King County Community Credit Union Feasibility Study

Transcription

1 King County Community Credit Union Feasibility Study Needs Assessment Prepared for the Medina Foundation 801 Second Avenue, Suite 1300 Seattle, WA On the web at: Prepared by: Joan Fanning and Jennifer Bright Principals, Strategic Market Strategies February

2 King County Community Credit Union Feasibility Study Draft analysis of King County s low and moderate-income populations, their financial services needs and available services. Introduction... 3 Summary of Findings... 5 King County Population Demographics... 7 Overall Population, Race and Ethnicity Information:... 7 Household Income:... 8 Characteristics of the unbanked and underbanked and King County s population... 9 Target Market(s) for financial services aimed at low and moderate-income households Detailed Demographic Information of Target Areas: Market Analysis of Financial Services in Target Areas Credit Unions: Banks: Payday Loans and Check Cashing Companies: Other Financial Services Service Comparison: Banks, Credit Unions and Payday Loan and Check Cashing Companies Short-Term Unsecured Credit Cost Comparison (14-day Example.) Financial Service Needs of Low and Moderate-Income Individuals Data Collection Methods Consumer Survey Response Banked Versus Unbanked Status Service Priorities Frequency of Service Use Non-English Speakers Interest in a Credit Union Geography Barriers, Frustrations and Needs: Focus Groups Provider Surveys Financial Education Service Gaps Appendix A Demographic and Financial Service Profiles of Targeted Areas Appendix B List of Credit Unions located in Targeted Areas Appendix C: Zip Code Categorization Appendix D: Service Provider Detail Barriers to Financial Services Appendix E: Survey instruments King County Community Credit Union Needs Assessment Report Page 2

3 Introduction Nationwide, research on the unbanked is abundant, and suggests that 10 million U.S. households the vast majority of them low-income - have no checking or savings account. Many million more households are underbanked meaning that they do not have access to the full range of financial services at an affordable cost -- that they need. Despite regulations requiring traditional commercial financial institutions to better address the needs of low-income communities, service gaps and barriers still exist. The services offered by traditional financial institutions may require minimum deposit or account balances that are not possible for lowincome individuals to maintain, can be complicated in their structure with fee and penalties for noncompliance that are difficult to fully understand, and do not provide the transaction-based services such as check cashing without a waiting period, bill payment, and money transfers needed by this population. Other barriers to using the services offered by traditional financial institutions include language barriers, inconvenient hours of operation and location, mistrust of banking institutions, and regulatory constraints on high-risk lending. Since the early 1990s, companies such as payday loan and check cashing businesses have become a significant financial service alternative for many low and moderate-income individuals. Today, such alternative financial services comprise the fastest-growing segment of the financial services industry. In many ways, these businesses are designed with the particular needs of low and moderate-income individuals in mind. They provide conveniently located and quick access to needed money, either through check cashing services with no hold on the checks or through immediately available shortterm loans. The problem, however, is that these services are more costly than comparable services provided by traditional financial institutions effectively reducing the income level of the low and moderate populations forced to use these services. For example, the average cost to cash a $300 check at a check cashing facility in Washington State is approximately $10 or 3.3% of the face value of the check, whereas most banks and credit unions provide this serve free to their customers. For noncustomers, the average cost to cash a check at a bank or credit union is between 1.5 and 2% of the check value 1. Likewise, the average cost of a two-week payday loan of $300 is $45 through a Payday Lender, or an APR of % whereas the cost to borrow the same amount through a personal line of credit through a bank or credit union is $1.47 or and APR of 12.81% 2. Moreover, the nature of how these services especially payday loans are structured can contribute to low and moderate-income individuals spiraling into a cycle of debt that is very difficult to climb out of. National and local data show that most payday loan customers do not use these loans for a single, occasional short-term emergency source of credit. Instead, an average customer may take out an initial loan and, when the two-week loan period is up, faces a difficult choice. He/she can use their available cash to repay the loan, however, given their limited income, they usually find they are short of the cash needed to repay the loan and meet their other expenses. In this scenario, the customer usually rollsover the loan by paying the finance charge and extending the loan for another two-weeks; so a short- 1 Information gathered through phone interviews with a sampling of check cashing facilities, banks and credit unions in King County, WA. 2 Payday Lending Report Statistics and Trends for Created by the Washington State Department of Financial Institutions. King County Community Credit Union Needs Assessment Report Page 3

4 term loan evolves into persistent, high-cost debt. In Washington State, over 50% of all payday loan customers either rollover their loan or take out another short-term loan 6 or more times a year. 3 Finally, the structure and services of payday lending and check cashing businesses provide no incentive or financial literacy training to help customers move towards financial stability. Services such as financial counseling to help customers understand their credit options and move towards more affordable credit choices or help them establish an overall financial plan that includes savings and prevents the need for short-term loans tend to be standard for banks and credit unions. To address these issues and better understand how the financial service needs of low and moderateincome communities in King County can be met, the Medina Foundation has commissioned a feasibility study. This report summarizes the first part of this feasibility study a needs assessment process to understand the demographics of King County s low and moderate-income population, their associated financial service needs and the financial services currently available to them. 3 Payday Lending Report, Statistics and Trends for 2003, page 4. Washington State Department of Financial Institutions. King County Community Credit Union Needs Assessment Report Page 4

5 Summary of Findings Throughout December of 2004 and January of 2005, we conducted research on low and moderateincome populations in King County, their financial service needs and the marketplace of available financial services. Information about King County s demographics was taken from the 2000 and 2002 Census. Research on credit unions, banks, payday loan and check cashing businesses was done using a variety of sources including: information from Washington State s Department of Financial Institutions, information from the National Credit Union Administration s web site; information from online phone books in order to determine number and location of banks, credit unions and payday loan and check cashing businesses; and telephone interviews with a sampling of each type of financial institution. Research on the financial service needs of low and moderate-income individuals was done via surveys and focus groups. In total, over 550 online surveys were distributed and 4 focus groups with approximately 65 participants were conducted as part of this process. Following is a summary of the main findings from this research. Demographic Profile of King County s Low and Moderate Income Households:!" In King county, almost half of all households or 43% -- are either low or moderate income: o Approximately 33% are all households are low-income (defined as annual household income under $35,000) o And 10% of all households are modest income (defined as annual household income between $35K and $50K.)!" Unlike larger east-coast and mid-west cities where there tend to be relatively large concentrations of low-income households in a single area, in King County, low-income households are distributed throughout the entire county with smaller concentrations in several areas.!" The three main areas (identified as our target areas ) with the highest concentration of low and moderate-income households are: o The greater, Seattle downtown area (86% of all households are either low or moderate income) o The Delridge, White Center and South Park Area (63.5% of all households are either low or moderate income) o The Auburn Area (64.5 % of all households are either low or moderate income.) Financial Service Needs of King County s Low and Moderate Income Households:!" About 10 percent of surveyed respondents were unbanked, having no checking or savings account. Low-income individuals made up 83 percent of the unbanked. Non-English speakers were much more likely to be unbanked than English speakers (30 percent versus 8 percent).!" In terms of desired services, all income groups listed checking accounts, savings accounts and debit/credit cards in their top priorities. Beyond that, low-income and unbanked respondents did have different priorities than higher-income/banked, particularly for cash-oriented services and emergency loans. Expectations of customer service, however, were similar for all groups (e.g. hours, location).!" Overall, 78 percent of respondents said they were somewhat or very interested in a new credit union, with interest decreasing as incomes got higher. King County Community Credit Union Needs Assessment Report Page 5

