Ferguson’s ‘Unbanking’ Problem

CREDIT: AP PHOTO/CHARLIE RIEDEL
CREDIT: AP PHOTO/CHARLIE RIEDEL

Just over a year on from police officer Darren Wilson’s killing of unarmed teenager Michael Brown in Ferguson, MO, a commission convened by Gov. Jay Nixon (D) has issued a lengthy report on the societal, governmental, and economic crisis that afflicts Ferguson and many communities like it in the St. Louis area.

The Ferguson Commission organizes many of its ideas around the importance of economic justice. “Many factors impact an individual’s opportunity to thrive. Key among them are health and financial stability,” the commissioners write. “Unfortunately, for many in the St. Louis region, these are not a given.”

The report calls for boosting the income of working people in places like Ferguson, but doesn’t stop there. It isn’t enough to boost the dollar value of the financial resources working families in communities like Ferguson can earn, the commissioners say. If those resources can’t find a safe haven, they won’t deliver the kind of broader financial stability that is the ultimate goal of the commission’s dollars-and-cents ideas.

As in other low-income communities, residents of Ferguson and other St. Louis County municipalities have a hard time finding a bank to do business with. Traditional commercial banks have been pulling out of poorer communities for years, leaving communities like Ferguson to rely on far more expensive options.

Nationwide, as many as 25 million Americans are “unbanked,” meaning they have no bank account. Close to 70 million are “underbanked,” meaning they have some form of traditional bank account but still rely on costly alternative sources of credit and cash. The problem is widespread in Missouri too. The commission notes a 2008 study estimating that more than one in four Missourans is un- or underbanked and that minority Missourans make up a disproportionate share of that population.

Paul Woodruff and his six full-time colleagues at an organization called Prosperity Connection are trying to do something about that, with the assistance of a diverse cast of institutional characters.

“It’s something as simple as somebody with an impaired credit score who needs a checking account to get direct deposit to get a job at the hospital they’re being trained to work at,” Woodruff, who helped the Ferguson Commission’s work on economic security, said in an interview. The commission’s report cites the group as an exemplar of what it calls “empowerment sites” that marry financial education and practical banking services targeted to the population that traditional banks neglect.

Without a checking account and access to affordable forms of credit, people who work for a living find themselves hemorrhaging cash in entirely unnecessary ways. Woodruff’s hypothetical hospital trainee doesn’t have a bank account, but there’s a check-cashing spot just down the black. The store charges exorbitant fees, but without an alternative that financially nonsensical bit of business starts to make perfect sense. When there aren’t other choices, the bad ones can seem good.

The effect of all of that lack of choice on the underbanked is staggering. “A household with a net income of $20,000 may pay as much as $1,200 annually” in fees and interest for such exploitative “alternatives” to basic banking services, the commissioners write, relaying a 2010 Federal Reserve finding.

It’s hard enough to build up a savings buffer to cover emergencies, let alone save for investments in housing or education, without six percent of your money evaporating on the journey from the Accounts Payable desk to your pocket. Such un-pluggable leaks in a hard-working family’s finances help destabilize communities and set the stage for the sort of rage against a rigged system that lit parts of Ferguson on fire last summer.

Rather than duplicating the kind of day-by-day casework that social services organizations already perform in these communities, Woodruff’s slim operation partners with existing institutions to augment their offerings. “We aren’t the social workers who’re going to do a lot of the handholding for a lot of the situations that a client encounters day to day,” he said. “We’re the financial education specialists who can fill in those particular blanks.”

When Prosperity Connection identifies someone from a group financial ed class who seems ready for more intensive coaching to put lessons into action, one of the group’s four coaches initiates one on one meetings that go beyond simple education.

“It’s not enough to just provide the educational training. There has to be the link to services that underserved communities can actually access,” Woodruff said. “We have a network of banks and credit unions we work with. We provide clients information to make choices about which services they’d like to receive, and which institutions they’d like to receive them from.”

Soon, those concrete service offerings will include a direct competitor to the predatory lenders and check-cashers that currently operate in Ferguson and communities like it. The group’s storefront will open in November and offer equivalent services at a price far below the current market standard in Missouri, which is an average payday loan interest rate of nearly 450 percent APR according to the commission report.

The service center will enhance what Prosperity Connection can do for its client base, Woodruff said, but the scope of the unbanked problem in the St. Louis area alone is likely far beyond what the organization can handle at its current size. In total, the group works with between 4,000 and 5,000 individual Missourans each year, he said, with seven full-time staff and a budget a bit under half a million dollars.

It’s hard to guess exactly how many more people there are in the area who need the training and practical services Woodruff’s team furnishes. “In terms of unmet demand, I think it could range all over the place. It could be several thousand more, it could be tens of thousands throughout the region,” he said. “And our ability to meet that is dependent in large part on funding from private sources, philanthropic sources, and public institutions.”

Some of the money that goes to work like this comes from the very same banks that have abandoned these communities. A 1970s law called the Community Reinvestment Act (CRA) requires large depository companies to kick money and staff volunteer hours into systems and organizations that work to make financial services more equitable across divides of income and race. That may sound like a requirement that rich banks throw some cash over their shoulder as they walk away from the impoverished, but Woodruff’s experience hasn’t left him that cynical.

“There are some banks that don’t do enough, but there are a lot of institutions that are trying to do the right thing. They don’t have the pulse of the community,” he said, and “we try to make sure that when they invest their resources they do it in a way that meets people’s needs.” The group is launching a new effort to track actual outcomes for their clients in hopes of securing greater funding for both education and services work from donors who demand measurable accountability for their cash.

And the opportunities that CRA rules create for conversation and contact are highly effective at reducing the mutual suspicion between poor people and bankers, he said.

“A lot of times you see the bank volunteers who comes out, it really opens their eyes. ’Hey, these aren’t scary communities to be in! They have needs just like I do!’” he said. “And then on the other side, we’re making sure our target populations are comfortable actually using financial services. We can provide all the education in the world but if people aren’t comfortable approaching banks and using the actual tools, our work does no good.”