be used to respond to the issue, the line of credit re looking at your line of credit rules, and trying to figure out whether you really need a 650 FICO score to get a line of credit. I mean, come on, guys. If the mortgage folks can do it, the retail folks can do it too, and re evaluating that step.

And then finally, I think when you get to the sort of the lowest level, the very riskiest folks, in addition to the kind of risk management things that are in the paper that RFSI has provided in the book, there is the possibility of collateralized checking accounts so that whether it's a community group or a foundation, or somebody puts the money in the bank and it sits there essentially to collateralize the first year of a high risk person's opening of a checking account. And then it becomes in everybody's interest not to draw on that collateral so it can be used for somebody else. So I think there are internal bank structural issues, which I think it's really important for advocates to work with the banks to help solve, but there are also some product solutions.

DR. SMITH: There are several questions here that relate to the exact same area, so why don't I just get them out on the table now. The combination of questions has to do with what are we really doing to reach the unbanked. Some people say that the problem is that most of our banking is statement driven. And since the unbanked and low income often move, shouldn't we return to something like a passbook kind of operation.

Another person says wait, don't just go to the passbook operation. Some of the unbanked have chosen payday lending. Why do you, the panelists, imply that payday lenders are predatory, when in fact we're being selected. Shouldn't we give them options as we give others? We just want to spice it up a tad. Go ahead, panel. Let's see what you have to say.

PROF. BARR: I'll just say, I guess, maybe a little bit about both questions. On the first one, the product side, just to continue the suggestions Ellen made, I do think that banks could be more creative and this is partly in answer to the second question, as well more creative about products that respond to the needs of low income people as I focused on to receive their income, to store it and to pay their bills, but also for short term credit.

So, for example, in the payday lending area, a bank product that might respond to the same need would be one that is based on a direct deposit into a bank account, have available a line of credit or an overdraft with repayment over a long period of time, say 12 months or 18 months, with automatic withdrawals from the bank account out of the direct deposit. So it's possible for banks, I think, to offer products that are useful in this area, that are reasonably low cost. And I would think that focusing on those would be partly an answer to that question.

DR. SMITH: Any quick comment on passbooks, or something that's more mobile. I think that's the issue.

PROF. BARR: Well, my own view is that we ought to be relying less on the older forms of delivery, less on bank branches, less on passbooks, less on paper intensive activities. So I think the more we move towards electronic modes of delivering financial services for low income people, the more low income people are going to have access to low cost financial services.

DR. SMITH: While we're getting the mic to the people on that side, just let me say, the other card I have that I didn't ask said okay, you're suggesting these electronic means. How do you protect people? How do we have a sense of security? They want you to solve or give some suggestions as to how to solve the technological security identity theft issues that come along with what you're suggesting. And it's not just directed at Michael. Why don't we let Ellen say something.

MS. SEIDMAN: One of the interesting things about identity theft, and there was a paper that I just read recently about this, is that in many ways the electronic is much less prone to it than the paper. I mean, just think of all those credit card slips that you used to get, that were rolled through the machine and then thrown out in the back of the restaurant. Or even these days, the ones that you do get, which I hate, that have my whole credit card number printed out on them, the electronic stuff where there's no person in the middle who could be tempted to do something can, in many ways, be more secure. And I think to some extent this is a generational learning problem.

DR. SMITH: Thank you. Yes.

AUDIENCE MEMBER: This question is for Michael Barr. On the issue of direct deposit of paychecks, it's a very simple question. What are the obstacles to employers providing that? I was under the impression that it's actually cheaper for them to do that. And I do find that this would be one of the really easy ways to get people banked. And I operate free tax clinics, and most clients who come in don't have that option.

PROF. BARR: I think you're right that it is, on balance, less expensive for employers to use. It, on balance, reduces their payroll cost rather significantly. It's not all in one direction, but on that it's a gain for them.

Large employers tend to offer direct deposit, and smaller employers and employers that hire seasonal or temporary workers tend not to. And so the barriers are greater in the area of expanding direct deposit for those types of employers. It's still very possible to do, and we ought to be spending attention trying to convince employers to do that. And I think it also might make sense to think about working with the major payroll companies who are going to eventually lose the paper based part of their business, to push these firms in that direction, as well.

DR. SMITH: We have a question here.

MR. SILVER: Good morning. Josh Silver, National Community Reinvestment Coalition. I did a little research in preparation of this event, and looked at 31 FDIC CRA exams of lenders doing business in Houston, Chicago, New York, and Puerto Rico. And even though there is a lot of Hispanics in these cities and states, not one of the banks offered remittance program for these Hispanics. And this also goes to the rigor of the CRA Service Test.