6 !" Among low-income focus group attendees, the key characteristics of an ideal financial institution included no-fee/no-minimum checking and savings; respectful customer service; Saturday and evening hours; debit cards with no fees and no ability to accidentally overdraw; flexible ID requirements; accessible short-term loans; and financial education. For immigrant communities, wire transfers and foreign-language service were also important.!" Barriers faced by the populations of interest were extremely varied and included: language barriers, mistrust of the banking system, problems with required identification, poor credit history, dislike or confusion about fees and rates, and asset restrictions for those receiving public benefits. Additional, specific barriers exist for immigrant communities and victims of domestic violence.!" Respondents from all communities wanted services close by, posing challenges for serving the three areas with high-density low and moderate-income populations (central Seattle, Burien/White Center, and the Auburn area). Market Analysis of Available Financial Services!" Banks or credit unions provide most traditional financial services. In the targeted areas with high concentrations of low and moderate-income individuals, there are approximately 54 credit unions and 70 bank service locations.!" Many credit unions located in the targeted areas have increased their field of membership so that any Washington State resident can become a credit union member. The average cost to join a credit union and open an account ranges between $5 to $25 whereas the average minimum balance required to open a no-fee savings or checking account at a bank is $100.!" In King County, there is not a single low-income designated credit union designed specifically to meet the financial service needs of low-income populations.!" The payday loan and check cashing industries in Washington State are rapidly growing segments of the overall financial services industry. The size of the payday loan industry alone in Washington State has gown 84% in the last three years (2000 to 2003.) In the targeted areas with high concentrations of low and moderate-income individuals, there are approximately 40 payday loans or check cashing businesses.!" Many homeless individuals in King County and those living in shelters or transitional housing, depend on the banking services provided by Compass Center. Compass center provides basic savings account for these individuals, many whom could not otherwise open a savings account at a bank or credit union due to poor credit histories, insufficient identification or other barriers. Compass center provides an avenue to basic banking services for approximately 700 lowincome and homeless individuals. Service Gaps Given the financial service needs of low and moderate-income individuals and the current marketplace of available financial services, there exists a need for a suite of financial services that essentially bridges what is now offered through traditional financial institutions and those offered by the payday loan and check cashing businesses. Characteristics of the services needed include:!" Basic savings, checking and debit accounts that are affordable (e.g. a low minimum deposit or balance) with simplified fee and rate structures. The debit account would be structured so that individuals could not overdraft their account.!" Minimum and flexible identification requirements to open these accounts.!" Affordable cash transaction services such as check cashing and short-term loans.!" Wire transfers and the ability to purchase money orders at an affordable rate. King County Community Credit Union Needs Assessment Report Page 6

7 !" Services provided after work hours and during the weekend and, ideally, close to the target markets.!" Services provided in a friendly, inviting manner.!" Financial education and literacy training. This training should be structured so that it is a significant service offering of the financial institution and done in collaboration with community-based organizations to reach the widest spectrum of the target market. King County Population Demographics 4 Overall Population, Race and Ethnicity Information: King County is the largest county in Washington State with more than 1,737,000 people and is the 12 th largest in the nation. The County has more population than ten States including Montana and Nebraska. King County s population has grown by 15% since 1990 and is forecasted to grow by an additional 140,000 persons (8%) to about 1,875,000 in Seattle makes up nearly one third of the County s total population and gained more than one fifth of the County-wide growth during the decade. However, South King County had the biggest share of the County s growth with more than half of the growth occurring there. The 2002 Census shows that 25 percent of King County residents now are persons of color. Non- Hispanic whites are the slowest growing racial group, growing by 1.5%. Between 1990 and 2002, the Hispanic population more than doubled to 95,000 persons and now stands at 6% of the total population. The Asian population increased almost 70% and represents approximately 12% of the total population. The African American population grew less rapidly, about 23% and represents 6% of the overall population. The Native American population remained relatively constant and is approximately 1% of the overall population (see chart below.) South King County experienced the most dramatic increase in overall diversity between 1990 and 2000, with minority populations doubling and tripling in several communities Census data shows that Tukwila has the largest percentage of minorities, 46%. Burien, SeaTac and Federal Way have large Pacific Island communities as well as African American, Latino and Asian populations. The largest number of King County residents are between 25 to 44 years of age (34%.) Of the remaining population, a little under one third or 31% are under the age of 25 and a little over one third or 35% are over 45 (see chart below.) 4 Information was taken from the 2002 King County Annual Growth Report as well as directly from 2000 and 2002 Census data. King County Community Credit Union Needs Assessment Report Page 7

8 King County 2002 Population Distribution by Race/Ethnicity Race/Ethnicity Number of persons Percentage of population White (non-hispanic) 1,344,052 75% Asian/Pacific Islander 210,949 12% Hispanic 103,849 6% Black (non-hispanic) 98,843 6% Native American/Inuit/Aleut 15,231 1% Other race (non-hispanic) 3,564 Less than 1% King County 2002 Age Distribution Age Category Number of persons Percentage of population 0 to ,034 17% 14 to ,852 14% 25 to ,435 34% 45 to ,256 16% Over ,642 19% Household Income: According to 2000 Census data, the median household income was $53,157, up 47% from the 1990 Census. The median income, however, does not portray the breadth of the income distribution in King County. A little under a half of the total population, or 43% fall into the category of low or moderate income households. Of these, 33% are low-income with annual household income of less than $35,000 and 10% are moderate income with annual earnings between $35,000 and $50,000. An equal amount of households, 43%, have annual household incomes over $75,000 with the largest single percentage of households, 23% with annual incomes between $100,000 to $150,000. See chart below for more information. King County 2000 Household Income Distribution Household Income Number of Households Percentage of all Households Less than $9,999 43,069 6% $10,000 to $14,999 58,065 8% $15,000 to $24,999 63,771 9% $25,000 to $34,999 76,468 10% $35,000 to $39,999 38,526 5% $40,000 to $49,999 39,038 5% $50,000 to $74,999 98,393 14% $75,000 to $99,999 89,690 12% $100,000 to $149, ,651 23% over $150,000 56,700 8% King County Community Credit Union Needs Assessment Report Page 8

9 Characteristics of the unbanked and underbanked and King County s population. The definition of the unbanked are individuals who have no relationship with a bank or traditional financial institution. Nationally, much research has been done on the characteristics of the unbanked and there is general consensus as to many of the individual characteristics that are associated with not having a bank account. These studies show that the unbanked are likely to be lower income, less educated, non-white, younger, and living paycheck-to-paycheck. 5 In King County, 33% of the overall population fall into a low-income category with incomes under $35, and are more likely to unbanked. Approximately 48% of the King County population is between the ages of 14 and 44, an age category more likely to be unbanked, if combined with a lower-income. And, 25% of the overall population is non-white again, a category of individuals more likely to be unbanked if combined with a low-household income. The under-banked, defined in this feasibility study are those individuals who turn to alternative financial services such as payday loans and check cashing businesses for many of their financial services. In one large national survey, about half of the customers had household incomes of between $25,000 and $50,000. The remaining customers were almost equally divided between those with incomes under $25,000 and those with incomes over $50,000- so, in essence, nearly 75% of all customers had household incomes under $50,000. In addition, they tend to be younger than the overall population and more likely to have children 6. In King County, 20% of the overall population falls into this category with an annual household income between $25,000 and $50,000. Furthermore, approximately 48% of the King County population is between the ages of 14 and 44, an age category most likely to have children and more likely to use the services of the payday loan and check cashing industry. It is relevant to our study to note that, contrary to popular belief, the lowest income, unemployed and unbanked individuals are not necessarily target customers for payday loan and check cashing businesses. In fact, in order to use these services, one must have an active checking account so, by definition, they must be banked. Rather, it is the employed and moderate income individual who tends to be the target customer of the payday loan and check cashing industry. So, as we consider how best to meet the financial service needs of both low and moderate income populations, we need to understand that we are dealing with two different groups - albeit with some overlap - with differing financial service needs and barriers. Target Market(s) for financial services aimed at low and moderate-income households. To identify possible areas for any new financial services targeted to the needs of low and moderateincome households, we identified communities with the following characteristics: 5 Who is Unbanked, and Why: Results from a Large, New Survey of Low-and-Moderate Income Adults. Paper written by Todd Vermilyea Economic Analysis Division O.C.C. and James A. Wilcox Haas School of Business University of California, Berkeley. Presented at the Federal Reserve Bank of Chicago Conference on Bank Structure and Competition May 8-10, The Economics of Payday Lending. John P. Caskey, Swarthmore College. Funded and published by The Filene Research Institute the Center for Credit Union Research. King County Community Credit Union Needs Assessment Report Page 9

