29 April 2009
Banking the Unbanked
Alternative financial services attract immigrants
Washington — For some immigrants living in San Francisco, what goes around comes around.
Susana Gama came to the United States from Mexico six years ago with two decades of banking experience; she knew her professional background would be useful in her new career as a women’s small-business coach. Gama had been educated in sophisticated financial products. But when she sought a grant from the Mission Asset Fund, she was surprised that the group recommended a version of a simple, informal Mexican financial practice: a savings and lending circle, something Gama and her clients had known about their entire lives.
“In [Mexico], we call it tandas,” Gama said.
In the United States, the practice is called ROSCA, or rotating savings and credit association, and it is just one of the nontraditional approaches banks and community organizations use to draw nearly 50 million U.S. immigrants into the formal banking system. ROSCA participants contribute the same amount to a fund each month; the fund is distributed in whole or in part to each contributor in rotation until the group disbands when all members have paid into the fund and received their lump sum.
Compared to native-born Americans, immigrants like Gama are not only poor, but also disproportionately “unbanked,” meaning they do not have bank accounts. Some might be "under-banked," making minimal use of banks. Among immigrants, Mexicans are most likely to be unbanked, reports the Pew Hispanic Center.
The reasons for this are manifold. One is culture. Many immigrants had no experience with banks in their countries of origin. For example, less than one-quarter of Mexicans in Mexico have checking accounts. In fact, none of Gama’s 15 clients ever had a bank account in her home country. Another reason immigrants don’t use banks is survival. Pew reports more than 80 percent of undocumented immigrants are Hispanic. They may shy away from banks for fear of revealing their illegal status and risking apprehension by immigration authorities.
Jennifer Tescher of the Center for Financial Services Innovation said banks have tended in the past to push immigrants away by not effectively explaining fees related to balance requirements and bounced checks. The result has been that immigrants turn to check-cashing firms and payday lenders that charge high rates.
“The fact is that consumers are often willing to pay more up front for the certainty of knowing how much something is going to cost, than at a bank, where there’s often a lack of transparency around what the fees are actually going to be,” Tescher said.
Another complicating factor is the nontraditional work lives that immigrants often lead. Barbara Robles of Arizona State University reports that migrant farmerworkers and day laborers are paid in lump sums on irregular schedules. That makes it difficult for them to meet loan requirements or keep enough money in accounts to avoid penalty fees, and as a result, they avoid banks.
Manuel Orozco of the Inter-American Dialogue, a Washington public policy group, said race and class issues have prevented many commercial banks from making strides toward banking unbanked Hispanics. If banks in the United States want to attract immigrants, Orozco said, they must throw out old assumptions. “One assumption is if you give [immigrants] the material in their language, it will be enough. Well, that is wrong.”
Building credit, said Orozco, is crucial to individuals in a consumption economy, and banks need to educate individuals in making responsible financial decisions to maximize their earnings potential. Wells Fargo & Co. of San Francisco, Orozco said, exemplifies a large commercial bank that effectively reaches out to Hispanics with in-home seminars and small loans. As Orozco sees it, Wells Fargo's successful model consists of three elements: transparency between the bank and the customers, financial education in the communities and a willingness to do small-dollar banking transactions.
Mitchell Bank, based in a densely populated Latino community in Milwaukee, adopted immigrant-friendly practices in the late 1990s and saw its business grow. The bank decided to accept most foreign-issued identifications, allowed a low $50 minimum to open a checking account and offered low-fee remittance services. In 2000, it reached out even further by opening a full branch at a nearby high school.
“We take 10 students and actually have them run the branch,” said James Maloney, president of the 100-year-old bank.
As children of immigrants or immigrants themselves, many of the students are the first people in their families to have a banking relationship, which puts them in a position to gain financial literacy and pass it on to their families. Using their experiences and material from Money Smart, a government financial literacy program, the student employees provide financial education to their peers, to elementary school students and to their parents.
Daniela Salas of Mission Asset Fund, the San Francisco nonprofit organization that recommended the ROSCA to Gama, said community activism allows her organization to connect thousands of immigrants with financial education and services. It certainly worked for Gama, who now recommends ROSCAs to her clients.
Salas explained that she and her colleagues find informal lending circles in the neighborhoods and connect the groups — such as Gama’s — with mainstream financial institutions that can help establish a taxpayer identification number and build credit for members of the group and their family members or friends.
“We took something that was informal and formalized it,” Salas said.
