Banking the “unbanked” in Connecticut

It’s expensive to be poor. And it’s compounded by a struggling economy.

In response, Connecticut is one of many states pushing financial literacy training. The Connecticut Association for Human Services (CAHS) and Citi Community Development (CCD) have announced a new effort to set up low-income people with “safe” bank accounts and basic financial education. It’s called Bank On Connecticut.

They’re offering classes that teach students and adults the basics of finance and credit in hopes that they’ll save more and avoid the common pitfalls of predatory lending and expensive financial tools.

It’s all about battling the high cost of poverty. Consider this common scenario:

It’s the end of the month, and a single parent needs to pay bills. With no bank account, she takes her paycheck to a check cashing service, paying steep fees to access her money. With no car, she gets on a bus and travels from the electric company to the gas company to the cable company — paying what she owes each utility in cash. It takes her six hours, plus $10 in transportation costs.

Back to banking

At Bank On Connecticut’s inaugural “Banking 101” course in Bridgeport last month, Tashaun Haywood listened as a Citi Bank representative explained the ins and outs of a checking account.

“I don’t have a bank account now,” Haywood said after the class. He had hit a few rough patches as a 20-something, and got badly into debt. His checking accounts were closed, and he hasn’t been able to bank traditionally since.

Haywood was laid off from a farm in Lebanon in July, and collects unemployment. He used a prepaid debit card called Green-Dot. They’re accessible and easily purchased, but come with a start-up and monthly fee. And they do nothing for his credit score.

“I’m losing money on those,” he said. “I’m hoping these guys can help me set up one of those second chance bank accounts.”

Bank On is about opening bank accounts, yes.

“But the end goal is really getting people to save money,” said Marcy Neufer, program director at CAHS.

Bank On, a national movement, uses two terms for its target audience. “Unbanked” people are those without a checking or savings account. “Underbanked” people have accounts but still rely on expensive financial services like check cashing and payday loans.

The Federal Deposit Insurance Corp. (FDIC) says about 73,000 households (5.3 percent of total households) in Connecticut are unbanked. Bank On Connecticut hopes to guide those individuals and families through the process of opening their first bank account. They’ll take a one-day, intro to banking course at a local nonprofit. Then they’ll be official, card-carrying members of the Bank On movement, and will take that member card to a participating local bank to open their first account.

“Once registered as a Bank On member, they will have access to other financial education courses,” Neufer said. Those include financial management, credit, lending, foreclosures, etc.

Participating banks — Bank of America, Citi Bank, Webster Bank, Chase and New Haven’s START Community Bank — have agreed to slow down the account opening process for Bank On members, walking them carefully through the steps and offering advice on how to avoid fees and overdrafts. Some plan to offer second chance accounts to members who might have bad credit histories or lingering debt.

The high cost of poverty

According to Bank On Connecticut, people without bank accounts spend about 5 percent of their income on check-cashing services. If they take out payday loans to make ends meet, the cost can be much higher.

“A bank account offers an alternative to those expensive services,” Neufer said.

Connecticut State Treasurer Denise Nappier has championed financial literacy in the state, supporting programs like Bank On Connecticut.

But there are vocal critics of the financial literacy movement who point out that efforts to track and test the effectiveness of financial education have failed. Professor Lauren Willis of Loyola University Law School is one of those critics — a recent paper of hers is titled, “The Financial Education Fallacy.”  

“Knowledge and skills aren’t enough,” Willis said in an interview. Financial education might increase confidence without improving ability, she argues. And that can lead to risky decisions.

“What’s going to be useful for folks overall is not what’s currently typically taught in these financial literacy classes,” she said. One of Willis’ basic arguments is that the financial industry is too complex and fast-changing for the average consumer to understand. 

And regular, for-profit banks may not be equipped to properly educate consumers, Willis said.

“They make money off of fees, and may not have the consumer’s best interest in mind,” she said. “That’s often why these programs, offered by the private banks, will end up failing.”

Neufer, who’s directing the Bank On Connecticut program, said she’s aware of the critics — and their arguments.

“That’s why we’re excited for this pilot program,” she said. “We’re going to try this out for the first year and see how it goes. And then we’ll re-evaluate.”

Neufer added that Bank On members will be introduced to the program through local nonprofits. “So we’re addressing the intimidation factor there,” she said. “People are coming to us through organizations they might already trust, who will be with them through this whole process.”

As for the private banks, Neufer said they will spend more time with Bank On members than they might another customer.

“They have commmitted internally to intentionally slow down the account process and offer second chance bank accounts,” she said. “They don’t have control over the products they can offer us, but they are going to do their best with what they have.”

START Bank in New Haven is an exception, she said. START is a community development bank geared toward improving the economic health of New Haven neighborhoods. That means it’s their mandate and daily business practice to spend time with customers, work with them as they struggle to learn good financial habits and offer support. They’re also already in the business of financial education.

“We’re thankful to have them on board,” Neufer said.

Bank On Connecticut will be tracking its members, she added. The nonprofits will provide demographic information on participants, and banks will be able to offer aggregate statistics: average account balance per month, how many accounts are closed after the first year, how many overdrafts, etc. They will also conduct phone surveys with willing members to get more information on what’s working — and what’s not — in the program.

“If they’re still struggling after a year, we will continue to work with them,” she said. “If what we’re offering isn’t helping people, then we’ll try and figure out what else we can set them up with.”

“The end goal for all of this is saving,” she said.