10 1. Has a large concentration of low and moderate-income households with characteristics that mirror those most likely to be unbanked or under-banked and use alternative financial services. 2. Has a relatively high concentration of payday lenders again, pointing to an underbanked market. 3. Has a proportionately high concentration of low-income households (e.g. with an annual income under $35,000.) This will help position us to obtain a low-income designation were we to want to establish a low-income credit union in this area 7. (e.g. meaning the credit union would need to have a majority or 51+% of its members designated as low-income.) 4. Is located in an area where there is easy access to middle and upper-middle income households who may be a secondary target for a potential credit union. Establishing a primary customer base of low and moderate-income households with a secondary customer base made up of middle and upper-middle-income households will help ensure the financial viability of any new credit union. 5. Is located in an area where there are a number of community based partners with whom we can partner to reach out to the target populations and assist in providing financial literacy training. In the King County Area, there are three main areas that meet the majority of these criteria. They are listed below in order how closely they meet all criteria. 1. Greater Downtown Seattle which includes South Lake Union, lower Capital Hill, First Hill area, International District and part of Rainier Valley (See map in Appendix A for a detailed view of this area.) In the greater downtown Seattle area 86% of all households are either low or moderate-income with 27% being low-income and 59% being moderate income. Of the three target areas, the Seattle Downtown area has the highest concentration of payday loan and check cashing businesses per individual, however, it also has the highest concentration of traditional financial institutions such as banks and credit unions, raising a question of whether a new financial institution is needed or whether a partnership with an existing institution could be formed. This area has the lowest percentage of middle to upper-income households residing there (14% of households have annual income over $50,000,) however, it has a large concentration of businesses and their employees working in this area who could be a secondary target for any new credit union. Finally, this area is home to a large number of nonprofit, foundation and other community partners who could help with outreach and financial literacy training to target customers as well as potentially support the credit union by joining as members. 2. The Delridge, White Center and South Park Area, located south of Seattle. In this area, 63.5% of all households are either low or moderate income with 4.3% being lowincome and 59% being moderate income. This area has the third highest concentration 7 Designation as a low-income credit union must come from the National Credit Union Administration (or sometimes from a state regulatory agency.) This designation gives a credit union certain special powers, such as the right to accept non-member deposits and secondary capital. Washington State s regulations defining low-income credit unions follow those of the NCUA. Section of the NCUA Rules and Regulations stipulates that a lowincome credit union is one where a majority of its members either earn less than 80% of the average for all wage earners as established by the Bureau of Labor Statistics or whose annual household income falls at or below 80% of the median household income for the nation. According to US census data for 2003, the national median income was $43, 318. Eighty percent of the national median income is or $34,654 or approximately $35,000. So, applying this definition would mean that any low-income credit union needs to have at least 51% of its members have annual household incomes of $35,000 or less. King County Community Credit Union Needs Assessment Report Page 10

11 of payday loan and check cashing businesses with one per approximately ever 7,600 individuals. The area has a high percentage of middle and upper-middle income households, 36% with household income over $50,000, who could be a secondary market for any new credit union. Finally, after the Seattle downtown area, the Delridge, White center and South Park area has the second highest concentration of community based organizations that could be potential partners, helping with outreach and financial literacy training. 3. The Auburn Area The Delridge, White Center and South Park Area, located south of Seattle. In this area, 64.5% of all households are either low or moderate income with 3.5% being low-income and 61% being moderate income. This area has the second highest concentration of payday loan and check cashing businesses with one per approximately ever 7,000 individuals. The area has a high percentage of middle and upper-middle income households, 36% with household income over $50,000, who could be a secondary market for any new credit union. However, unlike downtown Seattle and the Delridge/White Center area, there are fewer nonprofit and community based organizations located in this area potentially making it more difficult to conduct outreach to target populations or provide financial literacy training. Following are tables with detailed demographic information on each of the three target areas: Detailed Demographic Information of Target Areas: Downtown Area - Detailed Demographics Total Population in Target Area: 68,049 Census Tract Area 2000 Pop. Income Category!"#$%o()*#+), Low-income Population 18, South Lake Union 2,218 $0 to 35 % of Population with income under $35K: 27.0% 85 Pioneer Sq 6,025 0 to 35 Moderate-income population 40, Denny Blaine 4,098 0 to 35 % of Pop. with income between $35 to $50K: 59% 91 International Dist 2,083 0 to 35 Average income population 9, International Dist 2,134 0 to 35 % of Population with income over $50K 14% 92 Pioneer Sq 1,836 0 to 35 Nmber of Chk cashing payday loan places: Beacon Hill 5, to 50 1 Chk Cashing and Payday Loan per every: 5, Denny Blaine 3, to First Hill 4, to First Hill 5, to S. Lake Union 8, to First Hill 3, to First Hill 2, to First Hill 2, to S. Lake Union 3, to Bell Town 3, to Bell Town 2, to Downtown 3, to 150 TOTAL 68,049 King County Community Credit Union Needs Assessment Report Page 11

12 Delridge, White Center and South Park Areas - Detailed Demographics Income Census 2000 Category Total Population in Target Area: 61,189 Tract Area Pop.!"#$%o()*#+), Low-income population 2, White Center 2,640 $0 to 35 % of Population with income under $35K: 4.3% 107 Delridge 6, to 50 Moderate-income population 36, Highland Park 7, to 50 % of Pop. with income between $35 to $50K: 59% White Center 4, to 50 Average income population 22, White Center 1, to 50 % of Population with income over $50K 36% White Center 5, to 50 Nmber of Chk cashing payday loan places: South Park 5, to 50 1 Chk Cashing and Payday Loan per every: 7, South Park 3, to N. South Park 1, to Delridge 4, to Highland Park 5, to High Point 4, to White Center 2, to Seola Beach 5, to 150 TOTAL 61,189 Auburn Area - Detailed Demographics Income Census 2000 Category Total Population in Target Area: Tract Area Pop.!"#$%o()*#+), Low-income population 1, Auburn 1,959 $0 to 35 % of Population with income under $35K: 3.5% Auburn 3, to 50 Moderate-income population 33, Auburn 4, to 50 % of Pop. with income between $35 to $50K: 61% Auburn 5, to 50 Average income population 19, Auburn 3, to 50 % of Population with income over $50K 36% Auburn 5, to 50 Number of Chk cashing and payday loan places Auburn 3, to 50 1 Chk Cashing and Payday Loan per every: 6, Auburn 6, to Auburn 3, to Auburn 3, to Auburn 4, to Auburn 3, to Auburn 4, to 150 Total 55,386 In summary, it appears that the greater Downtown Seattle area or the Delridge, White Center, South Park areas are good areas to locate any financial service targeted towards low and moderate-income households. Were we to want to establish a low-income designated credit union, the greater Downtown Seattle area would be the primary target location because of the high concentration of lowincome households. Additional maps in Appendix A provide a picture of the target areas, their demographics as well as the presence of payday loan and check cashing facilities. King County Community Credit Union Needs Assessment Report Page 12

13 Market Analysis of Financial Services in Target Areas There are two predominant types of institutions providing financial services to low and moderateincome households: traditional financial services provided primarily by banks and credit unions and alternative financial services provided primarily by payday loan and check cashing businesses. An additional resource offered by the nonprofit organization, Compass Center, provides basic savings accounts to over 700 unbanked homeless and low-income individuals who, due to a variety of reasons, are excluded from the traditional financial institutions. Following is a brief summary of the scope and services provided by each category of financial institution. Credit Unions: Overview: Credit Unions are cooperative, non-profit institutions, designed to serve and benefit their members. As non-profit institutions, Credit Unions reinvest earnings back into the credit union, benefiting members directly. Usually this translates to higher interest rates on deposits than banks, as well as lower fees on transactions for their members. In the targeted areas of Greater Downtown Seattle, Delridge/White Center and the Auburn area, there are approximately 54 Credit Union Service locations provided by approximately 28 separate Credit Unions. Of these Credit Unions, 14 or 50% are open to any resident of Washington State -- so out of the total credit union service locations, nearly 70% are can provide services to any Washington State resident. (See Appendix B for a complete list of credit unions located in the targeted areas.) Fees and Services: In general, the financial barriers to joining a credit union and opening a basic checking or savings account are quite low. For example, in the credit unions located in the targeted areas, the average fee to become a member and open an account ranges between $5 and $25 dollars with the majority of the credit unions charging $10 or under. Services provided by credit unions, tend to mirror those provided by Banks, however, they usually have slightly lower fees for their services. Typical services include: savings and checking accounts, debit and credit cards, personal investment opportunities (e.g. CDs, money markets, IRAs, etc,) personal, auto and home loans as well other services available to their customers such as check cashing, money orders and wire transfers to account holders. In addition, most credit unions offer free financial counseling services for their members. A few large credit unions such as Boeings Employees Credit Union (BECU) and Washington State Employees Credit Union (WSECU) also offer free financial literacy training for the community and deliver these trainings in schools, at community centers and in partnership with nonprofit organizations. In addition to the traditional services offered by credit unions, a small number of credit unions will soon be offering payday loan and check cashing services. These credit unions will be joining a service provided by Washington State Employees Credit Union (WSECU) whereby members receive services traditionally offered by the payday loan and check cashing industry. WSECU s service, called Q- Cash, provides members with short-term payday loans as well as other cash transaction services such as the purchasing of money orders and wire transfers. Their fees for these services, however, are about a third less than industry standard (for example, Q-Cash charges $10 for every $100 borrowed whereas the industry standard is $15 for every $100 borrowed) and they have structured their service offering King County Community Credit Union Needs Assessment Report Page 13