Michael Barr was talking about Professor Stegman's research, and we found of the 31 CRA exams, 22 of them, the percent of bank branches in low and moderate income census tracks were much less than the percent of low and moderate income census tracks in the assessment area. So in other words, under service, a disproportionately low amount of banks in low or moderate income census tracks. And I do think that contributes a lot to the problem of the unbanked.

And last but not least, Professor Stegman found that the FDIC, taking the controlling factors like bank asset size, the FDIC was 1.8 times more likely to award higher grades in the service test than the Office of the Comptroller of the Currency. And the question is, in order to increase the rigor of the CRA exam, do the panelists support on the CRA Service Test, data on simply how many low income people or people in low income neighborhoods have checking accounts, having savings accounts, and have other accounts like debit cards for the unbanked. That's not part of the service test now, and we need that data.

DR. SMITH: Question to the panel.

PROF. BARR: Well, I wrote an article saying that we should do that, so yes.

DR. SMITH: Do any of the other panelists want to disagree?

MS. RAND: No. As a proud member of NCRC, I agree with Josh.

DR. SMITH: People are holding up their cards now. We're ready.

MS. WACHSLER: Hi, Irene Wachsler. I have a quick comment and question. First of all, to the comment of using cell phones for banking, they can be captured. MIT captured 10,000 accounts, so don't put personal information like I told my mom as a CPA don't ask for clients' Social Security numbers because they will be captured.

My question is, I just wanted to know on people who are unbanked, the biggest issue for people I spoke to is they're living paycheck to paycheck. Okay. They have an employer who has like five or six employees, doesn't have the infrastructure to do direct deposit, cuts a check. The bank takes three days to clear. They're paid weekly, but the people need the money now, don't have much money saved, can't afford if a bank check gets overdraft, and that's why they use check cashers. Any comments? Anything out there, any programs out there that are combating this issue? Now I asked these people, if you could save three or four hundred dollars to cover your checks, would you use banks, and they said yes, help me.

MS. SEIDMAN: I think this is and I know there are going to be folks who are going to throw tomatoes at this point, but you don't have any, which is a good thing this is where some of the interesting partnerships between check cashers and depository institutions can come into play, because you're right. The need for immediate funds at a reduced price is critical. And if you have that partnership, you can syphon off a piece of the paycheck directly into a savings account.

The Stored Value cards that some of the RFSI institutions are beginning to think about, the idea of having a savings component on that is another way to deal with the immediate need for funds with a savings component, while simultaneously avoiding high check cashing fees.

All of this is in various stages of development, and there's a lot of experimentation going on all over the country. And I know that you started a real e mail flurry which, you know, got a lot of juices going here, so I just urge you to talk to all those people who answered your e mails. But there are a lot of experiments going on, and a lot of them are showing up in the current conference book, and I think more will show up in the second volume.

DR. SMITH: We have another question over on this side. Yes.

MR. MATTHEWS: Hi. I'm Ernest Matthews from Housing Initiative Partnership, Prince George's County. In light of the situation that took place with the embezzlement of retirement accounts I won't mention any lenders, any prior situations we're all aware of that. There's a great mistrust from the populous, I believe, that if they invest their money in retirement accounts, how do they know whether or not if they invest it, the money is going to be there when they're ready to retire? I think that's a question for the panel to address, primarily, because I agree with the fact that we're trying to get the unbanked into the bank to start a savings and checking account, and to do business, to do some asset building. However, to have someone come in and say would you like to start a retirement account with X number of dollars, and knowing what the media is showing, even going back to Fairbanks. There is a great mistrust. How would the panel address that question?

MS. RAND: I'll take a stab at it. I'm not a banker or a Certified Financial Planner, but in our curriculum, we do have a chapter on investments. And I think just one of the very basic principles is, don't put your money in something you don't understand. And two, when you invest, you need to diversify, so don't put all your eggs in one basket. And I think that's a pretty basic concept that people can learn through financial education.

MS. EDWARDS: Also, you have to look at the age that the person is at that time, because there are particular investments for that particular age group. And we utilize a great presentation with asset allocation with our juniors and high school students to show them at this age you know, we look at different stocks that they're most interested in, as Coca Cola. We use those type of examples. And when you go to the markets, Viagra, it wouldn't be for our age group, you know, that younger age group. It would be for the old ones because it'll make them some money fast. And so you have to look at the particular age, whatever the age is at that time.

