The Filene Research Institute has published a report on how credit unions and community banks can help more minority households in the USA.
The report reveals that many traditional financial institutions struggle to meet the needs of minority households. US government figures show that 45.5% of Hispanic and 49.3% of African American households were unbanked or underbanked in 2015. Only 18.7% of white households fall into these categories.
Minority households are also twice as likely to live in asset poverty, compared to white households. Minorities make up 30% of all US households but hold just 10% of net household wealth.
Together with partners Ford Foundation and Visa, Filene launched the Reaching Minority Households incubator to develop financial products with a track record of results.
As part of the project, Filene identified and tested five financial products perceived to fill a gap in the credit needs of minority households. The five products were tested in five financial institutions, examining 1,000 loans per products. Around 40 credit unions issued 58,482 loans worth a total of US $84.8m and impacting 18,559 consumers.
Products tested were loans for non-citizen members, data-mining techniques to identify households that could benefit from an auto-loan refinance, small-dollar loans based on relationship factors other than credit score that relied on rapid underwriting and disbursement via a mobile application, small-business microloans to entrepreneurs and loans to consolidate high-rate payday loans into one affordable payment.
The tests found that serving financially vulnerable populations starts with having the right mind-set. However, serving minority households requires an approach tailored to the needs of the individual community served by each credit union.
“Although credit union testers started with a consistent playbook and set of principles, each adjusted rates, processes, technology, staff roles, and product marketing to meet the unique needs of its institution and community,” reads the Filene report.
The institute also notes that such programmes should not stand alone but be part of a suite of services for those financially vulnerable.
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Another finding suggests that credit unions need to look beyond traditional measures of creditworthiness such as credit scores to determine which customers are a good fit for their product.
Filene also argues that charging higher rates to vulnerable populations based on credit risk can often be necessary to ensure financial sustainability.
Accompanying this report is one credit union member’s personal story of how she started her own business with support from Point West Credit Union in Portland, Oregon. Sara Rodriguez obtained a US $500 business loan from her by her credit union in spite of the fact that she didn’t have a social security number. This financial support enabled her to start her own business, now a thriving enterprise.
“Financial institutions should always follow fair lending practices when setting rates and fees, but some products will inherently cost more for all consumers based on the nature of the product. These products allow the institution to meet the immediate needs of the consumer, let the consumer avoid predatory lenders, and improve their credit in order to give them access to lower-cost products in the future,” reads the report.
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Filene concludes that innovation is crucial to meeting the needs of the financially vulnerable populations and minority households, which are continually changing and require on-going experimentation.
Report author and chief knowledge officer at Filene, George Hofheimer, said: “Meeting the needs of financially vulnerable populations and pursuing financial stability do not have to be mutually exclusive pursuits.
“Financial institutions are at the front lines of changing the disparity in access to basic financial services for African-American and Hispanic households. Providing products like those tested in the incubator program can be a win-win-win for the customer, financial institution and community.”