14 so that customers do not fall into a cycle of high-cost debt. First, their repayment time period is 45 days, as opposed to the industry standard of 14 days. Secondly, they limit the number of loans any customer can take out to no more than two each year. And a customer can only take out another loan once they have shown that they have repaid the first loan in full, and without borrowed money. Finally, they offer free, comprehensive financial education and counseling for all customers of Q-cash and actively work with them to establish sustainable, personal finance practices. Q-Cash was piloted in five WSECU locations in early 2004 and then extended to all WSECU locations in the later part of The services are offered through a separate Credit Union Service Organization established by WSECU. In 2005, other credit unions in Washington State will be able to join the CUSO and provide similar service to their members. Branch Locations and Hours of Service: The majority of the largest credit unions in Washington State are now part of a shared branching network whereby members can go to any participating credit union s branch(es) to make deposits, withdrawals or apply for loans. Essentially, the shared branching network has dramatically expanded the number of locations where customers can complete their financial transactions making it much more likely that there is a branch located within a mile or two of every customer. As part of the shared branching network, there are locations with ATM only service open 24 hours a day, 7 days a week and fully staffed locations. Locations that are staffed tend to be open M-Fridays 8:30 to 5:00 and limited hours on weekends. Services targeted to low and moderate-income households: Unlike many other major metropolitan areas across the country, there does not exist a single lowincome designated Credit Union in either Seattle or King County and there are only 5 low-income designated credit unions in all of Washington State. Low income designated credit unions are created specifically to serve low-income communities as have to show that at least 51% of their members are low-income. A low-income designated credit union is eligible to receive secondary capital (or grants) from foundations and other investors to help meet the financial service needs of the community and ensure a credit union s sustainability. It is relatively unusual for a heavily populated area like King County or Seattle not to have a credit union targeted to meet the needs of the low-income community. The absence of such a credit union in our area, may point to unique challenges presented by our area s demographics specifically the lack of a heavily populated low-income community in a single area. A heavily concentrated population of low-income households is needed to ensure that a majority of a credit union s members are lowincome the requirement needed to receive a low-income designation. Banks: Overview: In the targeted areas of Greater Downtown Seattle, Delridge/White Center and the Auburn area, there are approximately 70 bank service locations. Banks, unlike credit unions, are not member drive cooperatives but are private businesses and are open to any individual with the money required to open an account. Fees and Services: In general, the fees and minimum account balance required to open and maintain a checking or savings account at a bank are higher than those at credit unions. For example, in a sampling of banks King County Community Credit Union Needs Assessment Report Page 14

15 contacted with locations in the targeted areas, the average minimum deposit to open and maintain a savings account is $100. Likewise, this seemed to be the minimum amount to receive a free checking account. So, the financial barrier to becoming a bank customer is a bit higher than it is to become a credit union member. Services provided by banks are similar to those provided by most credit unions. Typical services include: savings and checking accounts, debit and credit cards, personal lines of credit, personal investment opportunities (e.g. CDs, money markets, IRAs, etc,) personal, auto and home loans as well other services available to their customers such as check cashing, money orders and wire transfers to account holders. Very few banks offered free financial counseling services for the average customer. However, some offered this service as a free benefit to their premium customers (those with account balances over a certain threshold.) In addition to the traditional services offered by most all banks, one bank, Wells Fargo, provides a payday loan like service. Through this service, called their Direct Deposit Advance Program, a customer with a direct deposit checking account can get a small cash advance, up to $500 until their next scheduled direct deposit usually in two weeks. The fee for this service is $2 for every $20 advanced, so if a customer took the largest cash advance available, the fee would be $50. Similar to payday loans offered by other companies, Wells Fargo allows individuals to roll-over these advances, by paying only the service fee, up to 12 times a year. Other than the service offered through Wells Fargo, currently, no other banks in the targeted areas are offering short-term, payday-like loans. Branch Locations and Hours of Service: As mentioned above, there are approximately 70 branch service locations in the targeted areas. In addition, through the ATM network, most bank customers can use any ATM to make deposits and withdrawal money from their account 24 hours a day, 7 days a week. For other services such as personal loans, opening an account, etc, a customer would need to go to a bank during normal business hours which typically are open M-Fridays 8:30 to 5:00 and limited hours on weekends. Services targeted to low and moderate-income households: There are no banks in the targeted areas that specifically customize their services to meet the needs of low and moderate-income households. The Community Reinvestment Act, however, mandates that most larger banks must provide financial services in low and moderate income communities. This does not mean, however, that these banks must customize their services to meet the unique needs of low and moderate households. Payday Loans and Check Cashing Companies: Overview: A payday loan is a small, unsecured, high interest, short-term cash loan provide by a licensed payday loan company in the state of Washington. In most cases, consumers write a post-dated, personal check for the advance amount, plus a fee. The lender holds the check for the loan period and then deposits it, or the customer returns with cash to reclaim the check. In Washington State, the payday loan industry is a rapidly growing industry. The size of the market has grown 84% in the last three years and the number of payday loan companies has increased from 90 in 2000 to 124 in Similar to payday loan services, check-cashing services have grown dramatically in the past few years. Check cashing services are provided through check-cashing companies such as Ace Cash Express or King County Community Credit Union Needs Assessment Report Page 15

16 Advance America, two large check-cashing companies, through local area Wal-Mart and 7-Eleven s or through rent-a-centers and pawn-shops. Because of the diversity of places that offer check cashing services, it is hard to determine the exact size of this market. However, a stroll down most low and moderate-income neighborhood streets will attest to the fact that there is an abundance of locations where, for a fee, an individual can easily cash his or her check. In the targeted areas, there are approximately 30 payday loan companies and an unknown number of check cashing companies. Fees and Services: Services provided by payday loan and check cashing companies tend to include: unsecured, short-term loans, check cashing with no holds put on approved checks, selling of money orders and envelopes, wire transfer of money, both domestic and international and some bill payment services. Some companies focus exclusively on making payday loans whereas others provide the entire suite of services. The Washington State Department of Financial Institutions regulates the payday loan and checkcashing industry. The State of Washington limits the interest that can be charged on payday loans to no more than $15/per every $100 borrowed for the first $500 and then $10/per every $100 dollars borrowed after the first $500. The upper limit that can be borrowed is $700. The average fee to cash a check is 3% of the face value of the check. The cost to wire money depends on the amount and the location of the money transfer. However, in a sampling of services and associated fees, the charge to wire money tended to be higher at payday loan and check cashing companies than those charged at banks and credit unions. Branch Locations and Hours of Service: As mentioned above, in the targeted areas there is a minimum of 30 payday loan companies and an unknown number of check cashing companies. The majority of these companies are open both evening and weekend hours as well as during the business day. In addition, some are open 24 hours a day, 7 days a week making it extremely convenient to individuals in need of quick cash. The majority of these locations are situated in high-traffic areas that are easily accessible and in close proximity to other services needed by moderate and low-income households. Services targeted to low and moderate-income households: The services provided by payday loan and check cashing companies, by their very nature, tend to target low and moderate income individuals; or individuals who are in need of short-term cash. However, these services are not targeted at helping these individuals move toward a more secure financial footing, but rather targeted at meeting their short-term cash needs. Other Financial Services Many homeless individuals in King County and those living in shelters or transitional housing, depend on the banking services provided by the nonprofit organization, Compass Center. Compass Center is a nonprofit organization providing housing and support services for homeless individuals and families. As part of their services, they have been providing basic, no-interest bearing, savings account for homeless individuals and individuals living in low-income, transitional housing and shelters since the early 70s. More than 700 individuals maintain Compass Center savings accounts. Bank employees are social workers, not bankers, helping clients set up budgets, build self-discipline, and establish King County Community Credit Union Needs Assessment Report Page 16