DR. SMITH: All right. There are a couple of questions related. I'm going to give you two at the same time, and remind us that we've got about three or four more minutes before we need to end this panel, so you'll know we won't get to everybody.

One says how do you properly price tax refund loans to encourage a customer to stay at the financial institution? Isn't it possible that they're going to go to a rapid return provider anyway? What can we do? What's the pricing mechanism we, as lenders, should use to be fair and just? And one other comment that may relate to this, but not directly.

How do you see payroll and Stored Value Cards working with the unbanked? And I want you to know that there's two other questions which they won't have time to answer now, that have to do with we've got kind of a digital divide, and a lot of what's being suggested requires that people have computers or computer access, and the group about which we're speaking does not necessarily have those. So they'd like the panel, particularly those who are teaching, are you including some of this in your teaching, and how do you reach folks? We've got kind of three questions one that deals with the digital divide, another that deals with payroll and Stored Value cards, and then if I want to be a decent lender, how do I properly price the stuff?

MS. SEIDMAN: Well, let me just answer the last one first, and Lisa referred to this. Alternatives Federal Credit Union did a spectacular EITC Program this year. They did over 600 returns, but they made I think about 40 refund anticipation loans, and the pricing was fairly simple. They charged people $20, and then they charged I think it was something like 16 percent on the actual loan. And since the loan was outstanding for all of about a week and a half, you know, the actual interest paid was about $2. In fact, it was probably less than that. So they did it in order to keep those people in their system, to make them credit union members if they weren't previously, to encourage them to put at least some of the refund into the savings account. And as far as they were concerned, it was a very profitable operation in looking at the whole customer relationship.

PROF. BARR: Let me just say one other thing about refund anticipation loans. Part of this problem is not about lenders versus tax preparation services and so on. It's about a larger structural problem that the IRS is partly to blame for, in not permitting splitting refunds, and having a very poor track record that hasn't improved fast enough on speeding up refunds. And third, on focusing enormous resources on audits of EITC and pre certification procedures for the EITC, that higher income tax payers where there's widespread incidents of underpayment don't have to face. So part of this is a structural issue that's not going to get solved by individual lender decisions, but by changes in policy.

MS. RAND: I'll try to answer some of the other questions. As far as do we include this kind of information in curriculum yes, we do. We have a whole chapter on avoiding money traps, that includes payday loans, refund anticipation loans, title loans, rent to own, all of those things we strongly discourage our participants from getting into.

On the payroll Stored Value card, I just had this conversation with Ellen and Lisa recently, but the technology is available to use those kinds of cards and to link them to accounts and savings vehicles. My preference would be that if an employer is going to use a payroll card to deliver the paychecks to employees, that they make sure to include the savings option as part of it. It makes it a little more expensive, but I think that if we just move to these debit cards that are not attached to savings, we're kind of creating a second class citizen there. And we're also not including the consumer protections a lot of times with the debit cards that you would have with regular bank accounts or credit cards. So I know the Retail Financial Services Initiative is exploring this, but also with a goal of building assets and moving people up the ladder.

MR. COLEMAN: It's that check casher fellow again, Joe Coleman. Actually, my tablemate here raised a very good question. You said it was employers, employers, employers. I think the real issue in low income financial services is liquidity, liquidity, liquidity. I think that's the real problem.

I can't help but say that I think in New York we have a partnership with my check casher and Bethex Federal Credit Union. The customer can come in, open a credit union account in my check cashing store. And I've got my friend, Brian, here as a partnership with the credit union also. They can cash their check. They pay my fee for cashing the check, but they could then deposit all or part of that check into an account and get immediate credit for that deposit as cash, or they can deposit the check for free. But the point is that now a person can come in and cash the check, get the liquidity that they need. They can also leave a little bit of that check on deposit in a savings account.

I really feel that the solution isn't to kind of demonize the alternative providers, and it's not really an either/or. I think the creative thing that would be helpful is to try to find a marriage between these two different kinds of institutions, the financial services, the transaction based, fee based services and the insured deposit. I think some kind of marriage may be a good solution to all these problems.

DR. SMITH: We have a marriage proposal. Do we have anyone accepting? I think you're going to have to do a little suiting, a little more wooing during the lunch break here.

Once again, we've had a panel that's been absolutely tremendous. They presented you with information. Much of it is already duplicated for you, what isn't will be. And they've responded to a wide range of questions. I think we owe them a real round of applause.

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