Low-Income Citizens Can Benefit When Cities and Private Sector Partner

When I was elected commissioner of Public Works for the city of Chattanooga in 1987 and later when I became mayor in 2005, I found myself responsible for several hundred employees. Many – particularly those with low-wage jobs – were victims of check cashers and loan sharks. At the time, unscrupulous individuals would position themselves outside where the workers would leave the building, check in hand at the end of the day. Over time, we were able to discourage such illegal activity – but only to a degree. In our city and almost everywhere else, the practice of providing non-bank financial services proceeded to increase, manifesting itself into a much more significant open and legal enterprise with numerous storefront locations offering check cashing, title loans and payday advances.

The central problem was – and continues to be – that those depending on check cashers did not have regular bank accounts at reputable and mainstream financial institutions.

During my first term as mayor, we attempted to stop printing paychecks and move to direct deposit for city payroll. Even then, we still had dozens of employees without bank accounts. For those unbanked individuals we provided pre-loaded debit cards, but that solution was not well received since it usually required the employee to go to the bank that issued the card to get their cash.

What I experienced with unbanked city employees is just a microcosm of the greater population of most cities. Many residents living below the poverty level – and particularly minority and immigrant populations – often have little to no experience with financial institutions. These individuals lack confidence in banking as a way to manage their money and instead carry it with them or keep it hidden at home. As a result, they are clearly vulnerable and can be victims of theft, robbery or home invasions. During my term as mayor, some local churches, nonprofit corporations and other organizations serving special populations attempted to form credit unions designed to provide simple financial services specifically for the needs of those without bank accounts, but most were not sustainable.

This situation is not unique to any particular city, and solving the problem of citizens without banking services requires a rather sophisticated level of financial innovation. Recognizing this fact, in 2006, San Francisco City Treasurer Jose Cisneros – in cooperation with leading banks in the community – initiated a citywide effort to make it easier for low-income residents to open bank accounts. The program, Bank On San Francisco, has helped thousands of San Francisco residents and inspired similar initiatives – over 100 cities have replicated the program.

In a recent interview with Governing, Cisneros said the predatory practices of check cashers and payday lenders – who were taking hundreds of dollars a year from individuals living at poverty or near-poverty levels – often resulted in an unfortunate chain reaction.

"If a low-income family is unnecessarily spending hundreds of dollars each year with these predatory financial service providers, it puts them at risk,” Cisneros said. “It puts them at risk of not being able to pay their rent or their mortgage, which puts them closer to possibly losing their apartment or being foreclosed on if they can't pay their mortgage. This puts that property at risk and the more houses we see foreclose on, the more our neighborhoods and our city-wide economy suffers."

Thus, the Bank On San Francisco program set out to achieve certain basic goals:

• Increase bank starter accounts for the low-income and unbanked market
• Raise awareness among unbanked consumers about the benefits of conventional banking
• Make quality money management education more available to low-income residents
• Clamp down on the proliferation of check cashers and payday lenders
• Raise city-wide awareness of the unbanked problem and potential solutions

“We found that if we could help people become more successful financially, it not only helped those individuals and those families and households, but it also helped our local economy,” Cisneros said.

Cisneros also worked with the San Francisco School District to open college savings accounts with an initial $50 deposit for every kindergartner entering the public school system. The initiative, the Kindergarten to College Program, is designed to provide children with an early financial education and encourage parents to set aside money for their child’s higher education costs. Additionally, Cisneros said the city was inspired by a Washington University in St. Louis study that found children with savings accounts were six times more likely to attend college.

Citibank, one of the participating major banks in the Bank On San Francisco program, committed to create accounts for 1,200 children in the first year. "Citibank is committed to working with the city of San Francisco to deliver not only this great savings initiative but to put in place what we believe is a potential national platform for other municipalities," said Bob Annibale, global director of Citi Community Development. [The City Accelerator receives underwriting support from the Citi Foundation.]

Further recognizing the shift to digital money management, Citibank recently added "Access Account," a checkless banking account with low or avoidable monthly charges and no overdraft fees that gives customers greater control over their finances.  The new service gives customers funds availability through more than 34,000 Citibank ATMs and Citibank-branded ATMs at 7-11 convenience stores. The service is nationwide.

Again, the situation with unbanked individuals is not unique to San Francisco nor is it confined to large cities. What stands out, however, is the willingness – through the Bank On San Francisco program, the Kindergarten to College program and others like it – for a local government to step forward in partnership with private financial institutions and wrestle with the situation in an innovative fashion.

Communities are making progress in driving unlicensed check cashers and loan sharks from the streets and many states are reining in legal but predatory practices such as payday lending. However, the problem continues to evolve and change, and financial parasites that feed on the poor are not going away easily. An article in the December 1 issue of Bloomberg Businessweek, "Payday Loans Move Onto the Reservation," outlines how the predatory lending business is using the sovereign immunity of Native American reservations as a corporate location in order to skirt state laws and regulations. By operating a Web-based enterprise from such a site, the services are available to anyone with access to a computer – and in this digital age, that's just about everybody. 

Time marches on. The financial difficulties of poor and unbanked individuals continue. Predatory practices are damaging to the affected populations and the community at large. Cities have a vested interest and they can play a central role in dealing with the issue. Even if the problems cannot be completely eliminated, there are glimmers of hope which call for continued diligence and innovation.