17 safeguards against unsustainable spending habits. They also provide Representative Payee Services for the disabled who require a third party to administer their benefits. Compass Center s banking services provide an avenue to save for many individuals who could not otherwise open a savings account at a bank or credit union due to poor credit histories, insufficient identification or other barriers. Their services act as a bridge, helping homeless and other low-income individuals establish sustainable financial habits, eventually helping them establish accounts at traditional financial institutions. Service Comparison: Banks, Credit Unions and Payday Loan and Check Cashing Companies The chart below shows a comparison of the services offered by banks, credit unions, payday loan and check chasing companies. In addition, it provides a comparison of the ID required to open an account, the minimum cost to open an account and average fees for services. Financial Institution Services Offered ID Required Bank Savings accts; checking acct debit and credit cards; direct deposit; personal loans, hom loans; CDs and other person investment accts; wire transf money orders 2 forms of picture ID; Drivers license and passport, etc or 1 picture and 2 other forms of ID such as credit card, Cosc card, utility bills, etc. Minimum Fee t set up acct. Varies but hove around $100 to establish no-fee savings and/or checking accts. Money Check Cashing Fees Orders Free for acct. holders. May pla a hold on some checks. A few w cash checks for 1 to 2% of check value. Average of $4.00 *NO Short-term or "payday loans" Wire Transfers Yes, cost varies Averages of $1 to $30 domestic and $20 to $40 international. Hours of Service M-F 9:00 to 5:00. Some open on Saturdays 9:0 to 12:00 Credit Union Payday Loan Savings accts; checking acct debit and credit cards; direct deposit; personal loans, hom loans; CDs and other person investment accts; wire transf money orders Short-term loans with limite credit checking. Cost is $15 every $100 loaned. After $5 cost drops down to $10/per $ loaned. 2 forms of picture ID; Drivers license and passport, etc or 1 picture and 2 other forms of ID such as credit card, Cosc card, utility bills, etc. Ranges from $2 to $5 dollars to become a member and establish an acc Free for acct. holders. May pla a hold on some checks. Average of $2 **NO Washington State driver license or other picture I bank statement showing active checking acct. W need to verify employm and residence with documentation. N/A N/A N/A Yes N/A Yes, cost varies Average $12 domestic and $4 international. Note, with som CU's internation transfers can tak several days. M-F 9:00 to 5:00. Some open on Saturdays 9:0 to 12:00 Varies but usually open day, evening and weekend hours. Some locations ope 24 hrs. Check Cashing "No-hold" check cashing, m orders and wire transfers. 1 form of picture ID. N/A Average of 3.3% face value of check. Free if cashing a check, otherwise a average of 50 cents. NO Cost varies but averages 10% o cash transferred on domestic transfers -- muc less to Mexico. Varies but usually open day, evening and weekend hours. Some locations ope 24 hrs. King County Community Credit Union Needs Assessment Report Page 17

18 Short-Term Unsecured Credit Cost Comparison (14-day Example.) 8 Below is a comparison of the cost for a 14-day unsecured loan provided by a payday loan company or provided by services at a bank or credit union. Included in this comparison is the cost of taking out a default loan by writing a check for which an individual has insufficient funds or over drafting one s account. It is important to include this as a comparison because many low and moderate income individuals cited the high-overdraft fees as a barrier to using banks and credit unions. Payday Loan Personal Line of Credit Advance Credit Card Cash Advance Overdraft Protection - One Paid Overdraft Overdraft Protection - Two Paid Overdrafts Amount Borrowed $300 $300 $300 $300 $300 Repayment Period 14 days 14 days 14 days 14 days 14 days Interest Rate n/a 12.81% 18.80% n/a n/a Transaction Fee $45.00 $0 $13.50 $28.75 $57.50 Interest Paid n/a $1.47 $2.16 n/a n/a Total Cost $45.00 $1.47 $15.66 $28.75 $57.50 APR % 12.81% % % % Financial Service Needs of Low and Moderate-Income Individuals Following is a summary of results of surveys and focus groups held with low and moderate-income individuals and with human service providers serving these individuals. The goal of these surveys and focus groups was to identify the financial service needs of low and moderate-income households in King County. Data Collection Methods Data were collected through surveys and focus groups.!" Surveys of potential customers were distributed both in-person and on-line. The physical surveys were made available in English and Spanish through 20 different locations 9 around King County, with a focus on downtown/central Seattle, Burien/White Center, and Auburn/Kent/Renton. The online surveys were sent to an list of about 500 independent child care providers and employees/owners of child care businesses. The purpose of this survey was to get a sense of current financial service usage and barriers; and interest in/characteristics of a community development credit union. We received valid 331 responses.!" In addition, we surveyed case managers and other social service professionals who work directly with low-income individuals and refugees/immigrants in King County. The purpose of 8 Payday Lending Report, Statistics and Trends for 2003, page 5. Washington State Department of Financial Institutions. 9 Two locations through a social service agency; 11 locations through a community clinic; three low-income apartment buildings; one transitional housing facility; two grocery stores; and one manufacturing business. King County Community Credit Union Needs Assessment Report Page 18

19 this survey was to further explore the barriers faced by low-income individuals to using the mainstream banking system. We received 54 responses.!" Four focus groups were held with low-income individuals. Three focus groups were held in English, and one was in Spanish. Three were held in or near downtown Seattle, and one in Burien. Three focus groups were held in low-income apartment buildings and one in a transitional housing facility. Three were structured focus groups while one was an opportunity for informal conversation. In two cases, attendees received $20 cash or gift certificate for attendance. All together, about 65 people participated in focus groups. This was not a random or representative sample of King County residents. These results are illustrative, but not a statistically valid representation of the county population. Because of the manner in which we collected survey information, there are several ways that our respondents are probably not representative of the general population of King County.!" We went out of our way to find low-income individuals, and our income distribution does not match that of the county as a whole.!" Because many of the surveys from low-income individuals were filled out by focus group attendees, it is possible that these individuals self-selected out of interest in the subject matter, and therefore are more inclined to be interested in a new credit union than the overall lowincome population.!" Nearly two-thirds of our respondents were child care professionals who responded on-line, and most upper-income responses came from this group. Any characteristics particular to this group would skew the overall results accordingly. Consumer Survey Response There were 331 valid responses to the customer survey, of which 63 percent came from online responses and 37 percent came from in-person surveys. Respondents came from 67 different zip codes in King County. A breakdown of respondent characteristics follows. Geographic representation East King 194 North Seattle/King 104 Downtown/ Central Seattle 324 South King 234 Burien/ White Center/ SeaTac 164 King County Community Credit Union Needs Assessment Report Page 19

20 Age Income 51 to 60 16% 61 to 70 4% Less than 20 1% Over $50K 32% Under $19K 28% 41 to 50 37% 21 to 40 42% $35K to $50K 22% $19K to 35K 18% Employment status Student Retired Care for home M children Disabled Self-employed/home day-care No job One or more part-time jobs Full-time job Household size ranged from 1 to 8, with one-quarter of respondents in single-person homes; the average household size was 3. Respondents spoke 11 different languages, with 90 percent identifying English as their main language and 6 percent listing Spanish. Banked Versus Unbanked Status Consistent with other research, the lowest income group overwhelmingly represents the truly unbanked, with no savings or checking account at any financial institution. In our sample, 10 percent of respondents were unbanked, but thirty percent of low-income respondents were unbanked. Among unbanked households, 83 percent have incomes below $19,000. See Table 1 for more detail on account holdings by income group. Table 1. Within each income group, what percentage of respondents had accounts... Bank Credit Union Any institution (including Compass Center Bank) Savings Checking Savings Any Account Any Account Only Only Checking Neither Under $19K 55.4% 6.0% 20.0% 17.5% 31.3% 31.3% $19K to 35K 83.4% 38.9% 5.6% 16.7% 74.1% 3.7% $35K to $50K 87.3% 42.8% 1.6% 22.2% 73.0% 3.2% Over $50K 83.7% 49.9% 1.1% 9.8% 88.0% 1.1% All respondents 76.4% 33.9% 7.3% 15.9% 66.4% 10.4% King County Community Credit Union Needs Assessment Report Page 20

21 Who are the unbanked? (by income) Under $19K $19K to 35K $35K to $50K Over $50K Service Priorities Respondents were asked to rate the importance of a variety of financial services, as well as the attributes of those services (e.g. locations, hours). Summaries of those responses once again, by income group, as well as by banked/unbanked status are included in Table 2 through Table 5. A few things to note:!" All income groups put checking accounts, savings accounts and debit/credit cards in their top five priorities.!" Not surprisingly, the financial life of the lowest income group revolves around cash check cashing, money orders whereas the highest income group puts noticeably lower emphasis on cash transactions, almost as if physical cash is an afterthought.!" About half of low-income respondents, and a third of modest-income respondents, rated payday loans as somewhat or very important. Interest/use of payday loans did not differ by age.!" Interestingly, small business loans are of comparable interest to every income group. This may reflect the large number of child care providers (home-based and small-businesses) in our sample. However, based on focus group feedback, it may also reflect that low-income individuals see starting a business as a viable option, particularly for men with skills in the trades.!" More differences appear when comparing banked and unbanked individuals. This creates a certain chicken-and-egg problem with regard to causality. For example, unbanked respondents gave less importance to low rates and fees than banked respondents. There could be many interpretations of this. Do the unbanked use alternative services because they don t care about fees? (This seems highly unlikely given their income level, and would be inconsistent with qualitative feedback from the focus groups). Have the unbanked simply resigned themselves to paying higher fees, and therefore rank them as less important because they feel they have no other choice? Similar questions arise throughout this data, where the more affluent and banked respondents generally express higher expectations of customer service and convenience. King County Community Credit Union Needs Assessment Report Page 21

22 Table 2. Service usage, by unbanked vs. banked status Unbanked Not Important Important Not Important Banked Important How important is each service? Savings account 29% 71% 9% 91% Checking account 32% 68% 3% 97% Check cashing 14% 86% 20% 80% Money orders/cashiers checks 14% 86% 37% 63% Money wire transfers 45% 55% 54% 46% Bill paying (wiring) 40% 60% 31% 69% Debit/credit card 31% 69% 9% 91% Food stamps/public benefits 17% 83% 76% 24% Financial education 29% 71% 44% 56% Payday loans 57% 43% 79% 21% Car loans 63% 37% 32% 68% Small business loans 60% 40% 51% 49% Student loans 50% 50% 38% 62% Home loan/mortgage 70% 30% 25% 75% Home improvement loan 67% 33% 31% 69% EITC 59% 41% 46% 54% How important are these attributes of service? Close to home 10% 90% 3% 97% Low rates and fees 16% 84% 4% 96% Open late and weekends 20% 80% 9% 91% Quick and friendly service 11% 89% 3% 97% All needs met in one place 17% 83% 5% 95% Important signifies that the respondent indicated the service was somewhat important or very important to them. Not important signifies that the respondent indicated the services were not important, or that they had no opinion. Table 3. Most important services, for Unbanked vs. Banked groups: Unbanked Banked 1 Check Cashing Checking account 2 Money orders Savings account 3 Food stamps/public benefits Debit/credit card 4 Savings account Check Cashing 5 Financial education Bill paying (wiring) 6 Debit/credit card Home improvement loan King County Community Credit Union Needs Assessment Report Page 22

23 Table 4. Service and service attribute importance, by income level Under $19,000 $19,000 - $35,000 $35,000 - $50,000 Over $50,000 Not Not Not Not Important Important Important Important Important Important Important Important How important is each service? Savings account 19% 81% 9% 91% 5% 95% 9% 91% Checking account 18% 82% 4% 96% 0% 100% 0% 100% Check cashing 12% 88% 16% 84% 17% 83% 26% 74% Money orders/cashiers checks 12% 88% 28% 72% 33% 67% 52% 48% Money wire transfers 47% 53% 45% 55% 55% 45% 59% 41% Bill paying (wiring) 33% 67% 23% 77% 30% 70% 38% 62% Debit/credit card 23% 77% 10% 90% 5% 95% 7% 93% Food stamps/public benefits 27% 73% 75% 25% 77% 23% 97% 3% Financial education 33% 67% 35% 65% 41% 59% 50% 40% Payday loans 53% 47% 67% 33% 88% 12% 90% 10% Car loans 60% 40% 26% 74% 25% 75% 25% 75% Small business loans 54% 46% 43% 57% 53% 47% 53% 47% Student loans 53% 47% 27% 73% 29% 71% 40% 60% Home loan/mortgage 59% 41% 23% 77% 19% 81% 18% 82% Home improvement loan 62% 38% 37% 63% 20% 80% 24% 76% EITC 58% 42% 34% 66% 45% 55% 50% 50% How important are these attributes of service? Close to home 2% 98% 11% 89% 0% 100% 2% 98% Low rates and fees 7% 93% 9% 91% 3% 97% 1% 99% Open late and weekends 13% 87% 10% 90% 7% 93% 11% 89% Quick and friendly service 5% 95% 6% 96% 3% 97% 1% 99% All needs met in one place 6% 94% 8% 92% 3% 97% 8% 92% Important signifies that the respondent indicated the service was somewhat important or very important to them. Not important signifies that the respondent indicated the services were not important, or that they had no opinion. Table 5. Most important services, for each income group: Under $19,000 $19,000 - $35,000 $35,000 - $50,000 Over $50,000 1 Check cashing Checking account Checking account Checking account 2 Money orders/cashiers checks Savings account Savings account Debit/credit card 3 Checking account Debit/credit card Debit/credit card Savings account 4 Savings account Check cashing Check cashing Home loan/mortgage 5 Debit/credit card Bill paying (wiring) Home loan/mortgage Home improvement loan 6 Food stamps/public benefits Home loan/mortgage Home improvement loan Car loans King County Community Credit Union Assessment Report Page 23 Prepared for the Medina Foundation by Jennifer M. Bright, February 2005

24 Frequency of Service Use Table 6 shows usage rates of different services by income groups. 10 With both banks and credit unions, frequency of use increases with income. Not surprisingly, check cashing/payday loan businesses, and pawn shops are used more by lower income respondents. Note the sharp difference in check cashing/payday loan usage above versus below $35,000 in income. Electronic benefits transfer (which respondents also probably interpreted to mean direct payroll deposit) shows the least difference across income groups. Table 6. How often do you use each business/service? Weekly Monthly Less than monthly Never Bank (account holders only) most common responses in bold Under $19, % 59.10% 2.30% 0.00% $19,000 - $35, % 21.50% 2.40% 2.40% $35,000 - $50, % 29.10% 5.50% 0.00% Over $50, % 24.70% 1.30% 0.00% Credit Union (account holders only) most common responses in bold Under $19, % 80.00% 0.00% 0.00% $19,000 - $35, % 47.40% 10.50% 0.00% $35,000 - $50, % 42.30% 23.10% 11.50% Over $50, % 38.60% 15.90% 2.30% Check cashing or payday loan business Under $19, % 24.20% 16.70% 54.50% $19,000 - $35, % 23.40% 3.30% 66.70% $35,000 - $50, % 2.60% 7.90% 89.50% Over $50, % 5.00% 5.00% 90.00% Pawn shop Under $19, % 8.30% 11.70% 76.70% $19,000 - $35, % 3.30% 0.00% 90.00% $35,000 - $50, % 0.00% 11.10% 88.90% Over $50, % 0.00% 5.10% 94.90% Electronic benefits transfer Under $19, % 14.30% 4.80% 69.80% $19,000 - $35, % 27.30% 6.10% 57.60% $35,000 - $50, % 21.10% 15.80% 52.60% Over $50, % 24.60% 4.90% 55.70% Non-English Speakers Ten percent of our respondents were non-english speakers or did not have English as their primary language. Particular findings relevant to non-english speakers:!" They were much more likely to be poor - 52 percent were under $19,000 income (as opposed to 28 percent in the sample as a whole), and fully 86% were under $35,000.!" They were also more often unbanked - 30 percent were unbanked, compared to 8 percent for English-speakers. (See Table 7 for comparison of account holdings for English and non- English).!" 82 percent said services in their language were somewhat or very important. 10 For banks and credit unions, only bank or credit union account holders are included. For other services, all respondents are included. Page 24

25 Table 7. Account holdings by primary language Any institution (including Compass Bank) Savings Checking Savings Neither Only Only Checking English 6.5% 15.3% 70.2% 8.0% Non-English 12.9% 22.6% 35.5% 29.0% All respondents 7.2% 16.0% 66.6% 10.2% Interest in a Credit Union Overall, 78 percent of respondents said they were somewhat or very interested in a new credit union, with interest decreasing as incomes got higher. Again, because many surveys were filled out by lowincome individuals who attended a focus group on the topic, our low-income group may have a significant number of people who self-selected because of their interest in the credit union. Interest in a credit union (by income group) All Respondents Over $50K $35K to $50K $19K to 35K Under $19K Of those who said they were somewhat or very interested, following were the responses regarding their interests and likely service usage. Table 9. Services and attributes desired by those interested in a credit union Not Somewhat Very Important* Important Important How important is each service? Savings account 10% 27% 63% Checking account 5% 14% 81% Check cashing 18% 21% 61% Money orders/cashiers checks 29% 37% 34% Money wire transfers 50% 27% 23% Bill paying (wiring) 38% 32% 40% Debit/credit card 9% 13% 78% Food stamps/public benefits 67% 10% 23% Financial education 37% 30% 33% Payday loans 71% 16% 13% Car loans 24% 36% 30% Small business loans 44% 16% 30% Student loans 33% 29% 38% Home loan/mortgage 28% 16% 46% Home improvement loan 32% 27% 41% EITC 43% 19% 38% Page 25

26 Not Important* Somewhat Important Very Important How important is this attribute? Close to home 3% 23% 76% Low rates and fees 3% 11% 86% Open late and weekends 7% 22% 71% Quick and friendly service 3% 13% 84% All needs met in one place 3% 17% 80% * Rated not important or no opinion. Of those who said they were somewhat or moderately interested in a credit union, following were the responses to questions about how they might use a credit union. The response regarding initial savings deposit shows a sort of inverse bell curve, with responses largely at the low end ($5 to $50) and high end (more than $150). When asked how often they would make a deposit, more than half said once per month. How much would you initially deposit? How often would you deposit? $5 to $24 $25 to $50 $51 to $75 $76 to $150 More than $ > 1X per month Every 2 weeks 1X per month <1X per month Graphs show percent of respondents who selected each answer. Finally, respondents were asked how far they would be willing to travel to use the credit union. The vast majority of respondents said they d be willing to travel 1 to 5 miles, but no more. This is consistent with response to the question on having services close to home. It also presumably poses challenges for trying to serve all three low-income density area in King county. How far would you travel? 11% 20% 69% Less than 1 mile 1 to 5 miles More than 5 miles Geography As mentioned above, there were responses from the three target areas with the highest densities of lowincome households: downtown/central Seattle and Rainier Valley; the south King County communities of Renton, Auburn, Kent and Federal Way; and the south Seattle/King County communities of White Page 26

27 Center, Burien and SeaTac. There were also responses from east and north King County (from as far away as Carnation and Monroe). 11 Table 10. Respondent characteristics by geography Income Unbanked Under $19K $19K - $35K $35K - $50K Over $50K Interested in CU Downtown/Central Seattle 19.4% 58.3% 15.5% 14.6% 11.7% 85.6% Burien/White Center/SeaTac 17.6% 23.9% 32.6% 19.6% 23.9% 81.2% South King 1.3% 3.2% 17.5% 33.3% 46.0% 75.0% East King 1.7% 10.4% 22.9% 29.2% 37.5% 69.2% North Seattle/King 0.0% 10.7% 3.6% 10.7% 75.0% 68.9% The income data for south King County are not consistent with overall population statistics our sample had a much higher income distribution than the population at large. This is probably because the North and South King County responses were disproportionately from online rather than in-person survey responses (90 to 95 percent online), despite our efforts to reach low-income individuals in these communities. Most likely, data for Burien/White Center can reasonably be used to paint a picture of the low-income population in south King, and a large number of social service provider respondents were also from south King that helps to illuminate the needs and barriers of that community. Barriers, Frustrations and Needs: Focus Groups Provider Surveys The focus groups and in-person conversations with low-income individuals were a valuable source of qualitative information and deeper understanding of the barriers, frustrations, and needs of this population. In-person conversations illustrate the true frustrations and limitations of being poor and unbanked. For example: Those receiving disability benefits from the state now get a debit card (the Quest card) - which is convenient, except that the debit card is from the state directly, and isn't drawn on any bank. So every ATM charges the non-customer fee for withdrawing money, and card-holders can t withdraw more than $100 at a time, which means they are forced to incur the fee repeatedly. They also get hit at the other end; someone who lives on a few hundred dollars a month needs every penny, but most ATMs won't allow withdrawals of less than $20. Getting the last few dollars requires buying something at a store and asking for cash back. These are the sorts of stories we were able to gather via in-person conversations. In addition, we surveyed social service providers to ask them about the particular barriers and needs of the communities they work with. The 54 respondents worked with individuals from around King County, with a heavy emphasis on south King County (see the chart below). Their client base included a wide diversity in terms of income, age, ethnicity, health status, and special needs. A particular effort was made to connect with agencies serving immigrant communities, since this is one of the target populations identified as unbanked or underbanked. 11 For a complete categorization of zip codes, see Appendix A. Page 27

28 Client base represented by social service provider survey Where do your clients live? (check all that apply) North King East King West Seattle/White Center Downtown/ID South King The varied themes that emerged from these conversations and surveys are summarized below.!" -(../#%$0*#1$*22o(#%$o3+/.)4 Twenty to 50 percent of focus group participants had bank accounts of some sort. Those who worked with a commercial bank were largely (though not entirely) happy with their bank; most of them had either done considerable research to find a low-fee option and learn how to avoid fees, or they had opened an account with the help of a family member to work around ID or credit history problems.!" 5o)/$6"%o(%$0*#1$*22o(#%)4 All focus groups had a split, with some people satisfied with reliance on check-cashing (simplicity and convenience) and others dissatisfied (high fees, inability to earn interest, safety issues regarding reliance on cash). In all groups, participants really knew the fees and rates for different check cashing, money order, payday loan and wire transfer services. In each group, questions about these services led to lengthy discussions of who charges what, pros/cons of different services, and ways to best work the system at least cost. Within the options that they do use; people are clearly well informed. Among the more creative alternatives to a bank account were the use of a safe deposit box for savings (which only costs $25 per year), and cashing checks at the post office for a lower fee.!" 7/)"./$8o.$+/0"%$2*.+)$0(%$8.()%.*%"o#$6"%$o9/.+.*6)$*#+$8//)4 People like the convenience of debit cards, but questioned why ATMs allow you to overdraw (and thus incur fees). There was a general sense that technology should be able to fix this, and not allow you to withdraw money you don t have.!" -./+"%$")%o.:$"))(/);$*#+$#//+$8o.$2./+"%$2o(#)/3"#<$)/.9"2/)4 Many focus group participants talked about credit problems that make it difficult or impossible to open a bank account. In some cases, people owed money to another financial institution, which would in fact exclude them from opening a new account. Others reported being told they could not open a bank account, but for reasons which seem questionable (e.g. having a PO box as a mailing address). Still others had been the victims of identity theft, or had resolved the credit problem but hadn t been able to clear their actual credit record. This points to need for credit counseling assistance.!" =+/#%"8"2*%"o#$>.o03/?)$@$</#/.*3: In every focus group, many people talked about difficulties in providing adequate identification, whether for opening a bank account or for cashing checks. People were confused and frustrated at getting different stories about what kind of ID is required, and not knowing when a requirement really was a requirement, versus simply a way to exclude them because they were poor, disabled, non-citizens, or had a bad credit record. Page 28

29 !" =+/#%"8"2*%"o#$*#+$o%/.$"))(/)$>*.%"2(3*.$%o$8o./"<#$#*%"o#*3)4 o For foreign nationals, the desired ability to use foreign photo ID was emphasized. Mexican participants reported that they have both a Mexican citizenship card and a consular ID; they believed that other Latin American immigrants held similar identification. Because of ID issues, foreign participants were more likely to go to a store and buy something in order to get a check cashed they learn which stores will do this, and come to rely on them as their informal banking system. o Between ID issues the added need to wire money out of the country, the foreign participants also seemed more likely to have to go many places to meet all of their financial needs, and therefore expressed more of a desire to see a one-stop-shopping option, ideally in a grocery store. o Social service providers listed concerns about immigration status and mistrust of banks by immigrants from unstable political or economic environments as common major barriers. o Obviously, language barriers are a problem for anyone with limited English. While the consumer survey represented a dozen languages, the service providers reported clients speaking 23 languages. o Participants pointed out that some banks have formal relationships with Mexican banks and thus can offer no-fee money wiring. o Lastly, the Spanish-speaking group felt that if a new option were available that really did meet the needs of the growing Latino community, marketing would happen by word-ofmouth.!" A*.%"2(3*.$2*33/#</)$o8$+o?/)%"2$9"o3/#2/$9"2%"?)4 Social service providers reported that because Washington is a community property state, victims of domestic violence cannot or will not open bank accounts for two reasons: (1) abusers have used the community property argument to learn the whereabouts of their spouse through the bank, and (2) married victims wish to keep their financial assets independent from their abuser.!" B))/%$3"?"%*%"o#)$8o.$>/o>3/$./2/"9"#<$>(03"2$0/#/8"%)4 Both focus group participants and social service providers talked about the asset limitations placed on public benefit holders, which encourages people to keep savings in cash or gold.!" Co.%@%/.?$o.$D>*:+*:E$3o*#)4$ Focus group participants didn t respond much when asked about their use of payday loans. This could be because many participants had no checking account (and were therefore ineligible to use this service); because of stigmas around needing to borrow emergency funds or the reasons behind debt (a dynamic cited by the social service providers); or because these particular groups simply did not use this service much. However, when asked what services would be important in an ideal world, there was general agreement that access to loans is important. Suggestions included: o Reasonable emergency loan amount: Loans up to $100, $200, $300, $500 or 20% of an individual s monthly income were suggested as a reasonable overdraft or emergency loan option. o Reasonable fees and rates: Perceptions of reasonable fees included: 5% to 10% interest; a flat $10 or $15 per two-week or one-month loan term; a higher up-front fee followed by a flat $3-5 for subsequent (rollover) months; and interest-free grace periods for the first month on loans under $500. o Desire for longer-term loans: Some participants wanted the ability to borrow money for longer periods of time (e.g. a year or more) and at lower interest rates - like normal loans instead of the two-week, high-fee turnaround loans. Page 29

30 !" F%/.$0*.."/.)4 Issues raised by the social service professionals included many of the ones described thus far, but there were others as well, and a great deal more detail and insight than is provided here. See Appendix B for more detail and narrative comments from this survey. For the three structured focus groups, the following table describes the response to the question: What would be the characteristics of your ideal bank, whatever that term means to you? Table 11. Characteristics of an ideal bank English Group #1 Spanish Group English Group #2 Customer service Respectful!" Respectful!" Services in Spanish.!" Willingness ability to work through a language barrier if Spanish isn't spoken. Hours Location Services - general Open until 8 pm and some Saturday hours No charge/no minimum balance checking savings Weekends are more important than evenings. Convenient location - grocery store or other "one-stopshopping" Low fees Better convenience for the physically disabled (reduce need to stand in lines) Saturday hours Central location No charge/no minimum balance checking savings Loans Access to short-term loans Access to short-term loans!" Access to short-term loans!" Longer-term loans at reasonable rates Electronic banking Other service requests ID requirements Financial education Debit card (with convenient no-fee ATM options) Flexible rules on ID and credit history Money management, budgeting Ability to wire money overseas with limited/no fees. Flexible rules on ID and credit history (specifically, accept foreign photo IDs)!" Debit card without the ability to overdraw, and with convenient no-fee ATM options!" Direct deposit!" No withdrawal limit from the bank - if you have it, you can withdraw it!" Small savings investment instruments - ability to get better interest rate without needing large amounts for a certificate of deposit Flexible rules on ID and credit history Money management, using financial services, tax help. Financial Education The two English-speaking focus groups expressed a need for in financial education (sometimes for themselves, often for other people they know), and 83 percent of the social service professionals felt that there is a need to better educate low-income people about financial services. Specific suggestions for financial education included:!" Money basics, particularly but not exclusively for young people: budgeting, bill-paying, basic banking functions, responsible borrowing, and credit records. Page 30

31 !" Education on the financial services industry and how to understand and evaluate different service options.!" Financial planning.!" Homebuyer classes and home/car loans.!" Classes targeted specifically for immigrant communities what s different in the U.S., what to watch out for, what not to worry about, and classes in foreign languages.!" Credit counseling help for people with bad credit histories, identity theft problems, or issues regarding separation of assets/credit from a family member or former spouse. However, some social service professionals had a different take: That financial institutions and social service agencies are the ones in need of education.!" A better understanding of the circumstances facing domestic violence victims and immigrants would allow social service providers and banking professionals to better help such individuals navigate their options.!" Better skills and awareness among bank personnel of foreign languages, cultural issues, and many of the specific issues raised here public benefit complexities, identification and credit challenges would enable banks to draw in and keep more low-income individuals as customers. Service Gaps Given the financial service needs of low and moderate-income individuals and the current marketplace of available financial services, there exists a need for a suite of financial services that essentially bridges what is now offered through traditional financial institutions and those offered by the payday loan and check cashing businesses. Characteristics of the services needed include:!" Basic savings, checking and debit accounts that are affordable (e.g. a low minimum deposit or balance) with simplified fee and rate structures. The debit account would be structured so that individuals could not overdraft their account.!" Minimum and flexible identification requirements to open these accounts.!" Affordable cash transaction services such as check cashing and short-term loans. These services should be structured to help individuals avoid a cycle of debt. For example, payday loan services should provide for a longer repayment period than the industry standard of 2 weeks (ideally a repayment period of 30 to 45 days,) there should be a limit on the number of loan roll-overs allowed per year and the interest rate should be lower than the industry standard.!" Wire transfers and the ability to purchase money orders at an affordable rate.!" Services provided after work hours and during the weekend and, ideally, close to the target markets.!" Services provided in a friendly, inviting manner.!" Financial education and literacy training. This training should be structured so that it is a significant service offering of the financial institution and done in collaboration with communitybased organizations to reach the widest spectrum of the target market. Ideally, the financial education and literacy training would be combined with a savings incentive program such as Individual Development Accounts (IDAs.) IDAs are essentially a matched savings plan designed to encourage and help low-income individuals build savings. With IDAs, eligible individuals commit to saving a specific amount each month and every dollar they save is matched with three dollars funded primarily through Federal and State program. The limit on the match is $2,000 over a four year period. Programs that have combined IDAs with mandatory Page 31

32 financial education have been very successful in increasing the savings rates of low-income individuals. Page 32

33 Appendix A Demographic and Financial Service Profiles of Targeted Areas Page 33

34 Average (ousehold Income (2000) by Census Tract $50, to $150, $35, to $49, $0.00 to $34, King County Overview - Average Income.pdf 0 mi Copyright Microsoft Corp. and/or its suppliers. All rights reserved. Copyright 2002 by Geographic Data Technology, Inc. All rights reserved Navigation Technologies. All rights reserved. This data includes information taken with permission from Canadian authorities Government of Canada (Statistics Canada and/or Geomatics Canada), all rights reserved.

35 Population (2000) by Census Tract 6,001 to 9,000 Downtown Area.pdf 3,001 to 6,000 1,501 to 3,000 0 to 1,500 Average Household Income (2000) by Census Tract $50, to $150, $35, to $49, $0.00 to $34, mi Copyright Microsoft Corp. and/or its suppliers. All rights reserved. Copyright 2002 by Geographic Data Technology, Inc. All rights reserved Navigation Technologies. All rights reserved. This data includes information taken with permission from Canadian authorities Government of Canada (Statistics Canada and/or Geomatics Canada), all rights reserved.

36 Pushpins Credit Pnions Chk Cashing and Payday Roan Rocations Average Household Income (2000) by Census Tract $50, to $150, $35, to $49, $0.00 to $34, Payday loan and Credit Pnion facilities in Downtown.pdf 0 mi Copyright Microsoft Corp. and/or its suppliers. All rights reserved. Copyright 2002 by Geographic Data Technology, Inc. All rights reserved Navigation Technologies. All rights reserved. This data includes information taken with permission from Canadian authorities Government of Canada (Statistics Canada and/or Geomatics Canada), all rights reserved.

37 Population (2000) by Census Tract Q,001 to 9,000 Delridge and Ohite Center Area -- Average income and pop. (2000 data) 3,001 to Q,000 1,501 to 3,000 0 to 1,500 Average Household Income (2000) by Census Tract $50, to $150, $35, to $49, $0.00 to $34, mi Copyright Microsoft Corp. and/or its suppliers. All rights reserved. Copyright 2002 by Geographic Data Technology, Inc. All rights reserved Navigation Technologies. All rights reserved. This data includes information taken with permission from Canadian authorities Government of Canada (Statistics Canada and/or Geomatics Canada), all rights reserved.

38 Pushpins Credit Pnions Chk Cashing and Payday Loan Locations Average Household Income (2000) by Census Tract $50, to $150, $35, to $49, $0.00 to $34, Payday loan and Credit Pnion facilities in Delridge, White Center.pdf 0 mi Copyright Microsoft Corp. and/or its suppliers. All rights reserved. Copyright 2002 by Geographic Data Technology, Inc. All rights reserved Navigation Technologies. All rights reserved. This data includes information taken with permission from Canadian authorities Government of Canada (Statistics Canada and/or Geomatics Canada), all rights reserved.

39 !"#$%'(")*+,---.*/0*12)3$3 456' 6,001 to 9,000 Auburn Area Oopulation and Average Income 3,001 to 6,000 1,501 to 3,000 0 to 1, *:"$32;"%<*=)6">2* +,---.*/0*12)3$3*456' $50, to $150, $35, to $49, $0.00 to $34, mi Copyright Microsoft Corp. and/or its suppliers. All rights reserved. Copyright 2002 by Geographic Data Technology, Inc. All rights reserved Navigation Technologies. All rights reserved. This data includes information taken with permission from Canadian authorities Government of Canada (Statistics Canada and/or Geomatics Canada), all rights reserved.

40 Pushpins Credit Pnions Chk Cashing and Oayday Roan Rocations Average Household Income (2000) by Census Tract $50, to $150, $35, to $49, $0.00 to $34, Oayday loan and Credit Pnion facilities in Auburn Area.pdf 0 mi Copyright Microsoft Corp. and/or its suppliers. All rights reserved. Copyright 2002 by Geographic Data Technology, Inc. All rights reserved Navigation Technologies. All rights reserved. This data includes information taken with permission from Canadian authorities Government of Canada (Statistics Canada and/or Geomatics Canada), all rights reserved.